Cost
Cost is the amount of money a business spends to make a product or provide a service. It is influenced by the prices of raw materials, a company’s bargaining power, and the negotiation skills of its managers. Costs are subtracted from sales revenue to calculate profit.
Example: A bakery spends money on ingredients, equipment, and employee salaries to make cakes. These expenses make up the costs of running the business.
A business incurs both fixed costs (FC) and variable costs (VC) during the production process. Fixed costs are expenses that stay the same regardless of production output, like rent and equipment. Variable costs change based on the quantity produced, such as raw materials and labor.
TC = FC + VC
Types of Cost
- Fixed Costs (FC)
- Variable Costs (VC)
- Total Costs (TC)
- Average Costs (AC)
- Marginal Costs (MC)
- Opportunity Costs (OC)
- Sunk Costs
- Explicit Costs
- Implicit Costs
Price
Price is the amount of money a customer pays to buy a product. It is determined by factors such as supply and demand, market conditions, customer behavior, and speculation. Businesses may use different pricing strategies to set the final price.
Example: A bakery sells cakes for a certain price. The cost of ingredients, the competition, and the demand for cakes in the market influences this price.
Value
Value refers to the benefits a business brings to its stakeholders and the benefits a customer gets from using the product. For a business, value is determined by future cash flows, growth potential, and risk. A business that generates more cash with less risk is more valuable than a risky business that generates little cash.
Example: A fast car provides value to its owner by allowing them to arrive at their destination faster, saving time. This time saved is the benefit or value the car provides.
| Cost | Price | Value |
|---|---|---|
| The expenses a business incurs to make a product or provide a service. | The amount of money a customer pays to buy a product. | The benefits a customer receives from using a product and the benefits a business brings to its stakeholders. |
| Includes raw materials, labor, and overhead costs. | Determined by supply and demand, market conditions, customer behavior, and speculation. | Refers to time saved, convenience, sales revenue, profit, and cash flow. |
| Directly affects a business’s profit margins. | Can be influenced by pricing strategies used by a business. | Determines the overall worth of a product or a business. |
| Can be influenced by supplier prices and negotiation skills. | Can be negotiated between a business and a customer. | Depends on future growth potential and risk. |
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