Wednesday, May 18, 2011

Types of Costs

(This is a total idea dump for my own future reference. I'm not sure if anyone else would get any mileage from it.)

Joel Dean was a pioneering figure in the field of managerial economics. His 1951 textbook of that title was important in establishing the field. One of the things he wrote there that still rivets my attention is the beginnings of something - the beginnings of a schema for understanding costs. Basically, he noted a whole series of what you might call "opponent" costs:

Opportunity costs - Outlay costs
Past costs - Future costs
Short run costs - Long run costs
Variable costs - Constant costs
Traceable costs - Common costs
Out of pocket costs - Book costs
Incremental costs - Sunk costs
Escapable costs - Unavoidable costs
Controllable costs - Non-controllable costs
Replacement costs - Historical costs

This strikes me as one very, very important and promising unfinished idea. I see the shadow of a future theory of costs in this initial collection of observations. It makes me want to continue the list. Going to Wikipedia for cost concepts offers the following additional ideas:

Private (internal, transactional) costs - external costs (externalities)
Social costs (internal and external costs) - Psychic costs (stress, worry, anxiety, uncertainty, fear - adding "repugnancy" costs in this category? e.g. the repugnancy of a market for human kidneys)


In business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision.

The page then notes that cost of a business input ("intermediate consumption" in national accounting for GDP) includes its production costs, plus the markup for the producer's profit, plus transaction costs. Also mentioned are a couple of dimensions along which costs might be categorized:

Costs are often further described based on their timing or their applicability.

It is mentioned that biological costs (or the metabolic price of something like a big brain) are "a measure of the increased energy metabolism that is required to achieve a function." Then there are reproductive costs - life-history & somatic/reproductive tradeoffs - a whole other topic... perhaps related to information costs (the signalling and screening games that play out in asymmetrical markets are a lot like those that play out in sexual selection - Akerloff, Spence and Stigliz).

Is there a noise function in cost theory? Is the process of a diminishing marginal return analogous or commensurate with the increase of noise in a communications channel?

These are really half-formed, messy impulses and desires to learn. They may be very clear to people schooled in economics, perhaps behind some math I can't parse. But I have yet to find a non-mathematical general conceptualization of cost that systematizes all of the observations in this field. In the very little bit of game theory I've done, different games impose different configurations of costs or types of cost on players... I feel like the topic is still foggy, in my own mind certainly.

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