Cost Theory

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THEORY OF COST Economists have developed a comprehensive set of theories concerning cost, which they use to describe, explain, and predict the behavior of firms and individuals (e.g., consumers). The field of economics thus provides the underlying theory of costs, while accounting generally supplies most of the data that allow this theory to be applied in practice. The economist's idea of cost is more useful in analyzing the critical decisions made by management and government. In order to develop an appropriate costing methodology for a telecommunications service, it is important to understand both the underlying economic theory (and associated terminology) of cost, and the accountant's practical measures of cost (which do not directly…show more content…
Transaction costs theory focuses rather strongly the asset specificity and its role in determining how to better organize exchanges. The broad advice is that when assets are not specific to an exchange the market may be the most efficient way (or the best way for minimizing costs) to organize it. The asset specificity makes specific reference to the extent to which an asset can be redeployed to alternative uses and/or by alternative users without a substantial sacrifice of its productive value (Williamson, 1989: 141). and, it is possible to distinguish six different types of asset specificity: site specificity, physical asset specificity, human asset specificity, dedicated assets, brand name capital and temporal specificity (Williamson, 1989: 141142). The degree of asset specificity ranges from nonspecific to mixed to idiosyncratic (Williamson, 1979, 1985). The asset specificity assumption might be called the locomotive or driving assumption of TCT as Williamson himself states “the importance of asset specificity to transaction cost economics is difficult to exaggerate” (1985: 56). Uncertainty. Uncertainty is a straightforward assumption and it contrasts with the perfect-information assumption of the neoclassical view. Information about past, current and future states is not perfectly known, for various reasons. Without the existence of bounded rationality and opportunism, uncertainty would be much
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