Costs of production are the most important force governing the supply of a product. A firm chooses a combination of factors which minimizes its cost of production for a given level of output. Production of a commodity involves expenses to be incurred on different factors. It is the sum total of expenses incurred by the producer to pay for the factors of production. Costs of production have different meanings.
To some cost of production are all types of expenditure expressed in term of money. Some takes it as the totality of sacrifice undergone by the factors in the production. Some considers it in terms of alternative which are foregone. Below are given some of the costs of production.
(1) Accounting Cost and Economic Cost:
All these expenses incurred by a producer that enter the accounts of the accountant in course of production is known as accounting cost. An entrepreneur pays wages to the labour employed, rent for hiring land and building, interest on the capital borrowed, prices for raw material, transport, electricity etc. for doing the business. All these expenses are placed in the accounts.
Economic cost takes into account the accounting cost of his production and the costs arising out of his personal labour and capital investment. His personal labour and capital invested could have earned remuneration of otherwise employed somewhere else. But these remunerations are not received by the entrepreneur himself. When these remunerations are added in the accounting cost, this constitutes economic costs.
(2) Money Cost:
As we have a monetary economy costs are generally expressed in terms of money. money cost includes various monetary expenditure made by a producer in the production. These are the Wages and salaries paid to labour, the expenditure on machinery, the payment for materials, power, and transportation, advertisement and insurance etc. Therefore the sum of money spent for producing a particular quantity of commodity is called its money cost.
(3) Real Cost:
The concept of real cost is another view of classical economists. Real cost is viewed in terms of pains and sacrifices. According to Marshall the real cost of production of a commodity is expressed not in money but in efforts and sacrifices undergone in the making of a commodity. A worker at work derives pain and displeasure and a capitalist sacrifices his present for the future in laving his money.
While producing a commodity these pain and sacrifice are taken into consideration and constitute cost of production. The concept of real cost has little significance in the analysis of price. The main difficulty with this concept is that effort and sacrifices are purely subjective and psychological and therefore can not be subjected to accurate measurement. The doctrine of real cost in words of Prof. Henderson, "leads us into a quagmire of unreality and dubious hypothesis.”
(4) Opportunity Cost:
The concept of opportunity cost is based on scarcity and choice. The opportunity cost of a commodity is the next best alternative commodity sacrificed. In other words opportunity cost of a commodity is forgoing the opportunity to produce alternative goods and services. This is because resources are scarce. In view of scarcity of resources, every producer has to make a choice among several alternatives.
If one commodity is produced another commodity is sacrificed. So opportunity cost of producing a good is equal to the cost of not producing another commodity. For example the opportunity cost of producing tomato is the amount of income from the cultivation of potatoes sacrificed. Suppose the cultivation of potatoes yield Rs.500. The farmer cultivates tomato instead of potatoes. If he forgoes the cultivation of potatoes and takes up tomatoes to cultivation he should get a minimum of Rs.500 which is the amount to be received from the best alternative potatoes foregone. Thus Rs.500 is the opportunity cost of tomatoes.
(5) Explicit cost and implicit cost:
Explicit cost includes these payments which are made by the employer to those factors of production which do not belong to the employer himself. These costs are explicitly incurred by the producer for buying factors from others on contract. For example, the payments made for raw materials, power, fuel, wages and salaries, the rent on land and interest on capital are all contractual payments made by the employer. Explicit cost is also called accounting cost. These costs are interred in the accountant's list.
The implicit or imputed costs arise in case of those factors which are owned and supplied by the employer himself. An employer may contribute his own land, his own capital and even work as the manager of the firm. He is entitled to receive remuneration for the use of these personal factors on his own enterprise. All these items would be included in implicit or imputed costs and are payable to self. Usually the producers ignore these implicit costs while computing total costs. Thus total cost should, include both explicit cost and implicit cost.
6. Social cost:
Social cost is the total cost of the society which includes the directed and indirect costs that the society pays for the production of the commodity. The producer always tries to cover his private costs. But he never takes care of the costs that the society bears consequent upon his production of commodity. For example a producer counts his costs of production and never those of people living around the factory. Production of commodity pollutes air and water which impair health and property. This is a cost to the society which always exceeds private cost.
7. Fixed cost and variable cost:
In the short-run there exist certain factors which are fixed. These factors can't be changed. And the costs incurred on these factors constitute fixed cost. Fixed cost does not change with the change in out-put. Whatever the volume of production fixed cost remains the same. Fixed cost is to be incurred if there is production or no-production. Fixed cost includes those costs like interest on capital, salary of the permanent staff, insurance premium, property taxes etc. Fixed cost is otherwise known as supplementary cost.
Variable cost is that cost which varies with the volume of output. Variable cost is to be incurred if there is production only. Variable cost is more or less depending oh the increase and decrease in the volume of production. Variable cost is otherwise known as, prime cost. Thus labour, raw materials, chemicals etc. are the factors which can be readily varied with the change in output.