In economics, the practice of setting a product's price equal to the additional (marginal) cost of producing one more unit of output. The producer charges an amount equal to the cost of the additional economic resources. The policy is used to maintain a low selling price or to keep a business operating during a period of poor sales. Because fixed costs such as rent and building maintenance must be paid whether a company produces or not, a firm experiencing temporary difficulties may decide to remain in production and sell the product at marginal cost, since its losses will be no greater than if it ceased production.
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In governmental planning and budgeting, the attempt to measure the social benefits of a proposed project in monetary terms and compare them with its costs. The procedure was first proposed in 1844 by Arsène-Jules-Étienne-Juvénal Dupuit (1804–66). It was not seriously applied until the 1936 U.S. Flood Control Act, which required that the benefits of flood-control projects exceed their costs. A cost-benefit ratio is determined by dividing the projected benefits of a program by the projected costs. A wide range of variables, including nonquantitative ones such as quality of life, are often considered because the value of the benefits may be indirect or projected far into the future.
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Monetary cost of maintaining a particular standard of living, usually measured by calculating the average cost of a number of goods and services. Measurement of the cost of a minimum standard of living is essential in determining relief payments, social-insurance benefits, and minimum wages. The cost of living is customarily measured by a price index such as the consumer price index. Measurements of change in the cost of living are important in wage negotiations. Cost-of-living measurements are also used to compare the cost of maintaining similar living standards in different areas. Seealso social insurance.
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Monetary value of goods and services that producers and consumers purchase. In a basic economic sense, cost is the measure of the alternative opportunities forgone in the choice of one good or activity over others (see opportunity cost). For consumers, cost describes the price paid for goods and services. For producers, cost has to do with the relationship between the value of production inputs and the level of output. Total cost refers to all the expenses incurred in reaching a particular level of output; if total cost is divided by the quantity produced, average or unit cost is obtained. A portion of the total cost known as fixed cost (e.g., the costs of building rental or of heavy machinery) does not vary with the quantity produced and, in the short run, cannot be altered by increasing or decreasing production. Variable costs, like the costs of labour or raw materials, change with the level of output. Economic decisions are based on marginal cost, the additional cost of an incremental unit of production or consumption.
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