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Explain various concepts of the production cost.

Vidyadip · Accepted Answer

* Introduction : * There are three concepts of production cost exist in present. * Real cost. * Opportunity cost * Monetary cost. * The factors of production cost is affected most to the supply of goods. * Hence, the various concepts of cost information is useful. * * Real cost : * The real cost concept is presented by Neo-Classical economists. * The Marshall's contribution is great in this. * In the beginning this concept presented in reference of two original factors of productions land and labour but it also considered in present for four factors of production, land, labour, capital and entrepreneur. * Meaning : * According to Marshall. During the process of production factors of production i.e. labour capitalist and entrepreneur are having pain or abandon. * They bear mental imbalance to resists some uncertainty. * This type of pain, abandon or mental imbalance are their real cost. * In other words, while making production, the factors of production have to suffer or forgo certain things. * They have to face mental unrest and uncertainties. * Such pain renunciation or mental unrest can be called real cost of a product. * Real cost cannot be present in form of moneys. * It is called non-monetary cost. * In the real cost following three main matters are included : * The labours who joined in the process of production they realized fatigue, fed-up, tedium etc. * The capitalist who invested his capital in the process of production for that he abandon consumption for saving. * The entrepreneur doing mental stress and worry (unrest) for business and insecurity and uncertainty to resists. * According to classical economists, the land is gifted by nature, so its rent is not included in real cost. * According to Prof. Marshall, 'To attract in the process of production the factors named labourer, capitalist and entrepreneur of production to resist real cost, for this the reward is giving in the form of wages, interest, profit respectively. * Limitations of Real cost : * The concept of real cost being subjective and psychological, it is difficult to measure. For example : * Doing a some work some labourers are having interest so he does not get tired or boarded less, while other labourers are not having interest so he get more tried or boarded. * The social cost which is not connected directly with the process of production is not included in real cost. e.g. * The atmosphere becomes polluted due to chemical factories. the surrounding people suffer, that is not included. * The real cost of land has counted zero while presenting this concept as land is nature's gift but in reality the rent paid to the land-owner that must be calculated in production cost. * Opportunity Cost : * The opportunity cost concept is presented by Austrian economist. * This concept presentation is depends on two belief : * The factors of production having more than one alternative. * Each factor having full employment. * According to Mayers, "The cost of production of any commodity is equal to the value of the factors used in production of the commodity and its value can be known through the best alternative use of that factor". * According to Henderson, "Opportunity cost of a commodity means the reduction in supply of other useful commodity due to the production of that commodity" * According to this concept, when any factors of production is joint for any commodity production than it has to leave the second best alternate. * Thus, the factor's which income was left, it is his opportunity cost. * In short, 'Unborn is the cost of born'. That is to say the factor's best alternate which is left that is that factor's opportunity cost. * Example : Suppose one piece of land is uses for cotton, Tobacco and Millet cultivation. then cotton is cultivated then Rs. 4 lacks, if cultivated Tobacco then Rs. 3.5 lacks and if cultivated Millet ere h the Rs. 3 lacks income we gets. * In this example the farmer will use land to cultivate cotton where the expected income of cotton is the highest, so the Tobacco, the second best alternate tobacco for be waved. * The land's opportunity cost will be Rs. 3.5 lacks which is left of the best alternate tobacco for the use of to cultivate cotton. * In short, the concept of opportunity cost, is measured by commodities and work not directly by money. * If all the decision taken intellectually and factors of production are fully dynamic then monetary cost and opportunity cost become equal in long term. * Limitations of Opportunity Cost Concept : * The single use factor : * The opportunity cost cannot be known, those factor is only for single use. * For example : * The grass plain there nothing other to grow except grass. * The special use factor : * When the factors of production are special and when there is no other alternative use of them is possible, then its opportunity cost can not be known. * These factors rewards determine by demand not by opportunity cost. * E.g. The scientist's who is having knowledge of Atom power. * Full employment consumption : * Each factors of production having full employment which is depends on unrealistic assumption. * So, no alternate income to wave, when unemployment factor is using for work. * So its become an important question that how to count its opportunity cost. * Monetary Cost : * Monetary cost concept is most useful in economic analysis, decision of production and price determination. * Monetary cost measure easily. * Generally, in the process of production of goods, whatever monetary paying by entrepreneur, it is called monetary cost. * Generally, a wages paid to labour, interest paid to capital and rent, moreover raw material, fuel, transportation also paid by entrepreneur, all costs included in monetary cost. * Entrepreneur trying to earn maximum income by selling production at minimum cost. * Whatever costs in the form of monetary in the process of production it is called monetary cost. * In short, all the expenses increased in the form of money for production of goods is monetary cost. * Monetary cost depends on three factors:- * Price paid to the factors of production. * Level of production. * Period. * This monetary cost concept is narrow because the invisible cost are not included to it. * To know the true production cost, add visible and invisible costs.

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