The Free Market Center
Price and cost have different meanings. Learn the difference and keep it in mind when you hear them talk. If possible, ask them to make their meaning clear.
Many people use the words "price" and "cost" as synonymous. Price and cost have subtle but important differences in meaning.
A price amounts to a record of a transaction that has happened in the past. The amount on the "price" sticker does not reflect a price. A person only knows a price after the transaction has occurred.
The word price refers to the ratio of what a person gives up to what he receives. In other words, if Bill exchanges eight apples for four peaches, we can say that Bill's per peach price equals two apples. A price only appears with the consummation of an exchange.
A cost consists of what an actor gives up by acquiring or retaining a specific good. Costs, unlike prices, refer to the future. What good will a person not have in the future by acquiring or retaining a different good in the present?
A cost consists of (1) whatever asset must be spent, foregone, given up, or otherwise sacrificed; or (2) whatever liability must be acquired or suffered to obtain or produce something or attain some end.
People generally state prices and costs in terms of units of money.
A dollar price amounts to the number of dollars given up to acquire a specific product. As a medium of indirect exchange, those dollars represent what good(s) the buyer gave up to acquire those dollars.
A dollar cost refers to the products the buyer cannot acquire in the future because he no longer has the money paid to acquire the good he has.
Price: John paid $40,000, which he worked all year to earn, for that car sitting in his drive.
Cost: The car cost John $40,000. He no longer has the money for his college tuition.
Don't expect to change how people use the words price and cost, but remember that the words have different meanings. When it matters, ask them if they refer to an action taken in the past (price) or what they give up in the future (cost).
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