economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the

opportunity cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...

equal to what a firm must give up in order to use a

factor of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output (economics), output—that is, goods and service (economics), services. The utilized amounts of the various inputs determine the ...

for which it already owns and thus does not pay rent. It is the opposite of an

explicit cost An explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials, as opposed to '' implicit costs'', where no actual payment is made. It is possible still to underestimate these costs, however ...

, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting it out, selling it, or using it differently. The term also applies to foregone income from choosing not to work. Implicit costs also represent the divergence between

economic profit In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It i ...

(total revenues minus

total cost In economics, total cost (TC) is the minimum dollar cost of producing some quantity of output. This is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes ...

s, where total costs are the sum of implicit and explicit costs) and

accounting profit Profit, in accounting, is an income distributed to the owner in a profitable market production process (business). Profit is a measure of profitability which is the owner's major interest in the income-formation process of market production ...

(total revenues minus only explicit costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to accounting profit. Lipsey (1975) uses the example of a firm sitting on an expensive plot worth $10,000 a month in rent which it bought for a mere $50 a hundred years before. If the firm cannot obtain a profit after deducting $10,000 a month for this implicit cost, it ought to move premises (or close down completely) and take the rent instead. In calculating this figure, the firm ought to ignore the figure of $50, and remember instead to look at the

land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various islan ...

's current value.

References

{{Economics Costs Economics and time

See also

References