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In
economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interact ...

economics
, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the
opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produ ...
equal to what a firm must give up in order to use a
factor of production In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...
for which it already owns and thus does not pay rent. It is the opposite of an
explicit costAn 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'', where no actual payment is made. It is possible still to underestimate these costs, however: ...
, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting it out or selling it. The term also applies to foregone income from choosing not to work. Implicit costs also represent the divergence between
economic profit An economic profit is the difference between the revenue a commercial entity has received from its outputs and the opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') ...
(total revenues minus
total cost In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...
s, where total costs are the sum of implicit and explicit costs) and
accounting profit Profit, in accounting, is an income distributed to the ownership , owner in a Profit (economics) , profitable market production process (business). Profit is a measure of profitability which is the owner's major interest in the income-formati ...
(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 is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and consists mainly of Earth's crust, crustal components such a ...
's current value.


See also

*
Explicit costAn 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'', where no actual payment is made. It is possible still to underestimate these costs, however: ...
*
Cost In production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production ...

Cost
* Economic profit * Imputation (economics) * Cost of goods sold


References

{{Economics Costs Economics and time