By the cost principle, Nye can determine the profitability of production, whether the production is profitable or not, and whether we should continue the production or not.
Cost principle
There are two categories of cost in farming.
- Fixed cost
- Variable cost
i) Fixed cost: Fixed cost refers to the farming expenses, which do not change with output, e.g., taxes, hank interest, buildings, machinery, insurance, etc. These are the expenses that must be paid even though nothing is produced.
ii) Variable cost: Variable cost refers to farming expenses that change with output.- They are incurred only when the ram is operated. Fertilizer, seed, labor, irrigation, etc.
The cost principle follows the two rules.
1. If the returns are greater than the total cost (PC + VC), more resources can be used if more capital is available.
2. If the returns are less than the total cost but still greater than the variable cost, the production should be continued.
Analysis of the first rule is that the farm operator will have the greatest profit, and in the case of the second rule, the farm operator will have the smallest loss by continuing the farm operation.
For example: Variable cost (VC) = 7
Fixed cost (FC) = 3
Total cost = Tk 10
Suppose the production value is Tk.9 or Tk.13 When the production value is Tk.13, which is greater than the total cost, that is _a profit concern. So, we should apply the more variable cost to achieve the greatest profit. When the production value is Tk.9, it is a loss concerned, but since the fixed cost must be paid, if we do not continue production, the loss is ‘11.3, and if we continue production, the loss is (Tk.10 = Th.1 only. That is why; the farm operator will continue the production to aim at the smallest loss.
Application: With the help of the cost principle, we can determine whether production is profitable or not. Truly speaking, all farms and industries of the country are established depending on the cost principle.
Principle of opportunity cost
If an input is used in a particular production process, it has no alternative use at that particular point in time. This means that the input will be losing income from the alternative use, and this income foregone by this input from its alternative use is called opportunity cost. Opportunity cost is the value of the next best alternative sacrificed.
The opportunity cost would be the income that could have been received if the input had been used in its most profitable alternative use. Suppose a farmer has one-ton commercial fertilizer.
Suppose further that spreading it on his wheat field will add Tk.12000 to the total revenue from wheat, while spreading it on his onion field will add Tk.15000 to the total revenue from the onion. If he fertilizes the onion, his opportunity cost is Tk.12000 because he has forgone to earn Tk.12000 to earn Tk.15000. If he fertilizes the wheat, his opportunity cost is Tk.15000 because he has foregone Tk. 15000 to Tk.12000.