Cost theory and estimationm’s cos:
An individual firm cost of production has great influence on the total market supply of a particular commodity that is why it is important to understand the production cost concept.
Different types of costs:
Cost of production can be classified as
Opportunity cost is a cost associated with a decision that includes both the explicit and implicit costs. The unique aspect of opportunity cost is that it also includes costs associated with making an alternate decision. The costs associated with an alternative are called implicit costs. The accounting cost of making a decision is called the explicit cost.
While explicit, or accounting, ...view middle of the document...
With these expenses, it is easy to see the source of the cash outflow and the business activities to which the expense is attributed
Examples and Applications
Example 1: An example of an opportunity cost would be the choice of whether to choose leisure for an entire day or to work for an entire day. In this example the explicit cost would be any money that was spent on leisure, tickets to a baseball game for example, and the implicit cost is the money that you could have made while working. These quanitities added together equals the true opportunity cost.
For a "real world" application of this topic let's consider the choice between working for someone else and opening your own business. The investment, cash, and other reciepts are easily calculated by an accountant as the explicit cost of opening a business. To find oppotunity cost you need to caluculate the implicit cost of this decision. The implicit cost of not working for company may include salary, retirement plans, healthcare, bonuses, and stock options. These implicit costs are often times not easily calculated, but often it is better to consider an estimate so that one can calculate opportunity costs of a decision. By going through the rigor of calculating the implicit and explicit costs you will be able to make an informed decision on wether to work for a company or open your own business.
The opportunity cost of an asset (or, more generally, of a choice) is the highest valued opportunity that must be passed up to allow current use. Opportunity cost ia also called economic opportunity loss. And is the value of the next best alternative foregone as the result of making a decision
Example – I have a TV and VCR. I can either watch a movie or rent TV and VCR.Out of 2 choices, I am selecting one. In this example, If I watch movie, then the opportunity cost of watching the movie would be the amount of rent that I would have earned.
Explicit costs are expenses for which one must pay with cash or equivalent. Because a cash transaction is involved, they are relatively easily accounted for in analysis. These costs are never hidden, one has to pay separately.
Example- Electricity Bill, wages to workers etc.
Implicit costs do not involve a cash transaction, and so we use the opportunity cost concept to measure them. Implicit costs are related to forgone benefits of any single transaction. These are intangible costs that are not easily accounted for.
Example, the time and effort that an owner puts into the maintenance of the company rather than working on expansion.
The economic cost of a decision depends on both the cost of the alternative chosen and the benefit that the best alternative would have provided if chosen. Economic cost differs from accounting cost because it includes opportunity cost.
As an example, consider the economic cost of attending college. The accounting cost of attending college includes tuition, room and board, books, food, and other...