Implicit Costs

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Definition of cost

In accounting, production, retail and research, cost is regarded as the value of money which is expended for producing something and therefore, it cannot be used anymore as it is unavailable. The term cost in business may be related to acquisition, where it would mean the amount of money that is spent to acquire it. Here, the money is considered to be the input which is used up for acquiring the thing. This cost of acquisition may be the sum total of the production cost spent by the original producer and the transaction costs that are incurred by the person acquiring it over the price that is paid for it to the producer. In economics, the term cost is a metric which totals up as an outcome of a process or a differential for the outcome of a decision.

Types of cost

Cost can be divided into many categories on the basis of many things. Usually, cost is divided into two categories – implicit cost and explicit cost.

Definition of implicit cost

Implicit cost in economics, means the opportunity cost that is equal to what that has to be given up by a firm for using factors that it neither hires nor purchases. Implicit cost is actually the cost that is the consequence of using the assets, instead of lending, selling or renting them. It also means the income that is forgone from making a choice of not to work. Implicit cost is also known as implied cost, notional cost or imputed cost.

Implicit costs also show the difference between economic profit and accounting profit. Economic profit means the total revenues less total costs where the total of implicit and explicit costs is total costs. Accounting profit means total revenues less explicit costs. As the economic profit also consists of the opportunity costs, so it will either be equal or less than the accounting profit.

Difference between explicit cost and implicit cost

Explicit costs are the direct payments that are given to others while running a business like rent, wages, materials, etc. On the other hand, implicit costs are those costs where payments are not actually made.

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