Difference Between Implicit And Explicit Cost

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Written assignment unit 5 Victoria Martini University of the People What is the difference between Implicit and Explicit Cost? In order to understand the difference between Implicit and Explicit cost. You must first know the difference between the two. Implicit cost- “is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly” (Google). In laments terms an Implicit cost is a small cost that depreciates goods and services. For Example: Let’s say that I owned a taxi cab business and instead of paying a car note on a brand new vehicle for my business I instead used my own personal vehicle.…show more content…
Accounting profit- “is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out” (Economic pdf pg. 167). For instance, If you were running a bakery and had to find your accounting profit for taxes, you would add how much revenue you brought in for the year then subtract how much you spent on rent for the shop, Electricity, water, gas. The total will give you the Accounting Profit. When dealing with Economic Profit this is where the two start to differ. Economic Profit- “is total revenue minus total cost, including both explicit and implicit costs” (Economic pdf pg. 167) When trying to find the Economic profit of your business you subtract all cost including Implicit. For example, lets say again, I own a bakery. I would take my total revenue then I would subtract all cost not just rent and utilities but the cost of Flour, sugar, oil, eggs etc and the total would give us our Economic profit. This is important because the Economic Profit is what determines if a business is doing Economically well. If a Computer hardware store wanted to find their Accounting Profit they would first have to subtract their Explicit costs such as employee wage, rent, utilities etc from their revenue. If the hardware owner wanted to see how Economically sound his business was he would take his total revenue then subtract all his cost big and small…show more content…
What this means is that the more in bulk a company shops the cheaper per unit cost is for that company. A good example of how this can be seen in everyday life is Sam’s Club’. Sam’s Club is a membership only store that consumers can get bulk quantity household goods for cheaper than at their average grocery store. Diseconomies of scale means “the long-run average cost of producing each individual unit increases as total output increases” (Economics pg. 182). A good example of Diseconomies of scale would be lets say there is a limited edition product coming out and it is only made from a very limited ingredient. In this circumstance when more are being produced the price for the product will rise because the price of production rose. Also when there are limited quantities and an ongoing rise in demand that is when diseconomies cost arises. The less availability of a product to consumers the higher the demand and the
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