Cost concepts and categorization:

Money cost and Real cost

Nominal cost or money cost is the net money expenses incurred with a firm in producing a commodity.

It contains:

1. Cost of raw materials
2. Salaries and wages of labor
3. Expenses on machinery and tools
4. Depreciation on buildings, machines and such other capital goods
5. Interest on capital
6. Other expenses such as advertisement, taxes and insurance premium
7. Normal gain of the entrepreneur.

Real cost is a subjective idea. It states the pains and sacrifices included in producing a commodity. The money paid for protecting the factors of productions is money cost while the efforts and sacrifice made by capitalists to invest and save, by the workers in previous leisure and by the landlords comprise real costs.

Opportunity Cost:

The opportunity cost of any good is subsequently best alternative good which is sacrificed. For illustration a farmer who is generating wheat can generate potatoes with similar factors. Thus the opportunity cost of a quintal of wheat is the quantity of output of potatoes given up.

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