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Production costs
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Production costs play an important role in decisions making by the farmers.
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Cost of production often becomes a policy issue when producers complain that the prices they receive for their product do not cover the cost of production.
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Cost of production here means the expenses incurred per unit of output.
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Costs in farming can be divided into two main categories
Fixed cost (or) over head charges (or) sunk cost
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A resource or input is called a fixed resource if its quantity cannot be varied during the production period and in general costs associated with fixed inputs are called fixed costs.
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Fixed costs have to be incurred even when the production is not undertaken.
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E.g., taxes, rent, electricity, water charges, insurance, depreciation, labour hired on a year -round basis, interest on investment in equipment and livestock, etc
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In short run, some costs are fixed and others can be varied. However in long run, , all costs become variable.
Variable costs
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An input is a variable input if it’s quantity can be varied during the period of production and the costs associated with variable inputs are called variable costs.
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Variable costs vary with the level of production.
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These costs will not be incurred in the absence of production.
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E.g., seed, tractor fuel, repairs, feed, fertilizer cost, etc.
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Labour if hired on daily basis, interest on current investment, hired machines and other services are also included in variable costs.
Total costs
Cash costs (explicit cost)
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Cash costs are incurred when resources are purchased and used immediately in the production process.
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Cash costs result from purchases of non-durable inputs such as fertilisers, fuel, oil, and casual labour which do not last more than one production process.
Non-cash costs (implicit costs),
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Non-cash costs consist of depreciation and payments to resources owned by the farmer.
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E.g., Depreciation on tractor, equipment, buildings, payments made to the farmer himself or family labour, management and owned capital.
Opportunity cost
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Opportunity cost of an output is defined to be the income that can be earned in the next best alternative use.
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For example, a farmer with 25 kg concentrate feed which can either be fed to his cows or sold.
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If he gives the feed to his cows, the opportunity cost is the amount of money for which the feed can sold to others.
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If he sells the feed, the opportunity cost is the amount of extra income, which can be obtained by giving this feed to his animals.
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Opportunity cost is defined to be the real cost of any input.
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