While producing the commodities, producer uses several factors of production. So, payment paid to the factors of production according to their contribution in production process is known as cost.
Mathematically, C = F (X, T, CF)
C = cost
F = functional relationship
X = price of variable factor
T = technology
CF = fixed capital
Concept of fixed cost:
Fixed cost are those cost which are incurred on fixed factors of production such as capital equipment, plant, building, land, salary of permanent staff, etc. Fixed costs don’t change with the level of output in the short run. It remains same even at zero level of output.
Concept of variable cost:
Variable costs are those cost which are incurred on variable factors of production. Variable cost changes with the change in level of output in the short run. For example the expenditure made on raw materials, wages and salaries of casual (temporary) workers, running expenses like charges of water supply, electricity, tax is variable cost. Variable cost is zero if there is no production of output.