Money, Real and Opportunity Costs

          Money costs mean the aggregate money expenditure incurred by a firm on the various items entering into the production of a commodity. Money costs relate to money expenditure by a firm on factors of production, on wages and salaries paid to labor, on machinery and equipment, for rent and insurance and payment to the Government by way of taxes.

            Real costs of production is expressed not in money but in efforts of workers and sacrifices of capitalists undergone in the making of a commodity. According to Marshall, it is, “The extent ions of all the different kinds of labor that are directly and indirectly involved in making it, together with the abstinences or rather the waiting required for saving the capital used in making it, all these efforts and sacrifice together will be called the real cost of production of that commodity, “Marshall had in mind the disability, pain and the discomfort involved for labor when it is engaged in production and also of the unpleasantness involved in saving and capital accumulation. The concept of real cost though of some importance lacks precision since it is expressed in subjective terms.

            Opportunity Cost. A person cannot satisfy all his wants since the money at his disposal is limited in supply. He has to choose between on thing and another. The satisfaction of one want involves the sacrifice of another. The cost of production of any unit of a commodity A is the value of the factors of production used in producing that unit. The value of these factors of production is measured by the best alternative use to which they might have been put, had a unit of A not been produced. In other words, the cost of any factor in the production of a particular good is the maximum amount which the factor unit could yield in the production of other goods since the firm has to pay to owners of factor units what these units can secure in alternative occupations, the costs are known as alternative or alternative or opportunity costs.

The concept of opportunity cost is applicable to the determination of value in internal and international trade. But the main drawback of this concept in that is applicable to a specific factor, that is which can be put to one single use. Since the factor is a single use factor. It can have no alternative or opportunity cost. The opportunity cost stands for the cost of producing one unit of a commodity in terms of another that can be produced instead.

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