Implicit cost
Encyclopedia
In economics
, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost
equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost
, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting, selling, or lending it. The term also applies to forgone income from choosing not to work.
Implicit costs also represent the divergence between economic profit (total revenues minus total cost
s, where total costs are the sum of implicit and explicit costs) and accounting profit (total revenues minus only explicit costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to accounting profit.
Lipsey (1975) uses the example of a firm sitting on an expensive plot worth £10,000 a month in rent which it bought for a mere £50 a hundred years before. If the firm cannot obtain a profit after deducting £10,000 a month for this implicit cost, it ought to move premises (or close down completely) and take the rent instead. In calculating this figure, the firm ought to ignore the figure of £50, and remember instead to look at the land
's current value.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost
Explicit cost
An explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials, as opposed to implicit costs, which are those where no actual payment is made...
, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting, selling, or lending it. The term also applies to forgone income from choosing not to work.
Implicit costs also represent the divergence between economic profit (total revenues minus total cost
Total cost
In economics, and cost accounting, total cost describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a...
s, where total costs are the sum of implicit and explicit costs) and accounting profit (total revenues minus only explicit costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to accounting profit.
Lipsey (1975) uses the example of a firm sitting on an expensive plot worth £10,000 a month in rent which it bought for a mere £50 a hundred years before. If the firm cannot obtain a profit after deducting £10,000 a month for this implicit cost, it ought to move premises (or close down completely) and take the rent instead. In calculating this figure, the firm ought to ignore the figure of £50, and remember instead to look at the land
Land (economics)
In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...
's current value.