Economics

Cost Concepts

1.Money Cost:
Production cost expressed in money terms is called as money cost. In other words, it is the total money expenses incurred by a firm in producing a commodity. Money
cost includes the expenditures such as cost of raw materials, payment of wages and salaries, payment of rent, interest on capital,expenses on fuel and power, expenses on
transportation and other types of production related costs. These costs are considered as out of pocket expenses. Money costs are also called as Prime Cost or Direct Cost or Nominal Cost or Accounting Cost or
Explicit Cost or Out of Pocket Cost, suiting to context.

2.Real Cost:
Real cost refers to the payment made to compensate the efforts and sacrifices of all factor owners for their services in production.It includes the efforts and sacrifices of landlords in the use of land, capitalists to save
and invest, and workers in foregoing leisure.Adam Smith regarded pains and sacrifices of labour as real cost of production.

3.Explicit Cost:
Payment made to others for the purchase of factors of production is known as Explicit Costs. It refers to the actual expenditures of the firm to purchase or hire the inputs the firm needs. Explicit cost includes, i) wages, ii) payment for raw material, iii)
rent for the building, iv) interest for capital invested, v) expenditure on transport and advertisement vi) other expenses like license fee, depreciation and insurance charges, etc. It is also called Accounting Cost or Out of Pocket Cost or Money Cost.

4.Implicit Cost:
Payment made to the use of resources that the firm already owns, is known as Implicit Cost. In simple terms, Implicit Cost refers to the imputed cost of a firms self-owned and self-employed resources.A firm or producer may use his own land,
building, machinery, car and other factors in the process of production. These costs are not recorded under normal accounting practices as no cash payment takes place.However, the value of the own services are
imputed and considered for preparing the profit and loss accounts. Implicit Cost is also called as Imputed Cost or Book Cost.Economic Cost = Implicit Cost + Explicit Cost.

5.Economic Cost:
It refers to all payments made to the resources owned and purchased or hired by the firm in order to ensure their regular supply to the process of production. It is the
summation of explicit and implicit costs.Economic Cost is relevant to calculate the normal profit and thereby the economic profit of a firm.

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