Alauddin

Implicit cost

In economics, an implicit cost occurs when one foregoes an alternative action but does not make an actual payment. (For instance, the explicit cost of a night at the movies includes the moviegoer's ticket and soda, but the implicit cost includes the pay he would have earned if he had chosen to work instead.) Implicit costs are related to forgone benefits of any single transaction.

Implicit Costs, Explicit Costs, and Total Costs

Impicit Cost + Explicit Cost = Total Cost. Implicit cost is NOT equal to total cost, but a component of it. A simple example: Sean builds a cabinet. He spends 2 hours building the cabinet. He could have been working instead and normally makes $25/hour at his job. Since he was building a cabinet he wasn't paid for this time. The materials to make the cabinet cost him $20.

* His Explicit Costs are: $20 in materials

* His Implicit Costs are: $25/hr x 2 hrs= $50 of foregone pay

* His Total Costs are: $20 in materials + $50 of foregone pay = $70 Total Costs

Examples of implicit costs

* A firm's use of its own capital. This is considered an implicit cost because the capital could have been rented to another firm instead. This rental income foregone, or the implicit rental rate of capital, is the firm's opportunity cost of using its own capital. This implicit rental rate can be broken down beyond interest forgone.

* A firm's use of its owner's time and/or financial resources.

* Economic depreciation.'

Explicit cost

An Explicit cost is an easy accounted cost, such as wage, rent and materials. It can be transacted in the form of money payment and is lost directly, as opposed to monetary implicit costs.

Explicit cost are those which the entrepreneur has to pay from his own pocket.

Explicit Costs require an outlay of money by the firm

Law of diminishing returns

Law of diminishing returns, also know as the law of non-proportional returns, states that when an increasing quantity of a factor of...