In the production process the entrepreneur uses inputs and factors for which he has to make payments. Such payments comprise wages of labour, rent of building, raw material cost, interest on borrowed funds, etc. all these payments are included in cost of production and are called accounting costs.
But there are many factor services provided by the entrepreneur himself for which he makes payment to no one. He may have invested his own funds on which he could earn interest elsewhere, may have provided his own building for which he could have earned rent, or he is providing his own services for which he could have earned wages. Thus all these incomes that have been foregone because no payments have been made by the entrepreneur to himself for the inputs and services that he has provided, are also a part of the cost that have not been included in the accounting costs. Thus, to calculate the economic costs, we have to add to the accounting costs (a) normal returns for the capital invested by the entrepreneur himself in his own business, (b) wages and salaries not paid by the entrepreneur to himself for his services which he could have earned elsewhere and (c) all other such monetary rewards for other factor services that are provided by the entrepreneur himself and hence he does not charge anything for them, but could have received payments for these services if he had rendered them elsewhere.
Thus, economic cost is a wider concept than the accounting cost. Accounting costs consider only the cash payments while economic costs include both accounting cost as well as the market value of the services provided by the entrepreneur to his own business though no cash payment is involved here.SUBMIT ASSIGNMENT NOW!