What is Cost?

Cost is ordinarily understood to be the amount we pay or the price we are charged for a good or service we get. However, economists’ definition of cost is different than what the meaning of cost in daily use.  When economists think of cost, they add the opportunity cost, which is the next best alternative given up, to the out-of-pocket costs or explicit expenses. For example, to attend college, you have to pay tuition and fees. These are explicit expenses you have to incur. However, you also give up a substantial amount of time to become a fulltime student. How much would your time be worth in monetary value? Well, it is the sum of wages you would have received if you worked full time instead of attending college. So, the overall or total cost of you attending college is the sum of the explicit expenses you pay, such as tuition and fees, plus the wages you would have earned if you had chosen to work during the time you devote to being a student. Hence, from an economist’s point of view, the cost includes not only the explicit expenses you must pay, but also the monetary value of time, effort and other resources you have to give up. The sum of all these costs is called the economic cost.