🔹 1. Sunk Cost

✅ Definition:

A sunk cost is a cost that has already been incurred in the past and cannot be recovered, regardless of future decisions. These costs should not influence current or future business choices.

Sunk Cost = Irrecoverable Past Expenditure

📌 Key Characteristics:

• Irreversible: Cannot be retrieved once spent.

• Independent of future actions: Should not affect future decisions.

• Not considered in marginal or incremental analysis.

📘 Examples:

• Money spent on marketing a product that failed.

• Research and development (R&D) costs on a discontinued product.

🔹 2. Incremental Cost

✅ Definition:

Incremental cost (also called differential cost) refers to the additional cost incurred when a business undertakes a new decision or produces one more unit of output.

Incremental Cost = New Total Cost − Original Total Cost

📌 Key Characteristics:

• Forward-looking: Based on future decisions.

• Relevant for decision-making: Used to evaluate whether a new action is cost-effective.

• Variable in nature: Often includes labor, raw materials, utilities, etc.

📘 Examples:

• The extra cost of producing 100 more units of a product.

• Cost of adding a new delivery route.

Note : All marginal costs are incremental, but not all incremental costs are marginal.

🔹 3. Opportunity Cost

✅ Definition:
Opportunity cost refers to the value of the next best alternative that is forgone when a decision is made to pursue a particular course of action. In simple terms, it’s what you give up in order to choose one option over another. This concept is central in economics because it helps individuals and businesses evaluate the true cost of their decisions beyond just monetary expenses.

📌 Key Characteristics:

• Conceptual in Nature: Opportunity cost is not a direct financial cost but a measure of the lost benefit from the alternative that is not chosen.

• Not Always Monetary: Opportunity cost can involve more than just money; it can be time, resources, or other forms of value.

• Decision-Making Tool: It is crucial for making informed decisions by comparing potential alternatives.

• Relevant for all decisions: Every choice comes with an opportunity cost because resources are scarce and can be used in alternative ways.

📘 Examples:

• Personal Decision Example: If you decide to spend your Saturday working on a project instead of going to a concert, the opportunity cost is the experience and enjoyment you could have gained from attending the concert.

• Business Decision Example: If a company invests in new machinery, the opportunity cost is the alternative investment that could have been made, such as marketing or expanding existing operations.

Note: Opportunity cost is implicit, meaning it reflects the potential benefits lost due to a choice, rather than an actual out-of-pocket expense like explicit costs (e.g., wages, materials).