Accounting Cost and Economic cost

Accounting Cost and Economic cost

Accounting cost or explicit cost

Accounting costs or explicit costs are the payments made by the entrepreneur to the suppliers of various productive factors. The accounting costs are only those costs, which are directly paid out or accounted for by the producer i.e. wages to the labourers employed, prices for the raw materials purchased, fuel and power used, rent for the building hired for the production work, the rate of interest on the borrowed capital and the taxes paid.

Economic cost

The economic cost includes not only the explicit cost but also the implicit cost. The money rewards for the own services of the entrepreneur and the factors owned by himself and employed in production are known as implicit costs or imputed costs. The normal return on money capital invested by the entrepreneur, the wages or salary for his own services and rent of the land and buildings belonging to him and used in production constitute implicit cost. Thus Economic cost = Explicit cost + Implicit cost.

It may be pointed out that the firm will earn economic profits only if it is making revenue in excess of economic cost.

Economic profit = Total Revenue - Economic Costs.

Private cost and social cost

Private cost is the cost incurred by a firm for production. It includes both implicit costs and explicit costs.

Social costs are those costs, which are not borne by the producing firm but are incurred by others in society. For example, when an oil refinery discharges its waste in the river causing water pollution, such a pollution results in tremendous health hazards which involve costs to the society as a whole