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Implicit Cost

What is the implicit cost?

An implicit cost is a non-monetary opportunity cost that arises when a business uses an asset or resource it already owns instead of paying for it with money. The cost is non-monetary because the business does not spend money using the existing resource.

Implicit costs are also known as notional, implied, or imputed costs. They are different from explicit costs, which are normal monetary expenses that a business incurs to produce and sell the goods or services that it offers.

Implicit Costs Explained

Implicit costs, or imputed, implied, or notional costs, are not easy to measure. They do not appear in a business's accounting records because they do not involve any cash transactions.

These costs reflect the potential income a business foregoes by using its resources instead of selling or renting them to others. Implicit costs are a form of opportunity cost, which is the benefit that a business gives up by choosing one option over another. For instance, a business could earn rent by leasing its building to another party instead of using it for its production and sales activities.

A business may decide to account for implicit costs as part of its cost of doing business because they represent possible sources of income. Economists consider both implicit costs and the regular costs of doing business when computing total economic profit. In other words, economic profit is the difference between a business's revenue and the sum of its cost of doing business and any opportunity costs.