Accounting cost and Economic cost

Accounting cost and Economic cost:

Accounting cost:
Accounting cost includes only the payments and charges made bny the entrepreneur to the supplier of various productive factor.

Economic cost:
Economic cost involves two types of cost as shown below:

Economic cost= Implicit cost + Explicit cost

The accounting cost are considered as explicit cost by the economists and by implicit cost they mean the two following cost which are bona fide costs according to them. These are:

i) The normal return on money capital invested by the entrepreneur himself which he could have earned if involved outside.
ii) The wages or salary that he could have earned if he sold his services to others.

Fixed and variable factors of production

Fixed factors: The factors which cannot be readily varied and require comparatively long time to make adjustment in them are called fixed factors.

Example: Capital equipment, building, top management, personnel etc. are fixed factors.

Variable factors: The factors, which can be readily varied with the change in the ouput level, are known as variable factors.

Example: Labour, raw materials and chemicals etc. are variable factors.

Application Of Variable And Fixed Factors In Short And Long Run:

In short run, factors like building, equipment cannot be readily varied. These all are fixed factors. Yet factors like labour, raw material can readily be varied with outp0ut level, which are variable factors. So in the short run, both fixed and variable factors hold good.

But as we can see, in the long run, all the factors even if it is building or equipment can be varied with the expansion of the firm’s plant. So there is no existence of fixed factors in the long run.