Q&A - Distinguish between price and cost

The terms “price” and “cost” are often confused by students. The two terms are related, but quite different…

The price is the amount customers pay for a product. When you pay a price for something, the price represents the value of what you have to give up in order to acquire a product or service.

The cost is the amount spent by a business making the product. Cost is often split into two elements: the variable cost (costs that vary in proportion to the quantity being made) and fixed costs (costs that are required for production to take place but which do not vary as output varies).

However, whilst the two terms are quite distinct, a firm needs to take account of the cost of production when setting price to ensure that it is making a profit on the products it offers. In some cases a business may use the cost of production as the basis for setting price (see cost-plus or mark-up pricing).