Question

What is meant by Monetary Cost ?

Hint:

Business accountants only look at Explicit Costs, but economists always include Implicit Costs to calculate the "Economic Cost."

Answer 1

Step 1: Understanding the Concept:
While "Real Cost" refers to the mental and physical effort or sacrifice involved, "Monetary Cost" translates these into money terms for accounting and decision-making.
Step 2: Detailed Explanation:
In economics, monetary cost consists of three main components:
1. Explicit Costs: The actual out-of-pocket payments made to outsiders for purchasing or hiring inputs (e.g., wages, rent, raw materials).
2. Implicit Costs: The estimated value of the inputs owned and used by the producer themselves (e.g., interest on own capital, rent of own building).
3. Normal Profit: The minimum return required to keep the entrepreneur in the business.
Therefore, Total Monetary Cost = Explicit Cost + Implicit Cost + Normal Profit.
Step 3: Final Answer:
Monetary cost refers to the sum of all money payments made to factor owners and for non-factor inputs required for production.