Page 180 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-9: Theory of Cost and Revenue

In the words of Nicholson, “Accounting cost refers to out of pocket expenses, historical costs, Notes
depreciation and other book keeping entries.”
—Nicholson
Out of Pocket expenditure under this definition means instant payments have to be outsiders. The
Historical Cost of an asset, the actual cost of an asset which is actually the time of purchase. The books are
written in cost accountancy. That is also called Actual Cost, Acquisition Cost, Explicit Cost or Direct Cost.

4. Opportunity Cost

Economic costs are more important notion of opportunity cost. We know the cost of something means
those inputs whose prices are used for the production of that commodity. This is because the value of
an input is scarce or limited. If we use an input to the production of a commodity charge, then it is not
available for the production of any other commodity. The cost of production of a commodity as a result
of the production has to sacrifice a second best option as measured. When we spend a certain amount
of money on the production of an object, the amount of money, the cost is incurred, But rather as a
result of the production. The options must be abandoned or discarded as a measure of their value. As
a result of the production of a commodity has to give several options, then it abandoned Second Best
Opportunity or option value. It is called the opportunity cost. The Opportunity Cost is the Cost of
Next-best Alternative Foregone. It is also called alternative costs.
Suppose a farmer in a field can grow both crops of wheat and gram. If a hectare farm produces only wheat,
he has to sacrifice gram. If the amount of movement of the gram price is 1,000 then same will be the amount
of movement of the wheat price. Price of the gram which farmer has to sacrifice for producing wheat is
called opportunity cost. Thus, for a firm to be used for the production of income is the opportunity cost of
resources, this means that you cannot use their second best result of the experiment has to be discarded.
According to Leftwitch, “Opportunity cost of a particular product is the value of the foregone alternative
products that resources used in its production, could have produced.”
—Leftwitch
According to Ferguson, “The alternative or opportunity cost of producing one unit of commodity X is
the amount of commodity Y that must be sacrificed in order to use resources to produce X rather than Y.”
—Ferguson
Illustration: The concept of opportunity cost can be explained by Fig. 9.1.
It can be concluded from this figure that if a certain amount of resources X - object and Y - object is used
to produce both are produced in the following manner (i) Y–item 12 units and X the object is not a single
entity, (ii) X, 6 units, and state of the object – the object is not a single entity.

Fig. 9.1
Y

12 P
10
8
Commodity-Y 6

4

2
P'
0 X
2 4 6 8 10 12
Commodity-X

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