Economic costs are certain costs that are associated with the attraction of resources. The latter are necessary for the creation of material services and benefits. There are two main provisions that characterize the nature of costs. First of all, any resource is limited in its application. Secondly, each of its types, which is used in production, has at least two alternative applications.
In the conditions of the existing variety of needs that need to be met, a lack of resources is created. This, in fact, creates a problem of choice. Economic costs are due to the rejection of the manufacture of alternative goods. All expenses associated with attracting resources are taken for alternative (imputed). In other words, the cost of each resource that is involved in the production process is formed in accordance with its value at the best of all available options for using this production factor. In this connection, alternative (economic) costs are costs, caused by the use of economic resources in the production of a certain product. At the same time they are evaluated taking into account the lost possibility of their (resources) use, but for other purposes.
From the entrepreneurial point of view, economic costs are those payments made by the firm to the supplier of productive resources to divert those from use in alternative production. These payments can be internal or external. Thus, it is possible to consider monetary (external, explicit) and implicit (internal, implicit) costs. External expenses include payment for resources to those suppliers who are not co-owners of the company. These costs include, for example, wages, fees for materials, raw materials, energy, components that are provided by third-party suppliers, and so on.
The organization can apply resources that belong to itself. In this case, internal costs are considered. These costs are directed to own and independently used resource. Internal costs are equal to those cash payments that an entrepreneur could receive with the best possible application (from possible alternative ones). In this case, we consider some of the revenues that the manager refuses in the process of creating his own business. Such incomes can be attributed, for example, to the salary that he could receive if he worked for hire, or interest income in the sphere of lending, if he invested in it, and not in the development of the enterprise.
An inseparable component of the entrepreneur's internal costs is the nominal profit. This is the minimum revenue volume that exists in the industry at a given time, and which is able to keep a businessman within the business.
Economic and accounting costs
It should be noted that in practice only external costs are taken into account. They have the name of accounting costs. Due to the fact that internal costs are not used for accounting, financial profit will be the difference between gross income (revenue) and external expenses. At the same time, economic profit will be the difference between gross income and economic costs. The amount of financial income will always be greater by the amount of internal costs. Thus, even having a profit on documents, an enterprise may not have an economic income. In some situations, the organization can generally incur losses. This situation arises when the gross income does not cover all costs - economic costs.