Implicit cost

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.

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: Sean 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

ee also

*Explicit cost
*Economic profit
*Opportunity cost