Alternative, Opportunity or Transfer Costs
In modem economic analysis, the term real cost is interpreted in the sense of opportunity cost or transfer cost. The American economist Davenport explains this concept as follows: “Suppose. for example. that a child has been given both a pear and a peach. that some predatory boy tries to seize them and that the only method of saving either is to drop one. say the pear. in the wayside weeds, and to run for shelter with the peach while the aggressor is picking up the pear. What has the peach cost? True. the peach was a gift. In a certain sense. therefore. it costs nothing. Nevertheless it is retained only on terms of foregoing the pear. The term cost seems not quite satisfactory to cover the case.
Perhaps displacement or foregoing would be preferable. Or, if one offers you choice between a ride and an evening at the theatre, it is awkward to say that the acceptance of the one is at the cost of the other. Yet the resistance of the taking of the one is the letting go of the other. Or, if with a dollar which you have earned you arc at a choice between buying a book, or a pocket knife, and finally buy the book, the resistance overcome is best expressed. not by the labour devoted 10 the earning of the dollar. and not by the dollar itself. but hy the alternative application of the dollar, The highest cost of the book – the best test or measure of its worth to you -was in the significance of its strongest competitor, the knife.”:’
Since productive resources arc limited. the production of one commodity can only be at the expense of another, The commodity that is sacrificed is the real cost of the commodity that is produced, In the words of Henderson. “Real Cost of is the curtailment of the suppl, of othcr useful things, which the production of that particular thing entails.?” Economists define costs of production of a particular product as the value of the foregone alternative products that resources used in its production could have produced, The costs of resources to a firm are their values in their best alternative uses.
Suppose with a sum of Rs. 1OO’ a manufacturer can produce two radio sets or a small refrigerator. Suppose further that he decides to produce the refrigerator rather than the radio sets. In this case, the real COSt of the refrigerator is equal to the cost of two radio sets, i.e., the alternative foregone. Conceived on these lines, cost of production means not the effort and sacrifices undergone, but the most attractive alternative foregone or the next best choice sacrificed. Real costs are thus not entities, ultimate and independent of utility, but they are sacrifices of competing demands. In a money economy, it is “the amount of money necessary to induce the factors of production to be devoted to this particular task rather than to seek employment elsewhere.”