Why explicit cost and implicit cost are opprtunity cost.?

Question

Answer

Only implicit cost is called opportunity cost

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Not,both explicit & implicit cost are the opportunity cos,but only implicit cost is the opportunity cost simply because it involves the sacrifice of the benefit foregone in the production

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Yes.The opportunity cost  includes both explicit and implicit costs. Explicit costs are opportunity costs that usually involve a monetary ( money ) payment. Implicit costs usually do not involve a monetary payment - they deal with the foregone satisfaction of the resource. So both explicit and implicit costs are opportunity costs.

Answer

Can you explain why? or how?

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The concept of opportunity cost is fundamental in economics as it helps us understand the value of the next best alternative that is forgone when making a decision. Both explicit costs and implicit costs are types of opportunity costs.

Explicit costs:
Explicit costs refer to the actual monetary payments made by a firm or an individual to acquire resources from the market. These costs are explicit because they are explicitly stated and accounted for in financial records. Some examples of explicit costs include wages paid to employees, rent paid for office space, payments for raw materials, and utility bills.

Implicit costs:
Implicit costs, on the other hand, are the opportunity costs of using resources that are already owned by the firm or individual. These costs do not involve any actual monetary payments, but they represent the potential value that could have been generated by using those resources in an alternative way. Implicit costs are often related to the use of self-owned capital or self-employed labor.

Opportunity cost:
Opportunity cost is the value of the next best alternative that is forgone when making a decision. In the case of both explicit and implicit costs, they represent the value of the next best alternative that could have been pursued instead of the chosen course of action.

Relationship between explicit and implicit costs with opportunity cost:
1. Explicit costs as opportunity cost: Explicit costs are considered opportunity costs because when resources are used to meet one specific need, they cannot be simultaneously used to meet another need. For example, if a firm pays $1,000 in wages to hire an employee, that $1,000 cannot be used for any other purpose. The opportunity cost of paying wages is the value of the alternative uses of that $1,000, such as investing in equipment or marketing.

2. Implicit costs as opportunity cost: Implicit costs also represent opportunity costs because when resources are used in one way, they cannot be used in an alternative way. For instance, if an entrepreneur decides to use their own capital to start a business instead of investing it in the stock market, the implicit cost is the potential return that could have been earned through the stock market investment. The opportunity cost is the foregone return on that investment.

In summary, both explicit and implicit costs are considered opportunity costs because they represent the value of the next best alternative that is forgone when resources are used in a particular way. Explicit costs involve actual monetary payments, while implicit costs involve the opportunity cost of using self-owned resources. Understanding these concepts helps economists and decision-makers evaluate the true costs and benefits of different choices.

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