Question

Distinguish betwen implicit costs and explicit costs.

Differentiate between implicit and explicit costs.

Differentiate between Explicit costs and Implicit costs.

Answer 1

Basis of Distinction	Implicit costs	Explicit costs
Definition	Implicit costs are the costs of self-owned and self-supplied factors of production.	Explicit costs are the contractual money payments actually made to the owners of various factors of production.
Example	The owner of a firm may himself act as its manager. He does not pay any salary to himself.	The firm obtains land on lease and pays rent to the landlord.
Accounting	Not recorded in financial statements.	Recorded in financial statements.
Visibility	Hidden and not easily quantifiable.	Clearly visible and easily quantifiable.
Cash Outflow	There is no actual cash outflow.	Involves actual cash outflow.
Impact on Profit	Impacts economic profit but not accounting profit.	Impacts both accounting and economic profit.

Answer 2

Explicit costs: These are the money payments actually made by a firm for purchasing or hiring the factors of production. For example, a firm pays rent to get land on lease. Similarly, it spends money on raw materials, fuel, transportation, insurance premiums, and advertising. All these money payments are explicit costs, and they are recorded in the account books of the firm.

Implicit costs: The costs of self-owned and self-supplied factors of production are known as implicit costs. For example, a businessman may use his own building or act as the manager of his own firm. For these factors, he does not pay rent or salary. These costs are generally not recorded in the account books of the firm.