Meaning of Implicit and explicit costs

Implicit Costs:
These are costs of self-owned, self employed resources used a firm in the process of production (abstract costs) eg. opportunity cost, individual managerial skills etc. Such costs are not fixed and it’s the owner who evaluates them.

These costs are not expressly incurred but are implied. An example would be: a firm that operates its business from a building situated on a piece of land owned the owners of the firm. Practically, if the land was rented out to another person (3 rd party) this 3rd party would pay rent on it. Likewise,
theoretically, the business having its premises on this land should charge itself the rent it would be paying if it was not owning (holding) the land.
Otherwise, the stay on the land would not be economical since the opportunity cost of it would be too high.
This is because if this cost is not charged a large amount is forgone in terms of rent “receivable”.

Explicit Costs:
These are costs of resources hired or purchased a firm for use in the production process eg. wages, transport cost etc. profits calculated only taking into account explicit costs are known as financial profits.
Since such costs arise from acquisition of inputs (resources), the amount is determined price.
NB: Profits calculated on the basis of both implicit and explicit costs are called economicprofits.



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