This MedLibrary.org supplementary page on Implicit cost is provided directly from the open source Wikipedia as a service to our readers. Please see the note below on authorship of this content, as well as the Wikipedia usage guidelines. To search for other content from our encyclopedia supplement, please use the form below:
Related Sponsors
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.
Contents |
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.'
Implicit cost and economic profit
Economic profit equals total revenues minus both implicit and explicit costs. In contrast, accounting profit equals total revenues minus explicit costs. Since economic profit includes opportunity costs, it will always be less than or equal to accounting profit.
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: Paul 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
See also
 |
This economic term article is a stub. You can help Wikipedia by expanding it. |
Wikipedia content modification information:
- This page was last modified on 12 November 2008, at 05:48.
Wikipedia Authorship and Review
Wikipedia content provided here is not reviewed directly by MedLibrary.org. Wikipedia content is authored by an open community of volunteers and is not produced by or in any way affiliated with MedLibrary.org.
Wikipedia Usage Guidelines
This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article on "Implicit cost".
The URL for this specific entry is:
All Wikipedia text is available under the terms of the GNU Free Documentation License. (See Copyrights for details). Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc.