Question

What is meant by Monetary Cost?

Hint:

In accounting, only explicit costs are recorded, but in economics, both explicit and implicit costs are included in the monetary cost of production.

Answer 1

Step 1: Understanding the Concept:
Unlike "real cost" (which measures effort or sacrifice), monetary cost is expressed in terms of money units.
Step 2: Detailed Explanation:
It includes two types of costs:
1. Explicit Costs: Actual cash payments made to outsiders for purchasing inputs (e.g., wages, rent, raw material costs).
2. Implicit Costs: The estimated value of inputs owned and used by the producer themselves (e.g., interest on own capital, rent of own land).
Total Monetary Cost = Explicit Cost + Implicit Cost + Normal Profit.
Step 3: Final Answer:
Monetary cost is the sum of all money payments made by a producer for the services of various factors of production and non-factor inputs.