Cost Theory is a concept in economics that examines how businesses determine the costs of production and how these costs influence their pricing and output decisions. It categorizes costs into fixed costs, which do not change with production levels, and variable costs, which fluctuate with the amount produced. Understanding these costs helps firms optimize their operations and maximize profits. Additionally, Cost Theory is essential for analyzing market structures and competition. It provides insights into how firms can achieve economies of scale, where the average cost per unit decreases as production increases. This theory is crucial for strategic planning and financial forecasting in business.