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 a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly.

What is implicit cost formula?

Implicit costs are more subtle, but just as important. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. Economic profit is total revenue minus total cost, including both explicit and implicit costs.

Is an electric bill an implicit cost?

An implicit cost represents the amount of income or benefit a company is going to miss out on by choosing to use assets rather than trying to rent or sell them. Explicit costs can include expenses such as wages, Internet or electricity bills, rental or mortgage payments, promotional materials, and more.

What’s the difference between explicit and implicit costs?

We can distinguish between two types of cost: explicit and implicit. Explicit costs are out-of-pocket costs—payments that are actually made. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs. Implicit costs are more subtle but just as important.

What’s the difference between economic profit and explicit profit?

Accounting profit is revenue minus explicit costs, whilst economic profit is revenue minus explicit AND implicit costs. Explicit costs are those which are clearly stated on the firm’s balance sheet, whilst implicit costs are not.

How is the recognition of explicit cost easy?

The recognition and reporting of the explicit cost are very easy because they are recorded when they arise. They show that an amount has been spent over a business transaction. They can be calculated in terms of money.

Why does accounting profit not take implicit cost into account?

Additionally, the accounting profit does not take implicit cost into account, and the accounting profit can be a simplistic view of a company’s profitability rather than its overall economic success in the market industry.