Question

In: Economics

To be able to do a robust economic evaluation assessment of a health technology, the analyst...

To be able to do a robust economic evaluation assessment of a health technology, the analyst should be able to identify all cost elements involved. List the different types of cost that may be involved totally in the assessment and explain what each means, using everyday examples

Solutions

Expert Solution

Economic cost :- Economists take cost of production in a wider sense i.e. in the sense of economic cost. It consists of the following three components -

  1. Money cost or explicit cost
  2. Implicit cost
  3. Normal profit

Implicit cost- It refers to the imputed value of inputs owned by the firm and used by it in its own production unit. E.g. the entrepreneur may use his own land, his own capital.

Money cost - It refers to the money expenses which the firm has to incur in purchasing or hiring the factor services. E.g. wages, salaries paid to labour rental payments, etc.

Normal profit- It is defined as the minimum payment which a producer must het in order to induce him to undertake the risk of production.

Economic cost is the sum total of both explicit cost and implicit cost including normal profit.

Opportunity cost - ​​​​​The opportunity cost of producing any good is the next best alternative good that is given up to produce this good. E.g. tea and coffee

Real cost - It refers to the efforts and sacrifice made by the owners of factors of production used in the production of a commodity. Labour has to put physical and mental efforts in doing a work.


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