Implicit Cost

- Input cost that do not require an outlay of money by the firm
- A cost that is represented by lost opportunity and the use of a company’s own resources, excluding cash
- An opportunity cost that does not involve an economic payment or any other form of return
- The economic payment that is often made to recomprense the person who originally foregoes the approval is not made for implicit cost
- There is no payment to transfer the trouble of the opportunity cost from the original person to someone else
- A nonmonetary opportunity cost
- Implicit cost is also occasionally termed implicit opportunity cost
- These are intagible cost that are not easily accounted for. For example, the time and effort that an owner puts into the maintence of the company rather than working on expansion

Implicit Cost vs Explicit Cost

Cost of Production = Explicit + Implicit Cost

- These are intagible cost that are not easily accounted for. For example, the time and effort that an owner puts into the maintence of the company rather than working on expansion.

Real Life Example of Implicit Cost vs Explicit Cost:
Jill Johnson owns a copy store. In operating her store, Jill has explicit costs, such as the wages she pays her workers and the payments she makes for electricity and paper. But some of Jill's most important costs are implicit. Before opening her own store, Jill earned a salary of $30,000 per year managing a store for someone else. To start her store, Jill quit her job, withdrew $50,000 from her bank account --- where it earned her interest of $3,000 per year --- and used the funds to equip her store with tables, shelves, a cash register, and other equipment. To open her store, Jill had to give up the $30,000 salary and the $3,000 in interest. This $33,000 is a cost to Jill of running her store. It is an implicit cost because it does not represent payments that Jill has to make. All the same, giving that $33,000 per year is a real cost to Jill. In addition, during the course of the year, the $50,000 worth of equipment in Jill's store will lose some of its value due partly to wear and tear and partly to better equipment becoming available. Economic depreciation is the difference between what Jill paid for the equipment for at the beginning of the year, and what she could sell the equipment for at the end of the year. If Jill's equipment could be sold for $40,000 at the end of the year, then the $10,000 is economic depreciation represents another implicit cost.

Real Life Example:
If a firm is using a building that is owned by the entrepreneur then there will be no cash payment made, but there is still and implied cost. This building had substitue uses. Like the owner could have rented the building and generated the flow of rent. The owner is putting at risk this rental income by utilizing the buliding for his business. There is an implied cost to the owner, forgone rent. For a business to be profitable its revenues must not only recover the explicit cost but also the implicit cost.

Question #1:

True or False:
Implicit cost REQUIRES an outlay of money by the firm?

ANSWER: does not require an outlay of the money by the firm

Question #2:
True or False:
Cost of Production equals Explicit Cost plus Implicit Cost?
ANSWER: TRUE

Question #3:

Implicit Cost is:
A. The difference between the total revenue and the cost of all inputs used by a firm over a given period
B. Opportunity cost associated with a firm's use of resources that it owns
C. Measures the explicit cost of operating a business

ANSWER: B - Opportunity cost associated with a firm's use of resources that it owns

Question #4:

True or False:
A cost that is represented by lost opportunity and the use of a company's own resources, including cash

ANSWER: False: excluding cash

Question #5:

True or False:
Implicit cost can also be known as implicit opportunity cost

ANSWER: True

Question #6:

Explicit costs and implicit costs:
A. are alike in that both represent opportunity costs
B. are alike in that both reflect an outlay of cash
C. are alike in that both are deducted from revenue to find accounting profit
D. differ in that only explicit costs are deducted from revenue to find economic profit

ANSWER: A. are alike in that both represent opportunity cost

Question #7:

Implicit and explicit costs are different in that:
A. explicit cost are relevant only in the short run
B. implicit cost are relevant only in the short run
C. the latter refer to nonexpenditure cost and the former to out-pocket costs
D. the former refer to nonexpenditure cost and the latter to out-pocket costs

ANSWER: D. the former refer to nonexpenditure cost and the latter to out-pocket costs

Question #8:

Which of the following cost would be regarded as an implicit cost?
A. all cost that involve outlays of money by the firm
B. the opportunity cost of financial captial that has been invested in the business
C. the cost of all the raw materials used in production

ANSWER: B. the opportunity cost of financial captial that has been invested in the business

Resources:
http://en.wikipedia.org/w/index.php?title=Implicit_cost&oldid=111467078
http://home.maine.rr.com/ec/321/handout/Handout3.htm
http://www.investopedia.com/terms/i/implicitcost.asp