Oppurtunity cost on economics Essay Example | Topics and Well Written Essays - 1000 words

Oppurtunity cost on economics - Essay ExampleAccording to Varian (1999, p327) In the expression for cost we should be sure to embroil all the factors of production used by the firm, valued at their market damage. Usually this is pretty obvious, but in cases where the firm is owned and operated by the corresponding individual, it is possible to forget about some of the factors. Varian (1999, p327) went on to give the following standard which will enable a better understanding of luck costIf an individual works in his own firm, then his labor is an input and it should be counted as recess of the costs. His wage rate is simply the market price of his labor what he would be getting if he sold his labor on the open market. Similarly, if a farmer owns some bring in and uses it in his production, that land should be valued at its market value for purposes of computing the economic costs. We have seen that economic costs like these are often referred to as opportunity costs. The name comes from the idea that if you are using your labor, for example, in one application, you forgo the opportunity of employing it elsewhere. Therefore, those lost wages are part of the cost of production. Similarly, with the land example the farmer has the opportunity of renting his land to someone else, but he chooses to forgo that rental income in favor of renting it to himself. The lost rents are part of the opportunity cost of his production. The economic definition of profits requires that we value all inputs at their opportunity costs.When firms are making profits in an industry, the industry becomes enchanting to prospective investors. The costs of firms should imply all costs incurred at their market price. This market price is the opportunity cost. After all, the cost curve is supposed to include the cost of all factors necessary to produce output, measured at their market