Distinguish between implicit and explicit costs.
1. Implicit Costs:
These are costs of self-owned, self employed resources used by a firm in the process of production (abstract costs) eg. opportunity cost, individual managerial skills etc. Such costs are not fixed and it?s the owner who evaluates them.
These costs are not expressly incurred but are implied. An example would be: a firm that operates its business from a building situated on a piece of land owned by the owners of the firm. Practically, if the land was rented out to another person (3 rd party) this 3rd party would pay rent on it. Likewise, theoretically, the business having its premises on this land should charge itself the rent it would be paying if it was not owning (holding) the land.
Otherwise, the stay on the land would not be economical since the opportunity cost of it would be too high. This is because if this cost is not charged a large amount is forgone in terms of rent „receivable
2. Explicit Costs:
These are costs of resources hired or purchased by a firm for use in the production process eg. wages, transport cost etc. profits calculated by only taking into account explicit costs are known as financial profits. Since such costs arise from acquisition of inputs (resources), the amount is determined by price.
NB: Profits calculated on the basis of both implicit and explicit costs are called economic profits
OR
Actual money expenditure on inputs are called explicit costs. examples. expenditure on
hiring factor services.
Implicit costs refer to the estimated value of inputs provided by the owner. Examples
Estimated rent of the building owned by the entrepreneur.
lydiajane74 answered the question on May 12, 2018 at 12:32
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