Costs of a business


    Okay, guys so we’ll be talking about the costs a business incurs during its activity.

    To start with there are two types of costs. 1. VARIABLE COSTS  and 2.FIXED COSTS. An example would better help illustrate this.

    Ahmed is an entrepreneur and has been decided to open a large shop selling garments. Once he has bought a suitable place as his shop and bought all the necessary equipment, he has to buy clothes as his raw materials which he will sell to make money. These clothes will represent variable costs; variable costs are those that vary with the number of gods sold or produced. Hence, the more cloth Ahmed will buy, the more money he would have to give to the supplier. This is not the case with fixed costs, which remain the same regardless of the production or supply of goods e.g the electricity bill and telephone rent which would remain uniform.

    So, fixed costs don’t change but variable ones do. A much broader perspective of the costs of a business can also be taken. According to this, private costs and external costs exist. Private costs, are those costs that a business itself bears( fixed and variable costs come under this type) whereas  External costs are those costs which are paid by the rest of the society due to a business decision. E.g If a company decides to open a factory in a clean unspoilt area( a potential picnic place0, the external cost of this decision will be the loss of a picnic place which would otherwise be used by society for recreation.

    So when, private and external costs are combined, the result is SOCIAL COSTS. I hope you guys are clear about what these costs are. Now f factory A is operating in an are, along with its costs, it is enjoying private benefits i.e. making profits. And similarly the society also benefits from the presence of factory A, like the employment in that area and availability of goods and services.

    It is these costs and benefits that the government takes into consideration before giving a company the permission to open a factory in a particular area.


    Business Objectives and conflicts

    Now that we have done the costs of a business, we will move on to the objectives set by a business. We had in our previus lectures, talked about the growth of businesses which is one of the objectives. Before we talk about objectives, we should first know who stakeholders are(don’t confuse it with shareholders). Stakeholders are those people who have a direct interest in the management and performance of a business. The following are the groups of stakeholders:

    1. Owners of business
    2. Workers of the business
    3. Managers of the business
    4. Customers of the business
    5. Government
    6. The whole community

    Each of them have different interests e.g owners would like to see their business make maximum profit as they have invested in it whereas the managers would like to see it grow. Sadly, however, all these different interests, no doubt for the good of the business ultimately leave it struggling for direction.



    This is known as ‘conflict of business objectives’.




    Q:1 Define external costs.

    Ans. External costs are those costs that are paid by the society as the result of a business decision. Common examples of external costs are pollution, loss of clean areas.


    Q:2  What is the importance of social costs for a business?

    Ans. Social cost is the sum of external cost and private cost of a business.

    Lack of social costs would prevent governments from accurately assessing the worth of a business to its society. This would lead to the establishment of factories in clean and unspoiled areas which would afterwards suffer from pollution.

    Without social costs a business cannot gauge the effects of a decision on itself or the society. Hence, it would not be able to take necessary preventive measures for restricting pollution and other harmful activities in its adjoining areas.

    Therefore, social costs are very important for the correct and eco-friendly running of a business.