Any process and life itself is a series of choices. Having decided to invest the money earned in the purchase of new equipment, the entrepreneur refuses an infinite number of possibilities for their use. Here the imputed costs arise. This is the predicted profit from deciding in favor of the best alternative after the planned course of action. They characterize the benefits that had to be abandoned, making the final choice. The imputed concept is the concept that is best suited to consider two mutually exclusive events. For example, a choice between buying for the profit earned in the current period for new equipment or increasing the work of the employees of the enterprise.
Study history
The term “imputed costs” is a product of the work of the Austrian economist Friedrich von Wieser. He first used it in his book Theory of Social Economy, published in 1914. However, the idea has long been in the academic community. Benjamin Franklin formulated the famous saying: "Time is money." He described his concept in the book “Tips for Young Merchants” back in 1764. Franklin gives an example of a man who earns ten shillings a day. Consider his rest. Let him spend six pence and half a day on entertainment. At first glance, its costs are obvious. These are six pence. However, there are alternative imputed costs - the five shillings that he could earn in half a day. Hence Franklin's famous dictum that time is always money. Obviously, there is the idea of imputed costs in the essay “On what is visible and what is not visible” by Frederic Bastia, written in 1848. In it, the author gives an example of a metaphor for broken fire. She dispels the widespread belief that disasters, wars, terrorism, and other misfortunes can contribute to economic growth. The essence of the metaphor is that the boy knocked out a window in the bakery and ran away. Its replacement costs 3, 000 conventional units. Some people believe that this event is not negative. The glazier will receive an additional 3, 000 conventional units, then spend them, and this will lead to a revitalization of the local economy. However, in such arguments, according to Bastia, there is a mistake. It consists in the fact that the baker needs to spend money on restoring a window from his own pocket. And this amount will not be received by other manufacturers in the region. After all, they could become potential buyers of the baker. Therefore, the economy was not enriched, but lost 3, 000 conventional units. Representatives of the Keynesian direction believe that the boy can benefit the economy, but only during crises, when resources are underutilized. Austrian economists, like Bastia in their time, interpret the metaphor in a different way. Suppose the boy actually paid the glazier. Then it immediately becomes clear that the theft of 3, 000 conventional units actually takes place. The economy is not enriched, only the glazier benefits, and at the expense of others.
Rating
When an entrepreneur makes a decision on investing earned funds, he is looking for the option with the highest return. Often, the expected rate of return on investment and the payback period are calculated. However, any final decision is always fraught with opportunity costs. For example, an entrepreneur makes a choice between buying new equipment and investing in securities. Whatever decision was made, it is associated with imputed costs. This is the difference between the expected profitability of the chosen option and the one that had to be abandoned.
Imputed costs also play an important role in determining the structure of capital. The decision to expand is always associated with other features. And the accuracy of the choice depends on the accuracy of the forecast of their real profitability. Another important characteristic is risk. It also needs to be considered when making a decision. The existence of risks is the reason that the company does not always choose the most commercially viable option, at first glance.
In everyday life
Economic imputed costs - a concept that is rarely used by ordinary people. However, in fact, its use in making important decisions related to monetary waste would be useful. For example, consider buying a new large house. When making this decision, most will simply consider the pros and cons of such an acquisition, evaluate the balance on their bank account. But so we miss the imputed costs. After all, it is quite possible that we don’t really need a big house, and this money can be spent on travel or education, which will bring new knowledge and impressions that will bring income in the future. Or consider another example. Suppose we buy a cheeseburger every day for $ 4.5. If this trend continues for 25 years, then this will not only lead to a deterioration in our health. In this case, the imputed costs are equal to 52, 000 dollars. And this, if only to set the rate of return on investment at 5%.
Explicit Expenses
There are two types of opportunity costs. Explicit are associated with direct cash costs of producers. For example, the electricity costs of the company amounted to $ 100 per month. This money could be spent, for example, on the purchase of a printer. Explicit imputed costs equal to 100 dollars.
Implied Costs
Unlike the expenses of the first group, they are not displayed clearly in the balance sheet of the company. They are associated with the risk of failure. For example, a manufacturer purchased 1, 000 tons of steel and machinery in order to start producing certain equipment. The implied imputed costs in this case will be equal to the income lost due to the fact that he did not resell the purchased, did not lease his capacity.
Choice of many
It should be noted that imputed costs are by no means the sum of the possible revenues for all alternative options. This is the rate of return for only one of them. The one that is second in expected return. If someone decides not to work, as in the example of Franklin, then this option also involves opportunity costs. If we decide to go to the cinema instead of sitting in the office, then the costs increase. They will be equal to the amount that would be earned per day, plus the cost of tickets.
Law of imputed costs
The production capability curve shows the process of choosing from two alternatives. If you look at it, it immediately becomes clear that imputed costs increase with an increase in the output of one product and a decrease in another. It turns out that over time you have to sacrifice more and more of the second good. Just about this and says the law of increasing imputed costs. Its functioning is connected with the fact that not all resources are universal and interchangeable. Suppose we grow corn and wheat, but decided to gradually begin a reorientation in favor of the first. However, not all lands are equally suitable for planting both crops. And over time, we will begin to use the area less and less efficiently.
Irretrievable losses
Now that we have figured out that imputed costs are the difference between the expected rate of return of the chosen option and the second best alternative, we can consider other concepts. The closest concept to them is irrevocable loss. The difference is that it considers already spent money. When we think about imputed costs, the amount is still in our pocket. You can change the decision at any time, and invest in another option. But irretrievable losses occur when we have already invested our profits. Their calculation is associated with a lack of choice.
