Question

An individual is both the owner and the manager of a shop taken on rent. Identify implicit cost and explicit cost from this information. Explain

Answer 1

Implicit cost is the estimated value of self-owned inputs and there is no payment involved. Hence, the value of a manager’s service in his own business is the implicit cost.

Explicit cost is the actual money expenditure on inputs and there is payment for hiring factor services. Hence, the rent paid for the shop is an explicit cost.

Therefore, the total cost of production of good includes not only the actual cost incurred in the firm, i.e. explicit cost but also implicit cost, i.e. the inputs supplied by the owners of the firm.