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By “cost of production” is meant the total sum of money required for the production of a specific quantity of output.

Definition and Meaning:

In the word of Guthrie and Wallace:

In economics, cost of production has a special meaning. It is all of the payments or expenditures necessary to obtain the factors of production, i.e., land, labor, capital and management required to produce a commodity. It represents money costs which we want to incur in order to acquire the factors of production”.

In the words of Campbell:

Production costs are those which must be received by resource owners in order to assume that they will continue to supply them in a particular time of production”.


The following elements are included in the cost of production:

(a) Purchase of raw machinery, (b) installation of plant and machinery, (c) wages of labor, (d) rent of building, (e) interest on capital, (f) wear and tear of the machinery and building, (g) advertisement expenses, (h) insurance charges, (i) payment of taxes, (j) in the cost of production, the imputed value of the factor of production owned by the firm itself is also added, (k) the normal profit of the entrepreneur is also included in the cost of production.


Prof. Mead in his book, “Economic Analysis and Policy” had classified these costs into three main types:

(1) Production Costs:

It includes material costs, rent cost, wage cost, interest cost and normal profit of the entrepreneur.

(2) Selling Costs:

It includes transportation, marketing and selling costs.

(3) Sundry Costs:

It includes other costs such as insurance charges, payment of taxes and rate, etc.

Meaning of Normal Profit:

By normal profit of the entrepreneur is meant in economics the sum of money which is necessary to keep an entrepreneur employed in a business. This remuneration should be equal to the amount which he can earn in some other alternative occupation. If this alternative return is not met, he will leave the enterprise and join alternative line of production.