Cost Contd Thus

Cost Contd Thus

Cost (cont�d) Thus the period under consideration, the adaptability or otherwise of the factors and their method of payment all serve to make money costs (unless interpreted as opportunity cost) an imperfect basis for economic decisions even by individual producers. The economist is concerned with the principles that determine decisions on the use of scarce resources, which are necessarily about what to do tomorrow, not yesterday. Hence his interest is in the costs which actions will incur rather than in the expenses which past actions have incurred. His concern with cost as a whole derives from his interest in the question of how much of a commodity is likely to be supplied (produced) at any price. The answer requires consideration of exactly what costs are relevant to production decisions.

Economics analyses the following categories of production costs:

Fixed costs are those which do not vary with output. A better term might be constant costs, since they refer to the cost of fixed factors of production, those whose quantity employed (and thus cost) is a constant Strictly speaking it is necessary to add 'over some range of output'. What is regarded as fixed cost thus depends on the period of time and the range of output. If a sufficiently long period and wide range is taken, no factors are fixed and all costs are variable.

Variable costs are those which vary with output They refer to out-lays on factors of production the quantity of which varies with output, e.g. power, raw materials. The longer the period and the wider the range of output, the more factors fall into this category. In the long run all costs are variable.

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