what is implicit cost and Explicit cost

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Well explicit cost is the actual money expenditure on inputs or payments made to outsiders for hiring their factor services.For ex:wages paid to the employees.Implicit cost is the estimated value of the inputs supplied by the owners including normal profit.For ex:salary for the services of entrepreneur.

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implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly.

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Implicit Costs:
Implicit costs refer to the opportunity costs that are not directly measurable or explicitly incurred by a business. These costs are associated with the resources that are already owned by the firm and could be used for alternative purposes, but are instead utilized in the current production process. Implicit costs primarily include the foregone opportunities and benefits that result from the chosen course of action.

Examples of Implicit Costs:
1. Owner's Time: If an entrepreneur decides to start their own business, they may invest a significant amount of their time and effort into the venture. This time, however, could have been used for alternative activities or employment opportunities, which represents an implicit cost.
2. Unearned Income: Similarly, if the owner of a business invests their personal savings into the company, they forgo the potential interest or dividends that could have been earned by investing in other financial assets.
3. Property Rent: If a business operates in a building owned by the owner, the implicit cost of rent is the amount of money that could have been earned if the property was leased to another business.

Explicit Costs:
Explicit costs are the actual out-of-pocket expenses that a business incurs in its operations. These costs are easily measurable and can be tracked using financial records and invoices. Explicit costs are the tangible monetary payments made by a firm for various resources, such as labor, raw materials, rent, utilities, advertising, and other expenses necessary for production.

Examples of Explicit Costs:
1. Wages and Salaries: Payments made to employees for their work.
2. Purchase of Raw Materials: The cost of acquiring materials necessary for production.
3. Rent and Utilities: Payments made for leasing business premises and utility services.
4. Advertising Expenses: Costs associated with marketing and promoting the business.
5. Insurance Premiums: Payments made to insure the business against potential risks and damages.

Comparison:
The key difference between implicit and explicit costs lies in their measurability and tangibility. While explicit costs are easily quantifiable and recorded in the financial statements, implicit costs are not readily visible and require careful consideration of the foregone opportunities and potential benefits.

Explicit costs directly impact the financial performance of a business and are deducted from revenue to determine profit. Implicit costs, on the other hand, do not affect the financial statements directly but still play a crucial role in decision-making and determining the true economic cost of a particular course of action.

In summary, explicit costs are the out-of-pocket expenses incurred by a business, while implicit costs represent the opportunity costs associated with the foregone alternatives. Both types of costs are essential in assessing the overall economic impact and profitability of a business.

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