Question

Distinguish between explicit cost and implicit cost.

Answer 1

• Explicit Cost:

1. Payment made to others for the purchase of factors of production.
2. It includes wages, payment for raw material, rent, interest, expenditure on transport, and advertisement.
3. It is also called accounting cost or out of pocket cost or money cost.

• Implicit Cost:

1. Payment made to the use of resources that the firm already owns.
2. Cash payment is not made for the use of the producer’s own land, building, machinery, and other factors of production.
3. Implicit cost is also called imputed cost or book cost.