Question

A producer starts a business by investing his own savings and hiring the labour. Identify implicit and explicit costs from this information. Explain.

Answer 1

Implicit cost (or imputed cost) refers to cost of the factors that a producer neither hires nor purchases. These costs are not actually paid by the producers but are included in the cost of production. It is a difference between the economic profit and accounting profit. On the other hand, explicit costs are those costs that are borne directly by the firm and are paid to the factors of production.

Implicit Cost: The interest that could have been earned by the producer by keeping the savings in his savings account is referred to as implicit cost.

Explicit Cost: The cost incurred on making payment to the labour in the form of wages is termed as explicit cost.