Page 179 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Objectives

After studying this unit, students will be able to:
• Learn the concepts of cost.
• Study Average cost.

• Learn Marginal costs.
• Understand the long-term costs.

Introduction

The decision of a firm to maximize its profits, depends on the cost of production and revenue. In this
unit we will study the principles of cost. Generally, refers to a firm’s production cost which is taken
from the monetary costs, which is carried out in relation to the production of the commodity. The
colloquial language of the monetary expenditure on these inputs is called the cost of production. It must
be done on the output of the monetary costs, the costs of a variety of perception. Costs related many
assumptions are monetary costs, opportunity costs and social costs.

9.1 Concepts of Cost

1. Monetary Cost

To produce an object has to spend the money as currency that is called the monetary cost of item.
Generally speaking language ‘Cost’ is used for monetary cost.
According to J.L. Hanson, “The money cost of producing a certain output of a commodity is the sum
of all the payments of the factors of production engaged in the production of that commodity."
—J.L. Hanson
The following expenses are included in the monetary costs—(i) Workers wages paid. (ii) Any interest
charged for loans (iii) The fare paid for standby (iv) Spending on raw materials and machines
(v) Insurance (vi) Tax (vii) Driver power, light, and spending on fuel (viii) The expenditure in transport.

2. Real Cost

It is the actual cost of the item to produce an object that has mental and physical effort and sacrifice, real
cost refers to the pain, the discomfort involved, in supplying the factors of production by their owners.
In the words of Marshall, “The exertions of all the different kinds of labour that are directly or indirectly
involved in making it (a commodity) together with the abstinences or rather the waiting required for
saving the capital used in making it, will be called the real cost of production of commodity.”
—Marshall
In short, the actual costs incurred for the production is expressed in the form of hardship, sacrifice and
effort. For example, a clay potter making a toy has to work for eight hours, and then eight hours of
labour must be the actual cost of the toy. The perception of the actual cost is a Subjective perception. It
is not possible to measure it. The importance of this notion is not so today.

3. Accounting or Business Cost

Accountancy cost means that the cash payments, firms instrument input, and depreciation expense as
the non-mains input, and the other is from the book on other entries.

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