What is meant by cost? 

Meaning of Cost. Cost of producing a good is the sum of actual expenditure on purchase of inputs and imputed expenditure on inputs supplied by the firm itself Thus sum of explicit costs and implicit costs constitutes total cost of production of a commodity.

Explicit Cost. The actual money spent by a firm on buying or hiring of factor inputs and nonfactor inputs is called money cost or explicit costs. These include wage bills, raw material expenses, electricity bills etc. Thus all money costs paid are known as explicit cost of production.

Implicit cost. Implicit cost is the estimated (imputed) value of inputs supplied by the owner of the firm himself. For example the owner may utilise his own building, his own capital or may act as a manager of his firm himself. He does not pay rent or interest or salary to himself although such payments accrue to him. Imputed or estimated value of these productive services supplied by the owner himself is called implicit cost.

Thus in economies sum of explicit cost and implicit cost constitute total cost of production. It needs to be noted that cost also includes normal profit (i.e., the minimum profit) which a producer must get to remain in business. Costs are discussed in the context of short run and long run.

Cost Function — The functional relationship between output and cost is called cost function. Symbolically C = f(Q) i.e., Cost (C) is function (f) of units of output (Q).