What are accounting costs and economic costs, Microeconomics

It is necessary for the proper understanding of the price theory to know the various concepts of cost that are often employed. When an entrepreneur undertakes production of a commodity he has to pay prices of the factors which he employs for production. He thus pays wages to the laborers employed prices for the raw materials fuel and power used rent for the building he hires for the production work and the rate of interest on the money borrowed for doing business. All these are included in his cost of production. An accountant will take into account only the payments and charges made by the entrepreneur to the suppliers of various productive factors.

But an economist view of cost is somewhat different from this. It generally happens that the entrepreneur invests a certain amount of this own money capital in his productive business. If the money invested by the entrepreneur in his one business had been invested elsewhere it would have earned a certain amount of interest or dividends. Moreover an entrepreneur devoted time to hid one work of production and contributed his entrepreneurial and managerial ability to it. If the entrepreneur had not net up his own business he would have sold his services to other for some positive amount of money. Therefore economists would also include in the cost of production (i) the normal return on money capital invested by the entrepreneur himself in his own business which he could have earned if invested outside and (ii) the wages or salary he could have earned if he had sold his services to other. The accountant would not include these two items in a firm cost of production but the economists consider them as bean fide costs and will accordingly include them in cost. Likewise the money rewards for other factor owed by the entrepreneur himself and employed by him in his own busies are also considered by the economists as parts of the cost of production.

If follows from above that the accountant considers those costs which involve cash payments to others by the entrepreneur of the firm. The economists takes into account all of these accounting costs, but in addition he also takes into account the amount of money the entrepreneur could have earned if he had infested his money and sold his own services and other factures in next best alternative uses. The accountings costs are contractual cash payments which the firm makes to other factor owners for purchasing or hiring the various factors are also known as explicit costs. The normal return on money capital invested by the entrepreneur and the wages or salary for this series and the money rewards for other factors which the entrepreneur himself owns and employs then in his own firm are known as implicit costs or imputed costs. The economists take into consideration both the explicit and implicit costs. Therefore

Economic costs = accounting costs + implicit costs

Posted Date: 9/21/2013 4:47:01 AM | Location : United States

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