Nominal cost, accouting cost,,opportunity cost

Nominal cost and Real cost:

Nominal cost: It is the money cost of production. It is also called expenses of production. These expenses are important from the producer’s point of view. He must make sure that the price of the product, in the long run, covers these expenses including normal profit otherwise3 he cannot afford to carry out business.

Real cost: The real cost of production has been variously interpreted. Adam Smith regarded pins and sacrifices of labour as real cost. Marshall includes under it “real cost of efforts of various qualities” and “real cost of waiting”. This is called the social cost by Marshall.

Opportunity cost:

The Australian school of economist and their followers gave this new concept. According to them, opportunity cost of any good is the next best alternative good that is sacrificed.

Prof. Benham says, “Opportunity cost of anything is the next best alternative that could be produced instead by the same factors or bay and equivalent group of factors, consisting the same amount of money.”

Two points must be noted from the above definition.

i) The opportunity cost of any thing is only the next best alternative forgone, not the other goods that could also be produced.
ii) The group of factors are equivalent and cost the same amount of money.

As for example, the factors, which are used to manufacture a car, may also be used for producing military equipment. Thus the opportunity cost of producing a car is the output of military equipment forgone.

Application of opportunity cost of doctrine:

The opportunity cost doctrine has a wide application in the field of economic theory. It applies to the determination of values both internally and international. It also applies to income distribution.

Limitation: There are some limitations in its application.

i) It does not apply to productive services, which are specific because a specific factor ahs no alternative use.
ii) It does not take into consideration the element of inertia.
iii) Non-pecuniary considerations.
iv) Factors are not homogenous.
v) The theory is based on perfect competition, which seldom exists.
vi) Difference in individual and social costs.

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.