Economic cost is the utilization of resources related to choosing to engage in a specific financial or economic activity. This process also takes into consideration not only the actual expenditures of resources in order to pursue the activity but also the amount of sacrifice involved in choosing that particular action. From this perspective, economic cost involves not only accounting costs but also the opportunity costs associated with the particular activity.
The process of assessing the economic cost associated with an activity often begins with looking closely at the accounting cost. This type of cost focuses on the actual use of cash assets in the process of moving forward with the action. These costs are often focused specifically on the outlay of any cash that is on hand, but can also involve resources obtained from a line of credit or loan while also allowing for any interest that may accrue on those balances until the debt is retired. Addressing this aspect of the overall cost of choosing a particular action is especially important when the cash reserves are not on hand to manage the activity and there is a need to seek some sort of funding from outside, or possibly liquidate an asset in order to secure the cash necessary.
Determining economic cost also requires a clear understanding of the opportunity costs involved with choosing a particular course of action. Here, the focus is on what type of costs are incurred by dedicating time, effort, and other resources to the pursuit of the selected action and how those same resources could have been used to manage other essential tasks. For example, there is an opportunity cost involved by redirecting the efforts of employees to concentrate on a new project versus allowing them to continue working on previously assigned tasks. From this perspective, the economic cost calls for evaluating the amount of sacrifice that must be made in order to pursue the action all the way through to its logical conclusion.
Taking the time to identify the economic cost associated with any given action is very important. By accurately assessing the accounting as well as the opportunity costs that are incurred as the result of choosing a certain activity or action, it is possible to compare that cost with the rewards that are likely to result from the choice. Making the comparison before actually moving forward with the activity can help an individual or business avoid making a poor choice that ultimately fails to produce enough benefits to merit the commitment of those resources.