home Magazine Opportunity costs for the production of goods 1. Opportunity costs: essence, causes, practical significance in the economy

Opportunity costs for the production of goods 1. Opportunity costs: essence, causes, practical significance in the economy

From this article you will learn:

The answer to the question "FOR WHOM are various goods produced?" depends on the solvency of consumers, determined by their income from labor, intellectual property, ownership of land, real estate, capital assets, securities, cash deposits, transfers and other payments from the state. The problem "FOR WHOM to produce" contains an important social "component" in case of low purchasing power of consumers. However, this problem is solved not by the market system, with its inherent principles and mechanisms, but by the distributive functions of the state.

Opportunity cost theory

Wieser's opportunity cost theory and imputation.

Baron Friedrich von Wieser (1851 - 1926), more than other representatives of the Austrian school, contributed to its "organizational" design. Having studied law in Vienna, he entered the civil service and at about the same time, together with his friend and brother-in-law Böhm-Bawerk, got acquainted with K. Menger's "Foundations ...". He devoted 42 years to presenting the ideas of the Austrian school from the professorial chairs of the Prague (1884-1902) and Vienna universities (in Vienna he inherited Menger's chair). His major works include the monographs: "On the Origin and Basic Laws of Economic Value" (1884), "Natural Value" (1889), "The Theory of the Social Economy" (1914) - the most comprehensive exposition of the theories of the Austrian school, "Sociology and the Law of Power" (1926). In addition to pure theory, Wieser was also engaged in practical activities, in 1917 he was Minister of Trade for a short time and was appointed a member of the Austrian upper house. He became famous for giving vivid catchy names and formulations to many of the ideas of marginalism.

Wieser did two fundamentally new things. He introduced a term that stuck and remained in science forever: marginal utility. And he developed such a concept, which became one of the cornerstones in neoclassical economics. In English, this is called opportunity cost.

In Russian, in various translated books, you can find four variants of this term:

1) costs of alternative opportunities;
2) the cost of missed opportunities;
3) opportunity cost;
4) opportunity costs.

Your version of the new economic theory Wieser outlined in two books. One is called The Origin and Basic Laws of Economic Value (1884). The other is "Natural Value" (1889). In subsequent works, Wieser refined and developed his ideas in the context of broader problems. social science.

Here is one of the possible formulations of the law of costs (Wiser's law): the real value of any thing is the lost utility of other things that could be produced (acquired) with the help of resources spent on the production (acquisition) of this thing.

It is clear that the concept of opportunity costs cannot exist without the assumption that there are many sellers, buyers, and consumers. It may manifest itself, however, for some separate individual, but this is a social concept. And it was received by Wieser because he shifted the angle of view from the individual to society.

Another condition implied by the notion of opportunity cost is the presence of competition. Competing uses of productive resources, competing uses of stocks, all presuppose competing producers or consumers, sellers or buyers. It is only under competitive conditions that costs reflect the value of alternative uses of resources.

And, finally, the third. What is in abundance is not appreciated by people. If a good is available without restriction, alternative possibilities cease to regulate the use of this good. The abundance of goods means that there is no competition for their possession. The concept of opportunity cost makes sense only in cases where there are limited and constant stocks of certain resources.

Opportunity cost concept

In the theory of value, the concept of utility and the concept of production costs have traditionally been opposed to each other. Wieser, on the other hand, tried to overcome the dualism of utility and cost. The value of productive goods is determined in Austrian theory by the value (marginal utility) of the product that can be produced with their help. By producing some goods, the producer sacrifices the opportunity to produce something else, and it is "the total utility of other products that can be obtained with the help of these productive means" that constitutes costs for him. Thus, Wieser's concept of costs turned out to be purely Austrian: costs for him consist of unreceived subjective utility, do not contain any real costs of production factors, as with the representatives of the classical school or Marshall, and are not associated with the anti-usefulness (“burdens”) of labor, as with Jevons. Such costs are directly commensurate with the usefulness of the product, so that any economic entity will easily, consciously or unconsciously, make the necessary calculation of costs and results.

imputation theory

The general idea that the value of productive goods is determined by the value of consumer goods produced with their help was argued in Menger's "Foundations ...". The main problem was how to determine the value of each of the set of complementary (complementary) production goods necessary for the production of this product. Menger, consistently adhering to his theory of value, determined the value of such a good through the loss of wealth associated with its loss.

Thus, the value of a productive good is equal to the value of the product that would be produced if it were lost with the help of optimally ("economically", in Menger's terms) used remaining goods.

However, Wieser found weaknesses in this definition. First, in this case, the value of productive goods will not be the same depending on which unit of which we hypothetically “remove”. The synergistic effect (the whole is always greater than the sum of the parts) that is present in the optimal combination will always be attributed to the good being removed.

Secondly, the value of the product will not be distributed among productive goods without a remainder. Wieser proves it this way: the optimal production combination is in the best possible way the use of all the benefits involved. Therefore, if we withdraw a unit of one of them, all the rest "will give less income than that which was expected from the originally envisaged combination." This, according to Wieser, is contrary to "the law that productive means should be valued on the basis of the income possible with their maximum use." The differences in the approach of Menger and Wieser are explained by the fact that Wieser, unlike Menger, professed an equilibrium approach, in which all production combinations are optimal and the value of productive goods cannot differ in them. Therefore, Wieser, in his theory of imputation, tried to refine Menger's theory in such a way as to exclude any unallocated balance.

Wieser distinguished between "general" and "specific" imputation. By "general" imputation is meant the case when different products are produced using the same productive goods. In this case, we can obtain a system of equations in which the values (marginal utilities) of products, as well as the physical costs of productive goods, are known, but the values of productive goods are unknown. If, as is quite likely, the number of products exceeds the number of productive goods, and the consumption coefficients of productive goods for each product are different (that is, the equations are linearly independent), then our system can have a solution.

For example, production goods x, y, and z are used to produce three different products in the following proportions:

x + y = 100
2x + 3z = 290
4y + 5z = 590.
From here, the economist and economic agent will be able to calculate their value:
x=40;
y = 60; z = 70.
Similarly, the value of all "general" production goods used in the economy is determined.

If, in addition to them, some specific production good is used in production, its contribution to the value of the product is determined as the remainder, the difference between the value of the product and the value of the general productive goods.

Opportunity cost examples

opportunity cost are costs that are an expression of the value of the best of the alternative options, and also that would have to be eliminated in terms of economic choice.

It is often found that the opportunity cost is defined as the opportunity cost forgone. They are characterized by the costs of only a single good, which are expressed in another good, while this good has to be sacrificed in order to obtain the very first good. Opportunity cost is inevitable in practice.

In the case of a choice between food production and investment products, the opportunity losses will be presented in the form of a reduced output of investment products that the company bears and compensation for a large volume of food products. Thus, people pay for purchased additional food products by reducing the amount of accumulated investment stock. People have a choice of food products, and they pay for it with investments. The price of this choice is the unissued means of production, that is, the amount of production that is lost and cannot be restored. In economic theory, this price is usually called the alternative price, as well as the cost of missed opportunities, or imputed costs.

Opportunity costs are represented by the following two types:

1) opportunity costs, which are directly related to income that cannot be returned. This type of cost is characterized by the loss of potential income, in order to study in higher education. educational institution;
2) opportunity costs, which are associated with costs expressed in monetary terms.

This type costs can be represented as cash costs for studying at a higher education institution. The total number of opportunity costs in the above cases will contain both non-reimbursable income, i.e. lost, and costs expressed in monetary terms.

Opportunity costs include payment for the resources used in production, payment wages employees, etc. The main goal of these payments is to attract these factors by diverting them from alternative use.

In economics, there is a direct relationship between costs and the abandonment of the production possibility of producing alternative products and services.

There are also explicit and implicit, i.e. implicit, costs.

Explicit costs are opportunity costs that take the form of direct or monetary payments for inputs. An example would be the following payments: interest to banks, wages, cash fees, payment to suppliers for manufactured products and contractors for services rendered, payment on delivery transport organizations etc. Explicit costs do not limit the limits of the costs incurred by the enterprise.

Implicit, or implicit, costs are represented by the opportunity costs of production resources, which are owned by the owners of enterprises. Their existence is not reflected in contracts; as a result, they become unreceived, expressed in material form. An example is the use of steel only in manufacturing process for the production of weapons, and not for use in the production cars. Mainly reflected in the accounting financial reporting There are no imp-liquid costs at the enterprise, but this fact does not reduce their value.

The opportunity cost of learning

For the concept of opportunity costs is especially important because it forms the methodological basis for a direct assessment of the value. Performing the function of a universal equivalent, with the help of which the valuation of any assets and liabilities of an enterprise is carried out, money also has its own value. Chapter 2 discussed in detail the principles of measuring the time value of money. Developing the main provisions of this chapter, we can come to the conclusion that the value of the money that an economic entity possesses is determined for it by the potential benefit that it misses by not investing money in income-generating operations. It can be assumed that there is some possibility of absolutely safe money at a certain percentage - for example, put it on a deposit in a reputable bank or purchase government securities. The interest rate at which the investor will be paid income on such investments and will be the opportunity cost of passively owning money. A thousand rubles not deposited in a reliable bank at 10% per annum will become cheaper by exactly this 10% by the end of the year (if it was not possible to place these funds on even more favorable terms). Recall that the process of depreciation of money over time is modeled by means of the initial amount at a given interest rate. This means that in financial management the interest rate at which an investor can, with absolute reliability and security for his money, place them on certain period, represents the opportunity cost of ownership, and the discounting procedure allows you to determine the real value of money at any point in time.

Thus, discounting future cash flows, the financier simply reduces them by the amount of opportunity costs associated with these flows. In other words, he subtracts from the amount of income the costs of obtaining them. Typically, these costs are not the only costs of a financial transaction, they are added to various other costs generated by this decision (for example, commissions paid to a stock broker when buying securities, or labor and material costs for the implementation of a real investment project). By subtracting the amount of both costs from the amount of expected future cash inflows, the net (NPV) of these inflows is obtained. Recognizing the time value of money, financiers are forced to take it into account in their calculations, increasing the amount of expenses for their planned operations by its value. The measure of this cost is the interest rate.

It should be perfectly clear that, like the concept of opportunity cost itself, this application of it would remain nothing more than a bold game of economic thought if it did not find practical confirmation throughout the history of human society. You don't have to be a graduate of a prestigious university to understand why an increase in the rate by the central bank of any country means an almost proportional fall in the stock prices of enterprises and a decrease in economic activity. An increase in the opportunity cost (that is, the price) of money devalues all future earnings, including stock dividends. It becomes much more convenient and safer to receive an increased guaranteed bank or loan interest than the expectation of a return on real investments. Money becomes a more expensive commodity and in exchange for it the owner wants to get more than he had before. And since the increase in the interest rate of the Central Bank is most often carried out in response to inflationary processes, it becomes clear why high inflation is incompatible with stable economic growth: in an attempt to resist the objective inflationary depreciation of money, the government and the central bank increase their opportunity cost, as if luring them to banking deposits. Before the money (more precisely, their owners) “bite” on this bait and subside from the commodity and currency markets, thereby easing the pressure on the price level; they will exit riskier stock markets first, i.e. depreciate corporate securities traded on these markets. With a favorable set of circumstances and technically competent actions of the financial authorities, their goals can be achieved: a decrease in prices on the stock market will result in an increase in the return on investments, calmed down investors will again carry their money there. If any miscalculation is made, then the situation will get out of control: an increase in the interest rate will only spur inflation and the money that has left the stock markets will not want to return to them; in order to keep this money in banks, the interest rate will have to be raised again, and so on. until Black Monday.

An example of the use of the interest rate to regulate the opportunity cost of money is the recent actions of the US Federal Reserve System (FRS) and the central banks of other Western countries. More than a decade of prosperity for the American economy turned into an unprecedented increase in the activity of the stock market. Stock prices are rising steadily at a rate of about 5% per year. This cannot but attract stock speculators who earn "quick money" on the resale of shares. A side effect of these processes could be an “overheating of the economy”, generating high inflation. In order to prevent undesirable developments and somewhat “cool down” the market, America's financial authorities were forced to raise the Fed's interest rate. European central banks immediately responded to this increase, as an increase in the profitability of bank deposits in the United States could cause a significant outflow of capital from other countries. As a result, by mid-February 2000 the rate of the Bank of England was 5.75%, which is a whole percentage point higher than it was half a year ago.

Time will tell how timely and justified these measures will be. There are examples of unsuccessful attempts to influence the economy by changing the opportunity cost of money: in the early 1980s, the Central Bank of France raised its interest rate sharply. In this way, the socialists who came to power wanted to reduce the outflow of capital from the country, stabilize the economy and reduce unemployment. The result turned out to be the opposite - inflation increased, and capital investment in the real economy decreased.

Despite all the originality and relative underdevelopment Russian economy, The Central Bank of Russia also actively uses its interest rate (refinancing rate) to regulate macroeconomic processes. As the high inflation that arose at the initial stage of reforms was suppressed, the Central Bank rate steadily decreased, reaching a record high in October 1997. low level- 21% per annum. However, the subsequent financial crisis caused it to rise to 150% in May 1998. Overcoming the consequences of the crisis, growth industrial production and lower inflation (36.5% in 1999) allowed the refinancing rate to be gradually lowered to 45% by February 2000 and to 33% by the end of March. However, its level remains extremely high (especially in comparison with Western countries). The high opportunity cost of funds is one of the most significant obstacles to investment in the real sector of the Russian economy.

In ch. 2 noted that the change in the value of money over time is due to several reasons, in particular: inflation, loss of income from investment and the risk of not receiving money in the future. All of these reasons are taken into account when estimating the true value of the opportunity cost of money. In practice, this finds expression in the choice of an adequate discount rate at which future cash flows to their present value, the so-called desired rate of return or comparison rate. As a rule, such a rate includes several elements: the level of risk-free returns available to a given investor (in the US, these are short-term treasury bills); the expected rate of inflation; premium for the risk inherent in the investment option under consideration. For example, with a risk-free rate of 8% per annum and expected inflation of 5% per annum, an investor has the right to expect a return on investment of at least 13% per annum. Taking into account his individual assessment of the risk inherent in the investment option under consideration, the desired return on these investments can be increased by another 7%. Then, to discount projected future returns on investments, he should apply a rate of 20% per annum. It is in this amount that the investor will evaluate the opportunity cost of the funds that he has. The project will be of interest to him only if the NPV of all future income from this project at a discount rate of 20% is positive.

Another criterion for the effectiveness of financial investments in this case is the rate of return (IRR). Economically viable are projects whose IRR is higher than the opportunity cost of the money invested in these projects. In our example, the investor should only choose a project with an internal rate of return higher than 20%. Understanding the financial nature of opportunity costs allows you to more deeply define the meaning and scope of the IRR indicator. Two financial postulates can be formulated:

Cash should invest in projects that bring the maximum NPV.
You should invest in the project as long as the IRR of the project exceeds the opportunity cost of the money invested.

Not surprisingly, the indicators of internal rate of return and net present value are widely used in valuation practice. investment projects. However, this area does not exhaust the areas of use of these most important financial parameters. Virtually any long-term financial solution can (and should) be justified from the standpoint of the two rules above. By observing these rules, the financier contributes to the achievement of his main goal - maximizing the value of the enterprise, i.e. increase the capital of the owners of this enterprise.

The concept of opportunity costs enriches financial theory and makes it more reasonable. It allows you to understand the nature of the relationship between individual economic entities - the population, the state, enterprises. The use of this concept makes it possible to explain why the rise in the price of oil on world markets led to an increase in the price of gasoline in Russia, which exports rather than imports oil. Without applying this concept, it is impossible to understand why raising the interest rate is not profitable for fixed income holders, why investors demand higher yields on long-term bonds compared to short-term ones, why firms do not keep large balances of money in their accounts ...

At the same time, it does not make life easier for financial practitioners, who clearly feel the distance between the theoretical solution of the problem and its practical implementation. Realizing that the results of the company's activities depend not only on internal, but also on a large number of external factors, financial managers want to get in their hands reliable tools for measuring the strength of the influence of these factors and ways to properly respond to their impact. Practical work daily poses a large number of questions to the financier, for the answer to which it is necessary to calculate and analyze opportunity costs. Here are just some of these questions: how to choose the right risk-free rate; how to predict the rate of future inflation; how to measure risk and identify its level with the value of a specific discount rate? In fact, there are much more questions, and far from all of them have already received unambiguous answers. In later chapters of this manual, we will show further development considered concepts and ways of their practical use.

Opportunity cost formula

Any production of goods and services, as you know, is associated with the use of labor, capital and natural resources, which are factors of production, the cost of which is determined by production costs.

Due to the limited resources, the problem arises of how best to use them from all the rejected alternatives.

Opportunity costs are the costs of issuing goods, determined by the cost of the best lost opportunity to use production resources, ensuring maximum profit. The alternatives are called economic costs. These costs must be distinguished from accounting costs.

Accounting costs differ from economic costs in that they do not include the cost of factors of production owned by firm owners. Accounting costs are less than economic costs by the amount of implicit earnings of the entrepreneur, his wife, implicit land rent and implicit interest on equity the owner of the firm. In other words, accounting costs equal economic costs minus all implicit costs.

Variants of classification of production costs are diverse. Let's start by distinguishing between explicit and implicit costs.

Explicit costs are opportunity costs that take the form of cash payments to owners of production resources and semi-finished products. They are determined by the amount of expenses of the company to pay for the purchased resources (raw materials, materials, fuel, work force etc.).

Implicit (imputed) costs are the opportunity costs of using resources that are owned by the firm and take the form of lost income from the use of resources owned by the firm. They are determined by the cost of resources owned by the firm.

The classification of production costs can be carried out taking into account the mobility of production factors. There are fixed, variable and general costs.

There are the following types of costs:

Basic - the cost of the previous period;
- individual - the amount of costs for the manufacture of a particular type of product;
- transportation - the cost of transporting goods (products);
- products sold, current - assessment of sold products at the restored cost;
- technological - the amount of costs for the organization technological process production of products and provision of services;
- actual - based on data actual costs for all cost items for the period.

Determine the opportunity cost of production

Opportunity cost is the amount of lost profit that can result from choosing alternative way use of resources and rejection of other opportunities. The calculation of alternative costs allows the head of the enterprise to make the most profitable decisions and plan the activities of the organization.

A similar valuation method is used for those factors of production that are acquired by the entrepreneur. For example, if an entrepreneur hired workers, then the cost of their labor is not equal to wages, but to the income that can be obtained by using these workers in alternative production.

Economic Choice Opportunity Cost

It has already been noted above that there are different ways of using resources and different goals that are achieved when using them. There is also the possibility of moving resources from one application to another. Assuming that the amount of resources (labor, land, capital, entrepreneurial ability) is given and does not change over time, moving them from one sphere to another should mean a decrease in production volumes where resources are moved from, and an increase in production where resources flow in. With constant volumes of resources, the choice is always made on the principle of "something for something". With any choice of “what is more, what is less”, we are faced with production costs, since we always get something, but at the same time we spend something. This reasoning leads us to the concept of opportunity cost.

The opportunity cost is the opportunity cost. They are measured by the value of the products that we refuse in order to increase the production of other products. Opportunity cost reasoning draws attention to the rationality of economic choice. It's about about not choosing a worse solution if there is a better one, i.e. bringing more effect.

For example, when applying the same amount of labor, machines and fertilizers, 30 centners can be obtained from 1 hectare of land. wheat or 150 c. potatoes. Comparing the cost of grain and potatoes at market prices, the producer can easily answer that it is more profitable for him to produce 30 centners. grain is an opportunity cost of 150 c. potatoes and vice versa.

Another example. Money savings can be kept at home in anticipation of accumulating the right amount needed for a large purchase. But they can be put in a bank on a long-term deposit, receiving a certain percentage on it. The opportunity cost of keeping money at home is the amount of interest not earned.

In practice, the choice is made not according to the principle “either one or the other”, but according to the principle “what is more, what is less”. Then it is necessary to carry out the distribution of resources in accordance with the choice of the structure of production. The choices can be presented in the form of a table.

Suppose we have a given amount of capital and labor available for the production of tractors (a means of production) and private cars (a means of consumption).

Assuming a constant volume of resources, the transfer of a part of them (if they are characterized by perfect divisibility) from one sphere of production to another leads to the fact that initially the increase in the production of cars in relation to the reduction in the production of tractors is large. As this process continues, the ratio indicator positive effects decreases to negative. This is where the law of diminishing returns comes into play.

In the above example, the transition from option B to option C means an increase in the production of cars from 160 to 250 thousand units, but is carried out by reducing the production of tractors from 400 to 300 thousand units. In the transition from option D to option E, there would be an increase in the production of cars from 320 to 380 thousand units, but at the cost of reducing the production of tractors from 200 to 100 thousand units. In the first case, alternative costs for additional production of 90 thousand pieces. there was a loss of production of 100 thousand pieces. tractors. In the second case, the opportunity cost would be higher, since the additional production of 60 thousand pieces. would also require the abandonment of the production of 100 thousand pieces. tractors.

The constructed table reflects, therefore, not only the law of diminishing returns, but also the law of increasing opportunity costs.

It was tacitly assumed above that opportunity costs (opportunity costs) are understood as the opportunity costs of producing an additional volume of output. Such opportunity costs are called marginal opportunity costs. It is more convenient to illustrate the concept of marginal opportunity cost in the form of a table reflecting a consistent increase in the production of tractors at the expense of a decrease in the production of cars.

In addition to marginal opportunity costs, the concept of total and average opportunity costs is also used.

For example, during the transition from production possibility E to D, an additional second batch of tractors of 100 thousand units is produced. The marginal opportunity cost in this batch is 60 thousand pieces. cars. The production of both batches of 100 thousand pieces. tractors is estimated at a total opportunity cost of 80 thousand pieces. cars (400-320). On average, one batch of tractors in 100 thousand pieces. of the two produced, it costs 40 thousand pieces. cars (80:2).

The rationale for the operation of the laws of diminishing returns and increasing opportunity costs is the lack of perfect interchangeability of resources used in the production of different products. For example, initially, to expand the production of cars, resources are used in the tractor industry, which are highly productive for the production of cars and not so much for tractors. But then, after the exhaustion of such resources in the tractor industry, to expand the production of cars, resources of little use for the production of cars begin to be involved, which, however, can be highly productive for the production of tractors.

The question of whether it is more profitable to produce more tractors and fewer cars in the country (or vice versa) cannot be decided only on the basis of this table. This table illustrates only the possibilities of choice in conditions of limited resources of capital and labor. To select a specific production structure and the most effective way allocation of available resources is necessary Additional Information about the level of prices, production costs, specific profits, etc.

Types of Opportunity Costs

The economic cost of producing a good depends on the amount of resources used and the prices of the services of the factors of production. If an entrepreneur uses not acquired, but own resources, prices should be expressed in the same units in order to accurately determine the amount of costs. The cost function describes the relationship between output and the minimum possible cost required to provide it. Technology and input prices are usually taken as input when defining the cost function. A change in the price of a resource or the use of an improved technology will affect the minimum cost of producing the same volume of output.

The cost function is related to production function The minimization of costs for the production of any given output depends in part on producing the maximum possible output for a given combination of factors.

In real production activities it is necessary to take into account not only the actual monetary costs, but also the opportunity costs.

The opportunity cost of any decision is the best of all other worst decisions. The opportunity cost of using resources is the cost of using resources at the best of other worst alternative uses. The opportunity cost of the labor time that an entrepreneur spends running his business is the wages he gives up by not selling his labor to another company other than his own, or the cost of free time that the entrepreneur sacrifices, whichever is greater. .

Opportunity costs include such as payment of wages to workers, investors, payment of resources. All these payments are intended to attract these factors, thereby diverting them from their alternative use.

Explicit costs are opportunity costs that take the form of direct (cash) payments for factors of production. These are such as: payment of wages, interest to the bank, fees to managers, payment to providers of financial and other services, payment of transportation costs and much more. But the costs are not limited to the explicit costs incurred by the enterprise. There are also implicit (implicit) costs. These include the opportunity costs of resources directly from the owners of the enterprise. They are not fixed in contracts and therefore remain under-received in material form. So, for example, steel used to make weapons cannot be used to make cars. Usually enterprises do not reflect implicit costs in the financial statements, but this does not make them any less.

External and internal costs

Based on the concept of time costs, we can say that costs are those payments that an entrepreneur must make in order to divert the factors he needs from alternative uses. These payments can be both external and internal. Those payments that we pay to suppliers of labor services, raw materials, fuel, energy, transport services etc., are called external costs. That is, they represent payments to suppliers that are not related to the owners of this firm. However, in addition, the firm may use its own resources belonging to itself. As we already know, the use of both own and non-own resources is associated with some costs. The costs associated with using your own resource are unpaid or internal costs. For example, the owner of a company, paying rent, incurs internal costs, although he could rent this premises and receive monthly income. Working in his enterprise, using his capital, the owner sacrifices the interest and wages that he could have if he offered his services as a manager to any enterprise.

production costs in short term

The short-term period is a period of time too short for a change in production capacity, but sufficient for a change in the intensity of use of these capacities. Production capacities remain unchanged in the short run, and output can change by changing the amount of labor, raw materials, and other resources used at these facilities. The cost of production of any product depends not only on the prices of resources, but also on technology - on the amount of resources that is needed for production. We'll look at how output will change as more and more variable inputs are introduced.

Fixed, variable and total costs

As already noted, in the short term, some resources associated with technical equipment businesses remain unchanged. The number of other resources may change. It follows that in the short term, various types of costs can be classified as either fixed or variable.

Fixed costs are such costs, the value of which does not change depending on the volume of production. It is generally accepted in practice the definition fixed costs as an overhead. Fixed costs are associated with the direct existence of the enterprise, even in cases where the enterprise does not produce anything, they must be paid. These include: rent payments, depreciation, senior management salaries and forgone implied implied interest on invested capital, etc.

Variables are such costs, the value of which varies depending on the change in the volume of output. These are the costs of raw materials, fuel, electricity, most labor resources etc. Sum variable costs varies in direct proportion to the volume of production. At the beginning of the production process, variable costs will increase at a decreasing rate until they correspond to the maximum level of profitability, at minimal cost for each additional unit of output. Then variable costs will increase at an increasing rate, this is due to the law of diminishing returns. At the start of production, an increasing marginal product will call for fewer and fewer variable inputs to produce an additional unit of output. And since each unit of variable resources costs the same, variable costs will increase at a decreasing rate. But as soon as marginal product starts to fall, we will need to attract more and more variable resources. It follows that marginal cost will increase. The total cost of STC is the sum of fixed and variable costs at a given level of production. At zero output, total costs will be equal to fixed costs.

Average cost

Average cost (AC) is the total cost per unit of output. Determined by dividing the total cost of production by the quantity units of production.

Average fixed costs (AFC) are determined by dividing total fixed costs (TFC) by the corresponding number of products produced (Q)

Since fixed costs, by definition, do not depend on the volume of products produced, the average fixed costs will also decrease with an increase in the volume of production.

Average Variable Cost (SAVC) is determined by dividing Total Variable Cost (TVC) by the corresponding quantity of output Q

SAVC first falls, reaches its minimum, and then begins to rise. Such a slope of the curve is explained by the law of diminishing returns, i.e. up to one hundred and fiftieth unit, marginal cost falls, therefore, AVC will also fall, and then both TVC and AVC begin to increase.

Average Total Cost (SATC) is calculated by dividing total costs TC on the volume of products produced Q.

SATC = STC / Q = FC/Q+VC/Q = AFC + SAVC

marginal cost

Marginal cost is called the additional costs associated with an increase in output by 1 unit “or a change in total costs with a change in output (MC):

The production of the first thirty-five units increases the TC amount from 0 USD to 1700 USD, in which case the MC will be 48.57 USD per unit produced. The marginal cost of the next one hundred and fifteen units is $28.70 per unit. The marginal cost of producing each unit is presented in the table.

The relationship between marginal product and marginal cost is explained: at a given level of price (cost) for variable resources, increasing returns (i.e. an increase in marginal product) will be expressed in a fall in marginal cost, and diminishing returns (i.e. a fall in marginal product) - an increase in marginal cost.

Private and public costs

Costs can be viewed from the point of view of either an individual commodity producer or society as a whole. In some cases, both approaches have the same result, in others they are different. This is due to the fact that not all production results have commodity form, some of them are "implemented" directly, bypassing the relationship of purchase and sale, and have a direct impact on the welfare of society. Thus, the social costs associated with the operation of the metallurgical plant will exceed the private costs by the amount of external costs for the plant itself, the costs of compensating for the socio-economic consequences of environmental pollution, regardless of who will carry them out. Only in the absence of external costs and effects do public and private costs coincide.

Knowledge of cost functions is very important for decision making both at the enterprise level and at the government level. Short-term cost functions are of key importance for determining prices and output volumes, while long-term cost functions are important for planning the development of enterprises and their investment policy.

Opportunity Costs of Opportunities Forfeited

Choosing this or that option, society refuses something. The amount of one good that must be sacrificed to increase the production of another good is called opportunity cost, opportunity cost, opportunity cost, opportunity cost, opportunity cost.

Lost Opportunity Costs:

First, are public concept, as they arise when there is a choice;
Second, they presuppose the presence of competition (competing uses of resources, competing uses of economic goods); Third, the costs of foregone opportunities make sense in the presence of limited resources and benefits.

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A term denoting lost profits (in a particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other opportunities. The amount of lost profit is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an inseparable part of any decision making. The term was introduced by the Austrian economist Friedrich von Wieser in his monograph The Theory of Social Economy in 1914.

The theory of opportunity cost is described in the monograph "The Theory of the Social Economy" in 1914. According to her:

The contribution of von Wieser's opportunity cost theory to economics is that it is the first description of the principles efficient production.

Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.

Example

If there are two investment options, A and B, and the options are mutually exclusive, then when assessing the profitability of option A, it is necessary to take into account the lost income from not accepting option B as the cost of a missed opportunity, and vice versa.

A simple example is given by the well-known anecdote about a tailor who dreamed of becoming a king and at the same time "would be a little richer, because he would sew a little more." However, since being a king and a tailor simultaneously impossible, then the profits from the tailoring business will be lost. This should be considered lost profit upon ascension to the throne. If you remain a tailor, then the income from the royal position will be lost, which will be opportunity cost this choice.

Notes

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See what "opportunity cost" is in other dictionaries:

- (opportunity costs) The benefit lost due to the non-use of an economic resource in the most profitable of all possible activities. For example, for a self-employed smallholder, the opportunity cost is... ... Financial vocabulary

opportunity cost- Income lost by the economic agent as a result of his decision (although it could be otherwise). The opportunity cost of a good or service is the value of the goods or services that had to be given up in order to ... ... Technical Translator's Handbook

- (opportunity costs) Benefit lost due to non-use of an economic resource in the most profitable of all possible areas and economic sectors. For example, for a self-employed owner, the opportunity cost is the highest ... ... Glossary of business terms

- (opportunity cost) The amount of goods and services that could be obtained instead of any other goods. If it was not produced, the resources used to make it could be used to produce other goods and services. If… … Economic dictionary

opportunity cost- see Alternative costs ... Terminological dictionary of a librarian on socio-economic topics

opportunity cost- (OPPORTUNITY COST) economic costs any type of activity, the value of which is determined by the size of the maximum income from the most effective alternative activity ... Modern Money and Banking: A Glossary

opportunity cost- The difference between the effectiveness of real and desired investments, taking into account fixed costs and transaction costs. The efficiency differential represents the consequences of not being able to execute all desired trades. The most valuable of ... ... Investment dictionary

opportunity cost- income possible in an alternative option, but lost due to the fact that these resources are used in accordance with another option ... Glossary of terms for the examination and management of real estate

opportunity cost, opportunity cost- [(opportunity cost] Costs (often called imputed) that the owner of the resource may incur by choosing a specific option for its use and - thereby - rejecting all available alternatives. Numerically defined as ... ... Economic and Mathematical Dictionary

Expected return on the best investment alternative that is given up for the sake of this project (See RATE OF RETURN) Glossary of business terms. Akademik.ru. 2001 ... Glossary of business terms

Books

The Economic Way of Thinking, Heine P., Bouttke P., Prychitko D. The Economic Way of Thinking is one of the world's most popular economics courses. 15 of the book describes not only the basic principles of micro- and macroeconomic analysis, but also ...

opportunity cost is the cost of producing one good expressed in terms of the cost of producing another good. Opportunity cost is also called opportunity cost.

Opportunity Costs and Economic Efficiency. The concept of opportunity cost is effective tool in making effective economic decisions. The assessment of resource costs is carried out here on the basis of comparison with the best of the competing, most effective method use of scarce resources. The centrally controlled system has deprived business entities of independence in making strategic decisions. And that means the possibility of choosing the best alternatives. The central authorities themselves, even with the help of computers, were unable to calculate the optimal structure of production for the country. They could not find answers to the two main questions of the economy "what to produce?" and "how to produce?". Therefore, under these conditions, the result of opportunity costs was often a shortage of goods and low-quality products.

For a market economy, choice and alternativeness are integral features. Resources must be used in an optimal way, then they will bring maximum profit. Saturation with the goods and services that consumers need is a persistent outcome of the opportunity cost of the market system.

Uncertainty in the opportunity cost. Opportunity costs are sometimes difficult to imagine as a certain amount of rubles or dollars. In a widely and dynamically changing economic environment, it is difficult to choose the best way to use the available resource. In a market economy, this is done by the entrepreneur himself as the organizer of production. Based on his experience and intuition, he determines the effect of a particular direction of resource use. At the same time, income from lost opportunities (and hence the size of opportunity costs) are always hypothetical.

For example, assuming that the opportunity cost of producing miniskirts is 1 million rubles, the company proceeded from the hypothesis that maxiskirts could be sold for this amount. But who can guarantee that fashion would not make long skirts more popular? And that they could not be sold for 2 million rubles? However, one cannot be sure that all alternatives have been considered. Perhaps, by directing these funds to tailoring men's trousers, the company will receive much more profit.

Opportunity costs and the time factor. The accounting concept completely ignores the time factor. It evaluates costs based on the results of already completed

A term denoting lost profit (in a particular case - profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other opportunities. The amount of lost profit is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an integral part of any decision making. The term was introduced by the Austrian economist Friedrich von Wieser in his monograph The Theory of Social Economy in 1914.

Opportunity costs can be expressed both in kind (in goods, the production or consumption of which had to be abandoned), and in money equivalent these alternatives. Also, opportunity costs can be expressed in hours of time (lost time in terms of its alternative use).

The theory of opportunity cost is described in the monograph "The Theory of the Social Economy" in 1914. According to her:

The contribution of von Wieser's opportunity cost theory to economics is that it is the first description of the principles of efficient production.

Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.

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opportunity cost

Economics - Introductory Lecture: Core Problem, Opportunity Cost, CPV

Depreciation and the opportunity cost of capital

Subtitles

Let's say we decide to stick with Scenario E for a few days. On average, we catch one hare per day and pick 280 berries. Probably, at that time we wanted more berries. This is scenario E. But now we suddenly want more protein. Let's write: we stick to scenario E, but we wanted protein. So you need to think about ratios. If we want to catch more rabbits, we need to understand that if I want to catch another rabbit, I will have to give up something. If I catch one more rabbit, we will go from one rabbit a day to two, that is, from scenario E to scenario D. What will we give up? So, here we write +1, And it turns out that we refuse 40 berries. Visually, this can be shown here. If I want to catch another rabbit, I won't be able to move into that out-of-reach zone from the curve. I have to stay on the production possibilities frontier, sometimes you can see a reduction in the GPV. Or you can call it an abbreviation. If I want another rabbit, the production possibilities frontier will drop, and I'll have to give up 40 berries. That is, one more rabbit means that there are costs. On average, I lose 40 berries. 40 berries. There is a term to describe what we have just discussed - the opportunity cost of getting one more rabbit for me would be 40 berries. Let's write down. The opportunity cost of another rabbit. The opportunity cost of another rabbit. These are the overheads for Scenario E, but as we shall see, they will vary depending on the scenario chosen, at least for this example. The opportunity cost of one additional rabbit is 40 berries. Scenario E. For the sake of another rabbit, I have to give up 40 berries. Another term needed to talk about the opportunity cost of, say, production is the opportunity cost of producing one more rabbit, or the opportunity cost of producing one more unit of output. They are sometimes referred to as marginal costs. So this can be seen as marginal cost. In our video, the cost refers to what we refuse, a possible alternative. In other examples, marginal cost will sometimes be expressed in monetary units, such as dollars. What was the cost of producing an additional unit of output? Let's make sure we've dealt with the opportunity cost. So we stick with Scenario E, where we have the opportunity cost of another rabbit. But what will be the opportunity cost if, say, we are tired of eating meat. We stuck with Scenario E, but we decided to go vegetarian and move on to Scenario F: we forego rabbits and want to eat as much fruit as possible. Regarding scenario E, one can also ask the question: what will be the opportunity cost? Let's write it easier: the cost of another 20 berries will be minus one rabbit. So, the cost of another 20 berries will be minus one rabbit. We do the following. I want to increase the number of berries by 20, but to do this, I need to decrease the number of rabbits by one. The opportunity cost, if we stick to Scenario E, from an additional 20 berries would be equal to one rabbit. One rabbit. So it's not marginal cost, because I'm talking about the cost of 20 more units of output, not just one. If we are talking about the marginal cost of one more berry, then let's say that 20 berries equals one rabbit, i.e. we will need to divide both parts by 20. So, divide both parts by 20. The extra berry, suppose it will be here if you're interested in seeing it on a graph. Another berry, divided by 20, will be equal to 1/20 of the rabbit. That is, according to scenario E, if I want another berry, on average I will get 1/20 less rabbits. 1/20 less rabbits. If we represent it in this way, then it will be called marginal cost. For those who want to see it on a graph, this curve, maybe it's not very accurate, let's not try to depict everything absolutely exactly, the curve is for one berry, we can be sure of this, the opportunity cost of 20 additional berries is equal to one rabbit , but if we imagine that we have a straight line here, it is not so curved, imagine that there is a straight line between these two points, then the opportunity cost of 1 berry is 1/20 of a rabbit, the marginal cost of an additional berry is 1/20 of a rabbit. We can do it at other points on the curve, and I suggest you do it based on the table we made in the last video and this curve. Consider what the opportunity cost will be in different scenarios. For example, if you are on scenario B and you want another rabbit, how many berries will that cost you?

Example

There are several groups of production costs. One of them is the opportunity cost. Opportunity costs of production are costs that have been valued in terms of lost profits when using the same resources for other purposes. Read more about them in this article.

Most of the costs incurred by the firm are carried out for certain purposes, that is, they cannot be used for others. For example, the funds that were spent to make bakery products, cannot be used for the manufacture of fermented milk products.

When a company spends funds in a particular direction, it cannot use them for other purposes. In this regard, the choice of one method of production of goods implies that it is impossible to spend the same funds on another method. This is the alternative cost.

Also, such costs have another name. Opportunity cost of producing a product is the cost of producing products that have been valued in terms of the lost benefit of using the same means for different purposes. Also, they can be called imputed costs and costs of rejected opportunities.

Composition of alternative expenses

The opportunity cost of producing a good is measured in terms of monetary terms, as the difference between the income that the company was able to receive at the most rational use funds and actual income.

However, there are costs that cannot be recognized as alternative. Expenditures made by organizations in the order of unconditionality do not apply to alternative ones. For example, paying taxes, renting a workshop, and others. Costs of this nature will not participate in the economic decision.

Explicit and implicit costs

Alternative costs are divided into two groups: explicit and implicit.

Explicit costs are cash payments associated with the manufacturing process. These include:

Utility payments;
Payment of transport costs;
Salary of employees of the main production;
Costs for special equipment and raw materials;
Payment for the services of banks and insurance companies;
Others.

Implicit costs are non-committed expenses or lost revenues. They can be presented in the following forms:

Cash payments that the company would be able to receive with the most efficient use of its funds: lost income; salary when working elsewhere; rent payments for the use of land.
Ordinary income, as the minimum profit of a businessman, which keeps him in a particular area of business. For example, a company is engaged in the manufacture of dishes, and he will consider a sufficient profit for himself, which amounted to fifteen percent of the amount of funds invested in the manufacturing process. If the manufacture of dishes will give a profit of less than fifteen percent, he will change the field of activity, reinvesting his funds in another industry.
The profit that owners of capital could receive by investing their funds in another area of business.