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Home Cost Analysis Concept of Cost of Production

Concept of Cost of Production:

 

Definition and Meaning:

 

By "Cost of Production" is meant the total sum of money required for the production of a specific quantity of output. In the word of Gulhrie and Wallace:

 

"In Economics, cost of production has a special meaning. It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management required to produce a commodity. It represents money costs which we want to incur in order to acquire the factors of production".

 

In the words of Campbell:

 

"Production costs are those which must be received by resource owners in order to assume that they will continue to supply them in a particular time of production".

 

Elements of Cost of Production:

 

The following elements are included in the cost of production:

 

(a) Purchase of raw machinery, (b) Installation of plant and machinery, (c) Wages of labor, (d) Rent of Building, (e) Interest on capital, (f) Wear and tear of the machinery and building, (g) Advertisement expenses, (h) Insurance charges, (i) Payment of taxes, (j) In the cost of production, the imputed value of the factor of production owned by the firm itself is also added, (k) The normal profit of the entrepreneur is also included In the cost of production.

 

Normal Profit:

 

By normal profit of the entrepreneur is meant in economics the sum of money which is necessary to keep an entrepreneur employed in a business. This remuneration should be equal to the amount which he can earn in some other alternative occupation. If this alternative return is not met, he will leave the enterprise and join alternative line of production.

 

Types/Classifications of Cost of Production:

  

Prof, Mead in his book, "Economic Analysis and Policy" has classified these costs into three main sections:

 

(1) Production Costs:

 

It includes material costs, rent cost, wage cost, interest cost and normal profit of the entrepreneur.

 

(2) Selling Costs:

 

It includes transportation, marketing and selling costs.

 

(3) Sundry Costs:

 

It includes other costs such as insurance charges, payment of taxes and rate, etc., etc.

Relevant Articles:

Concept of Cost of Production
Concepts of Economic Costs

Analysis of Short Run Cost of Production

Average Cost
Short Run and Long Run Average Cost Curves
Marginal Cost
Relation of Average Variable Cost and Average Total Cost to Marginal Cost
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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