COST OF PRODUCTION 



Robert L. Christensen 

 Department of Food and Resource Economics 



The cost of production is a very popular concept; but not 

 clearly understood. A single value advanced as the cost of pro- 

 duction for a product, such as apples, should be viewed with skep- 

 ticism for several reasons: 



1. A cost of production estimate reflects some average or 

 norm situation. If it is based on a representative or 

 "model farm" production situation, it only represents 

 that situation's assumptions. If it is based on a survey 

 of some number of observations, it may be questioned on 

 grounds of representativeness. 



The cost of production estimate resulting from a survey 

 is the result of an implicit distribution of a set of 

 costs of production. Some will be higher than the "aver- 

 age" and some lower. Selection of the average, as a mea- 

 sure to be used for pricing purposes, means that approxi- 

 mately half of the producers would have a cost of produc- 

 tion higher than the average and half lower (assuming a 

 normal distribution). What is the equity of such a situ- 

 ation? Should one say that the price should be high 

 enough to cover the costs incurred by the highest cost 

 producer? Would the incentives for gains in efficiency 

 be strong? Most importantly, would such a pricing strat- 

 egy be acceptable politically and is it consistent with 

 maximization of consumer welfare? Still another alterna- 

 tive might be to propose that the price should be that 

 which favors the most efficient (lowest cost) orchards. 

 Thus, higher cost operators would be stimulated to become 

 more efficient or go out of business. Attrition of orch- 

 ards would be expected with substantial increases in 

 orchard size. The industry would then become more vulner 

 able to market changes. 



2. Cost of production estimates are the result of a set of 

 direct costs and a set of implied costs. These latter 

 costs include depreciation charges and interest on invest- 

 ment, both of which are somewhat arbitrary and variable 

 from, orchard to orchard. In most cases, the cost of pro- 

 duction estimate also contains an arbitrary cost assign- 

 ment for the operator and family labor. These charges 

 are also variable from orchard to orchard depending on 

 the situation and known opportunities available for the 

 family's labor and maragement. 



