 today we will be discussing about the different concepts in the unit 8 of your BA first semester course in the recent economic theory the title of the unit is cost of production and cost curves and this is part one of the videos in fact there are total three parts and let us start with the first part there learners in the previous video we had discussed theory of production in this video we shall discuss theory of cost which is very important in understanding the theory of production we all know cost plays an important role in taking any production decision thus cost of production is the most powerful force governing the supply of a product which also may influence the price of the commodity a cost function is a derived function in the sense that it is derived from the production function the relation between cost and output is known as cost function that is it relates the cost of production to the firm's level of output for a better explanation of production decision and price theory it is necessary to know the various frequently applied concepts of cost let us discuss these concepts money cost money cost are equal money cost are the total money expenses incurred by a firm for pasting the inputs together with certain other items the other items include wages and salaries of forecast, cost of raw materials, expenditures on capital equipment, depreciation cost rent on buildings, interest on capital invested and borrowed an advancement and transportation cost also insurance, charges, taxes and so on please note the term depreciation here refers to a reduction in value that is writing down the capital value of an asset over a period of time in the company's accounts money cost are also called nominal cost or expenses of production real cost some elements always lies behind the money cost which cannot be explicitly measured the efforts and sacrifices made by the capitalist to save and invest the foregone leisure by the workers are some examples of real cost marshal defines such expenditures as real cost an unpleasant work does not always carry high wages and a pleasant work does not carry low wages thus it can be said that money cost and real cost do not correspond to each other accounting cost and economic cost please note that a concept of cost as conceived by an accountant is different from the idea conceived by an economist when an entrepreneur undertakes an act of production he has to pay prices to the factors of production for example he pays wages to the workers employed buys raw material, pays rent and interest on money, borrowed etc all these are included in the cost of production and at terms of accounting cost on the other hand economic cost includes the return on capital invested by the entrepreneur himself in his own business plus the salary or wages the entrepreneur could have earned if the services had been employed somewhere else and the monetary reward for all factors employed by him thus economic cost takes into account not only the accounting cost but also the amount the entrepreneur could have earned in the next based alternative employment opposite cost or alternative cost the opposite cost of any good is the next based alternative good that is sexified since resources are scarce they cannot be put to use simultaneously if they are used to produce one thing they have to be withdrawn from other uses for example a plot of land can be used to produce either rice or wheat and it is employed to produce rice it means that we have sacrificed the quantity of wheat for rice the opposite cost is the cost incurred in the production of rice instead of wheat sunk cost now another important concept in the theory of cost is the sunk cost sunk cost is an expenditure that has been made and cannot be recovered for example let us take the case of a producer who buys a specialized equipment designed for a particular purpose that equipment can be used to do only what it was originally designed for and cannot be converted for original use it has no alternative use and therefore its opposite cost is zero the expenditure on this equipment is called sunk cost with this we have come to the end of the first part of the videos on theory of cost in the next videos we shall discuss the nature of cost curves in the short run and in the long run thank you