RELATION BETWEEN PRODUCTION AND COST

Cost Of Production Money Real And Opportunity Costs Include
Monetary Cost Vs Opportunity Cost
Cost Of Production Money Real And Opportunity Costs Examples
Opportunity Cost Of Saving Money
Opportunity Cost Of Time

The eight key points of difference between opportunity cost and money cost are as follows: 1. Opportunity cost represents the quantum of profit that is let go, when an entity chooses one resource utilization alternative over another. Money costs are the actual cash (or credit) costs that an entity incurs during its business operations. Opportunity Cost can simply be calculated by comparing the financial Cost of the next best possible option that has been foregone. The opportunity cost of producing an item for US$10 is the loss of Opportunity of buying that same item from the market. The other costs can be fit into either the fixed or variable categories. Direct, indirect, fixed, and variable are the 4 main kinds of cost. In addition to this, you might also want to look into operating costs, opportunity costs, sunk costs, and controllable costs. We have described these 8 major accounting costs below for further clarification. A core motivator in any decision is the concept of opportunity cost. Learn About Opportunity Cost in Microeconomics: 5 Examples of Opportunity Cost in Business Decisions and Everyday Situations - 2021.

The economists frequently assumes that the problem of optimum input combinations has been solved and conducts his analysis of the firm in terms of its revenues and costs expressed as functions of output. The cost function of the firm gives the functional relationship between total cost and total output. If C represents total cost and Q represents the level of the output, then the cost functions is represented as C=C (Q). The same level of output can be produced with the help of different cost combinations. The cost function gives the least cost combinations for the production of different levels of output.

Cost functions are derived functions. They are derived from the production functions, which describes the available efficient methods of production at any particular point of time. The cost function can be deduced from the inputs combinations of the firm. The input prices of the two inputs of production labor (L) and capital (K) are given to be constant as the wage rate and rent (r), respectively. If L and K are the amounts of the two inputs that are used for the production of the output level Q, the firm will always select those combinations of the two inputs, which lie on the expansion path. Along any expansion path the level of output increases as we gradually depart from the origin. Within the non-inferior zone of the factors of production, their total employment will also increase as we move along the expansion path. Therefore we can say that along any expansion path the demand for any factor of production will depend on the level of output to be produced. So, if L and K are the amounts of the factors of production and Q is the level of output then it can be said that L and K are functions of Q.

That is,

L = g₁(Q)

Cost Of Production Money Real And Opportunity Costs Include

And, K = g₂(Q)

Monetary Cost Vs Opportunity Cost

Now, following the equation of the costs line, the total cost (C) for producing the output level Q is given by

C = L. w + K.r

or C = w. g₁(Q) + r. g₂(Q)

or C = C(Q).

Cost Of Production Money Real And Opportunity Costs Examples

Since, w and r are constant C is only a function of Q. This function is called the total cost functions of the firm. The function shows that the total cost of the firm depends on the output to be produced. The costs function is deduced from the expansion path of the firm.

The cost function derived from the expansion path of the firm represents the cost function in its long run nature as in this case we have assumed that both the factors of production are variable.

A firm’s cost curves are linked to its product curves. Overt the range of rising marginal product marginal; cost if falling. When marginal product is a maximum, marginal; cost is a minimum. Over the rang4e of rising average product, average variable cost is falling. When average product is a maximum, average variable cost is a minimum. Over the range of diminishing marginal product, marginal cost is rising. And over the range of diminishing marginal product, average variable cost is rising.

Source: Addison-Wesley, Economics, 1997, 236

Cost Revenue Analysis and Market

Price determination analysis is based on the demand and supply forces. These in turn depend on the revenue and the cost of production respectively. Thus cost and revenue analysis is indispensable. This analysis exhibit only the profits or losses earned by the firm but also helps in output determination and production planning.

Opportunity Cost Of Saving Money

Distinguish between

Money, Real and Opportunity Costs.
Fixed Cost and Variable Costs.

Opportunity Cost Of Time

Explicit Costs and Implicit Costs.

Accounting costs and Economic Costs.
Past Cost and Future Cost. And others
Money, Real and Opportunity Costs

Money costs mean the aggregate money expenditure incurred by a firm on the various items entering into the production of a commodity. Money costs relate to money expenditure by a firm on factors of production, on wages and salaries paid to labor, on machinery and equipment, for rent and insurance and payment to the Government by way of taxes.

Real costs of production is expressed not in money but in efforts of workers and sacrifices of capitalists undergone in the making of a commodity. According to Marshall, it is, “The extent ions of all the different kinds of labor that are directly and indirectly involved in making it, together with the abstinences or rather the waiting required for saving the capital used in making it, all these efforts and sacrifice together will be called the real cost of production of that commodity, “Marshall had in mind the disability, pain and the discomfort involved for labor when it is engaged in production and also of the unpleasantness involved in saving and capital accumulation. The concept of real cost though of some importance lacks precision since it is expressed in subjective terms.

Opportunity Cost. A person cannot satisfy all his wants since the money at his disposal is limited in supply. He has to choose between on thing and another. The satisfaction of one want involves the sacrifice of another. The cost of production of any unit of a commodity A is the value of the factors of production used in producing that unit. The value of these factors of production is measured by the best alternative use to which they might have been put, had a unit of A not been produced. In other words, the cost of any factor in the production of a particular good is the maximum amount which the factor unit could yield in the production of other goods since the firm has to pay to owners of factor units what these units can secure in alternative occupations, the costs are known as alternative or alternative or opportunity costs.

The concept of opportunity cost is applicable to the determination of value in internal and international trade. But the main drawback of this concept in that is applicable to a specific factor, that is which can be put to one single use. Since the factor is a single use factor. It can have no alternative or opportunity cost. The opportunity cost stands for the cost of producing one unit of a commodity in terms of another that can be produced instead.