Economic Cost

12 Key excerpts on "Economic Cost"

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  eBook - PDF

  Micro Economic Analysis in Agriculture in 2 Vols

  • Kumar, K Nirmal Ravi(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  4. Economic Costs Economic Costs include both explicit and implicit costs. Explicit costs refer to out of pocket cost or paid out costs or accounting costs, which involve actual cash out lay from the pocket of farmer. Implicit costs refer to costs of self-owned and self-employed resources. So, Economic Cost = Explicit cost (Accounting cost) + Implicit cost. A firm will earn economic profits only, if it is making revenue in excess of Economic Cost. So, Economic profit = (TR – Economic Costs) or (TR - (Explicit + Implicit Costs)). So, economic profits are, therefore, smaller in value than accounting profits. Among these explicit and implicit costs, it is important for the farmer to cover explicit costs from gross returns, so as to continue the business, because explicit costs are paid out costs. Thus, Economic Costs include both Accounting costs and implicit costs ( Figure 15.1 ). If the entrepreneur wants to earn normal profits, he has to cover these Economic Costs from the gross returns of the business.So, both Economists and Accountants look at costs, but each takes a slightly different perspective. Accountants are retrospective. They look at explicit costs only i.e. , costs involving direct, out-of-pocket payments for wages, salaries, materials, hiring machinery costs etc. The implicit costs are not regarded as costs in an accounting sense, but they are a part of the firm’s costs of doing business, nonetheless. But, Economists look This ebook is exclusively for this university only. Cannot be resold/distributed. at both explicit and implicit costs and hence, they are forward looking or related to future. So, compared to Accounting costs, Economic Costs weigh more importance regarding the decision-making in the business. 5. Money Cost In general, when we talk about the costs incurred in the firm, it implies money cost. Money cost or nominal cost is the total money expenses incurred by the farmer in producing a commodity.

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  Advanced Introduction to Cost–Benefit Analysis

  • Robert J. Brent(Author)
  • 2017(Publication Date)
  • Edward Elgar Publishing

    (Publisher)

  55 4 Measuring the costs: direct, indirect and intangible Basically, costs are just the flip side of benefits. Thus, many of the ben- efit methods that have been covered in the last two chapters reappear in this chapter on costs. The main difference on the cost side from the benefits side is the reliance in CBA practice on market valuations rather than directly estimating individual preferences. Once cost has been defined, one can clearly see the extent to which taxes paid are, or are not, costs. We will see the many ways that costs have been used to value benefits in CBA. 4.1 The definition of cost in economics In economics, cost is opportunity cost. The cost of using a resource is the value foregone in its next best alternative use. That is, by using the resource for a particular intervention one is foregoing the opportu- nity of using that resource for some other project, or for some private sector activity. The opportunity cost of going to college is the tuition one has to pay (an actual financial payment) plus the implicit cost, which is the foregone earnings one could have received by working in paid employment (which presumably is the next best use of time rather than just spending it in leisure pursuits). The fact that cost is opportunity cost is a challenge for CBA because there might not be a bill or price for the next best alternative. If leisure is the next best alternative, this is not something that someone has to pay for. The economist’s view of costs is starkly different from an accountant’s view of costs. For an accountant, for a cost to exist, there must be a receipt. Without an actual receipt, there can be no record of the activity. For an economist, there are no “free lunches.” If someone cooks a meal for you, then something may be expected in return for it, not least your attendance.

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  21st Century Economics: A Reference Handbook

  • Rhona C. Free(Author)
  • 2010(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  Accounting profit considers only the difference between the revenues that a firm receives and its explicit costs. Before calculating economic profit, implicit or opportunity costs need to be added to the explicit costs. The implicit cost of using sewing machines to make shirts is the profit given up by not choosing the next best alternative, in this case sewing pants. These implicit or opportunity costs become important when the firm makes the wrong allocation (i.e., when it could have made more profit doing something else). When implicit costs are taken into consideration, accounting profits often turn into economic losses. There are implicit costs associated with the firm's use of retained earnings or profits. It may seem logical to use funds to purchase additional capital equipment, but the firm needs to consider how else those funds could be used. Similarly, if an individual decides to use her time to start a consulting business, she may be very pleased if, at the end of a year, she has covered all her expenses and made a tidy profit. However, this individual needs to also consider what else she could have accomplished with that year of work. Perhaps she could have earned much more working for someone else. This is not to suggest that making the most money lies at the heart of all economic allocation decisions. But it certainly emphasizes that considering the alternative uses of resources and measuring the value of forgone opportunities are critical to making correct production and allocation of resources decisions. Social and Private Costs One final cost consideration that needs to be discussed before moving to the long run is the distinction between pri-vate and social costs. Social costs include the private costs that a firm incurs plus any external costs that the firm imposes on the rest of society but typically does not pay for. If a firm dumps its dirty water into a river, it may inadver-tently kill some the fish.

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  Price Concepts in Management & Economics

  • (Author)
  • 2014(Publication Date)
  • Orange Apple

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter- 10 Cost Concepts (Influential in Pricing decisions) Cost In business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production. Costs are often further described based on their timing or their applicability. Accounting vs opportunity costs In accounting, costs are the monetary value of expenditures for supplies, services, labour, products, equipment and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoices as the price and recorded in bookkeeping records as an expense or asset cost basis. Opportunity cost, also referred to as Economic Cost is the value of the best alternative that was not chosen in order to pursue the current endeavour—i.e., what could have been accomplished with the resources expended in the undertaking. It represents opportunities forgone. In theoretical economics, cost used without qualification often means opportunity cost. Comparing private, external, social, and psychic costs When a transaction takes place, it typically involves both private costs and external costs. ____________________ WORLD TECHNOLOGIES ____________________ Private costs are the costs that the buyer of a good or service pays the seller.

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  The Economic Organization

  • Karl G. Heider, Frank Knight(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  25 In the nature of use capacity, or economic capacity, will presently be found to reside the crux of the problem of cost. The type of analysis which economic theory gives is meaningful only if we can obtain a clear conception of a capacity or potentiality the yield of or on which is realizable in different ways or forms, among which the capacity is apportioned in accord with the economic principle of maximizing total yield through equalizing increments of return from equal increments of capacity in all the alternatives of use. (In mathematical terms, this will read, equalizing differential rates of increase in return in all the alternatives.)

  Economic Cost, then, consists in the renunciation of some “other” use of some resource or resource capacity in order to secure the benefit of the use to which it is actually devoted. The uses of resources alone may have direct or primary value. But the fact of comparison and choice among uses gives any resource capacity the value of the best use of the “last” unit, i.e., of any unit when the whole stock is employed in the best way. This may be zero, in which case the agency is a “free good” and as such is not a resource in the economic sense. Under competitive enterprise, as roughly defined at the outset of this paper, the capacity of any resource gets uniformly the pecuniary value of the incrementally most valuable “product,” so that its employment in any less remunerative way involves a pecuniary loss. (All uses and values are to be thought of as having a time dimension, as “streams” or “intensities.”)

  It must be kept in mind that the conception of economy, of choice among resource-users, and of cost, does not necessarily involve different kinds of results from use. On the contrary, results must be quantitatively comparable, hence homogeneous in the quality of being valued. Alternatives of use are modes of using a resource in realizing a given result, and in an enterprise economy, the plurality of enterprises bidding for the use of a resource count as alternative modes of use open to its owner. There need be no other alternative open; these are enough, as already pointed out, to bring about imputation of the product value to the service. (Monopolistic action on the part of either owners or users is not in question here.)

  14. The theoretical analysis of enterprise economy for the purpose of explaining cost-price relations will necessarily begin with extremely simplified conceptions, and will proceed by successive stages of complication toward the particular compromise between generality and applicability to the real conditions of economic life which appeals to the individual analyst as a stopping point.26 Only a fairly complete discussion of the steps in such a development will enable one to be clear as to just what abstractions are involved at any stage; but only the briefest indication of the sequence can be given here. We start from the notion already developed of enterprise (in contrast with “exchange” economy) which is necessary to give rise to pecuniary cost and to distribution in any realistic sense. To secure any approach to realism, we must discuss the theory of enterprise under the condition of a complicated plurality of kinds of resources, distributed as to ownership in something like the manner characteristic of modern “free” society with its “property” system. Similarly, it is necessary to postulate certain technical and other conditions of organization: the production of each individual “product,” as named and priced in the market, is to be carried on by an indefinitely complex cooperation of different kinds of resources, each hired by enterprise on competitive terms, from diverse owners. And we must assume such technical conditions as will give rise to decreasing technical efficiency of the individual enterprise with increasing size, beyond fairly narrow limits, in order to have numerous enterprises in every “industry” and to have competition.27

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  eBook - ePub

  Markets for Managers

  A Managerial Economics Primer

  • Anthony J. Evans(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  see costs. By definition costs relate to actions that we don't take, and we make a best attempt to place a monetary value on them. They're hard to measure, precisely because we never actually see them.

  So what is the ‘cost’ of choosing £20? The NBA is the £50 note and it is easy to estimate how much this is worth to us: £50.

  Sometimes we need to be explicit that we are talking about opportunity costs (also known as ‘hidden’ costs, or ‘implicit’ costs) rather than accounting costs, but a good economist will always define and use ‘cost’ as ‘the next best alternative’. And this isn't mere semantics; understanding the difference between economic and accounting costs can be a major source of competitive advantage.

  One way to implement opportunity cost reasoning within an organisation is the concept of ‘Economic Value Added’ (EVA), a registered trademark of Stern Stewart & Company. The role of an accountant is to value assets and protect bondholders from potential bankruptcy. But what about equity holders? Joel Stern developed EVA as a student at the University of Chicago, part of a tradition in corporate finance that aimed to measure the economic value of company's activities.2 Put simply EVA is an attempt to make the hidden cost of capital more visible, allowing managers to monitor and reward genuine value creation.

  To an accountant ‘profit’ simply means that revenue exceeds costs. But to be economically profitable you need to go beyond ensuring that revenues exceed costs; you must deliver a profit that outperforms the next best alternative of the resources you utilise. The interest rate paid on government bonds is often used as a point of comparison, but most companies should be generating higher returns than this. The weighted average cost of capital is one benchmark that can be used.3 The bottom line is that if a company is making less profit than it could have made doing other activities, from an economic point of view it is making a loss

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  Macroeconomics

  Principles and Policy

  • William Baumol, Alan Blinder(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Why? Because one important item is typically omitted from the money–cost calculation: the market value of your time ; that is, the wages you could earn by working instead of attending college. Because you give up these potential wages, which can amount to $15,000 per year or more in order to acquire an edu-cation, they must be counted as a major part of the opportunity cost of going to college. Other common examples where money costs and opportunity costs diverge are goods and services that are given away “free.” For example, some early settlers of the American West destroyed natural amenities such as forests and buffalo herds, which had no market price, leaving later generations to pay the opportunity costs in terms of lost resources. Similarly, you incur no explicit The opportunity cost of any decision is the value of the next best alterna-tive that the decision forces the decision maker to forgo. Ideas for Beyond the Final Exam “O.K. who can put a price on love? Jim?” Jack Ziegler/The New Yorker Collection/The Cartoon Bank Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 42 Part 1 Getting Acquainted with Economics monetary cost to acquire an item that is given away for free. However, if you must wait in line to get the “free” commodity, you incur an opportunity cost equal to the value of the next best use of your time. 3-1b Optimal Choice: Not Just Any Choice How do people and firms make decisions? There are many ways, some of them based on hunches with little forethought; some are even based on superstition or the advice of a fortune teller.

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  Microeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  First is the opportunity cost of her time. Remember, she quit a $50,000-a-year job to work full time on her business, thereby forgoing that salary. Second is the $1,000 in annual interest she passes up by funding the operation from her own savings. And third, by using the spare bay in the garage for the business, she forgoes $1,200 per year in rental income. The forgone salary, interest, and rental income are implicit costs because she no longer earns income from the best alternative uses of these resources. explicit cost Opportunity cost of resources employed by a firm that takes the form of cash payments implicit cost A firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment accounting profit A firm’s total revenue minus its explicit costs EXHIBIT 1 Wheeler Dealer Accounts, 2015 Total revenue $105,000 Less explicit costs: Assistant’s salary 2 $21,000 Material and equipment 2 $20,000 ________ Equals accounting profit $64,000 Less implicit costs: Wanda’s forgone salary 2 $50,000 Forgone interest on savings 2 $1,000 Forgone garage rental 2 $1,200 ________ Equals economic profit $11,800 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 144 Part 2 Introduction to the Market System Economic profit equals total revenue minus all costs, both implicit and explicit; economic profit takes into account the opportunity cost of all resources used in production. In Exhibit 1, accounting profit of $64,000 less implicit costs of $52,200 yields an economic profit of $11,800.

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  Campus Economics

  How Economic Thinking Can Help Improve College and University Decisions

  • Sandy Baum, Michael McPherson(Authors)
  • 2023(Publication Date)
  • Princeton University Press

    (Publisher)

  The concept of total cost is simplest. It refers to all of the institu- tion’s expenditures over a certain period of time, such as an aca- demic year. The economic concept of cost is different from the accounting concept in that it includes opportunity costs. A firm which is making a 1 percent rate of return on its investment will, for accounting purposes, have positive profits. But from an economic perspective, the opportunity cost of the invested funds—the return they could have generated in the best available alternative use— must be taken into consideration. In economic terms, this firm is probably suffering losses since its revenues do not cover its opportu- nity costs. Investing these funds elsewhere would likely have gener- ated a higher return. Basic economic concepts [ 31 ] Similarly, if a college enrolls 50 students to whom it grants tuition waivers, it does not actually give money to these students. But if these 50 students take the place of 50 paying students, then the tuition waivers constitute a very real cost. As discussed in more detail in chapter 7, this idea creates ambiguity in discussions of how much institutional financial aid to offer. If the college could replace a student who will only enroll with financial aid (a discount from the tuition) with a student who would be able and willing to pay the full price, choosing the aided student involves a financial cost to the institution. But if there is no queue of students with a reasonable chance of succeeding at the institution who could pay the full price, enrolling the aided student is not a cost. The choice is between receiving partial tuition and no additional revenue at all. Some nonprofit organizations rely solely on donations from individuals, foundations, or other philanthropic sources. Others sell things such as cookies or museum store merchandise to fund their missions. Symphony orchestras sell tickets to their performances— and colleges and universities charge tuition.

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  Economics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  First is the opportunity cost of her time. Remember, she quit a $50,000-a- year job to work full time on her business, thereby forgoing that salary. Second is the $1,000 in annual interest she passes up by funding the operation from her own savings. And third, by using the spare bay in the garage for the business, she forgoes $1,200 per year in rental income. The forgone salary, interest, and rental income are implicit costs because she no longer earns income from the best alternative uses of these resources. explicit cost Opportunity cost of resources employed by a firm that takes the form of cash payments implicit cost A firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment accounting profit A firm’s total revenue minus its explicit costs EXHIBIT 1 Wheeler Dealer Accounts, 2015 Total revenue $105,000 Less explicit costs: Assistant’s salary 2$21,000 Material and equipment 2$20,000 ________ Equals accounting profit $64,000 Less implicit costs: Wanda’s forgone salary 2$50,000 Forgone interest on savings 2$1,000 Forgone garage rental 2$1,200 ________ Equals economic profit $11,800 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 144 Part 2 Introduction to the Market System Economic profit equals total revenue minus all costs, both implicit and explicit; economic profit takes into account the opportunity cost of all resources used in production. In Exhibit 1, accounting profit of $64,000 less implicit costs of $52,200 yields an economic profit of $11,800.

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  eBook - ePub

  Stress of War, Conflict and Disaster

  • George Fink(Author)
  • 2010(Publication Date)
  • Academic Press

    (Publisher)

  X Economics and Costs of War Passage contains an image

  Economic Costs and Consequences of War

  Carlos Seiglie    Rutgers University, Newark, NJ, USA

  Microeconomic Analysis Macroeconomic Implications of War The Transfer Problem and War Toward Measuring the Cost of War Further Reading

  Glossary

  External Cost  The cost borne by noncombatant nations in a war.

  Externality  When the action of a nation (individual) affects the consumption or production opportunities available to another.

  Internal Cost  The cost borne by combatant or participating nations in a war.

  Opportunity Cost  The value of a resource in their next-best alternative use.

  Terms-of-Trade  The price of commodities that are imported relative to the price of those that are exported by a country.

  Value of Life  

  From an economic viewpoint it generally focuses on the amount an individual is willing to pay to avoid death with some probability. This is referred to as the value of a statistical life. From an insurance viewpoint, it is the amount required to make the victim ‘whole’. The losses generally consist of: (1) the loss of wages and employee benefits net of personal consumption and (2) the loss of household services.

  In analyzing the cost of war, it is convenient to classify or partition costs in two ways. First, a distinction should be made between whether the cost and consequences are internal or external, that is, whether they are borne directly by the participants or by the wider international community, respectively. This distinction is similar to the one made in economics between private and social costs. If the decisions to go to war are based on the calculus of whether the private benefits outweigh the private cost of going to war, then many wars could be prevented if the parties involved internalized the higher social cost imposed by their actions. Once this distinction is emphasized, the importance of developing institutions which provide the proper incentives or mechanisms to account for these external effects becomes evident.

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  Management Economics: An Accelerated Approach

  An Accelerated Approach

  • William G. Forgang, Karl W. Einolf(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  5

  The Costs of Production

  This chapter examines the relationship between costs and output and discusses how a firm’s costs of production influence production, pricing, and competitive strategy decisions.

  Learning Objectives

  The successful reader understands:

  • The relationship between costs and output

  • How costs affect production and pricing decisions

  • How costs affect the number and relative size of competitors in a market

  • How the structure of costs helps to define a firm’s competitive strategy

  The primary question in this chapter is how costs vary with output. The answer depends upon the economic time period . Economists recognize four distinct time periods: the market period, the short run, the long run, and the very long run. The time period distinctions do not coincide with calendar time. Rather, the time periods refer to degrees of flexibility in the production process. Other topics in this chapter include the relationship between the costs of production and the number and relative size of firms in an industry as well as the business strategy implications of a firm’s costs of production.

  Accounting and Economic Costs

  Before examining the economic time periods, it is necessary to establish that economists view costs differently than accountants do. Economists include opportunity costs, which affect the allocation of finite resources among competing uses.

  Consider the video rental store in Table 5.1 . This store’s gross sales revenue is $100,000. The direct payments for rent, videos, utilities, and labor total $80,000.

  Table 5.1 Explicit Costs and Accounting Profit

  Income Statement
  Item	$
  Gross sales revenue	$100,000
  • Rent, materials, labor, and utilities	$80,000
  Accounting profit	$20,000

  Table 5.1 shows the video store’s profit is $20,000. This calculation is the accountant’s definition of profit. Accountants consider only direct payments. In Table 5.1

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