The Difference Between Explicit and Implicit Costs
Economists distinguish between explicit and implicit costs. Explicit costs, also called accounting costs, are out-of-pocket costs, such as expenses on labor, raw materials, and rent. Implicit costs are costs a business incurs without actually spending money. They are estimates of the value of alternative activities you have sacrificed. A person who invests $100,000 of her/his own money in a business does not have to pay any finance charges to a bank for using this money. Thus, there is no explicit cost for using this money. However, the implicit cost is the earnings the owner sacrifices by not using the $100,000 in an alternate activity, such as investing in stocks or bonds.
What are the Explicit Costs and Implicit Costs of Attending College?
Explicit costs of attending college include tuition, lodging, fees, books, and transportation. Implicit costs include sacrificed job earnings, and sacrificed interest earnings.
Let’s say that your annual costs on tuition and fees, lodging, books, and transportation are $25,000.
In addition, you estimate that your annual implicit costs are $30,000 because this is the money you could have earned had you not attended college. Your total annual cost of attending college is now $55,000 ($25,000 plus $30,000). Thus, your total cost of attending four years of college equals 4 times $55,000, or $220,000.
What are the Explicit and Implicit Costs of Operating a Business?
Problem: Let’s say that you are running a business and incur the following monthly expenses: labor costs are $80,000; raw materials and business supplies are 30,000; equipment leasing expenses are $7,000; finance charges on loans are $3,000. You are not paying rent, because you own the building in which you operate the business. If you had rented it out, however, you would have received $12,000 in rent income. You also estimate the value of your own time to equal $40,000. What are your implicit, explicit, and economic costs?
Solution: Explicit costs are $80,000 + $30,000 + $3,000 +$7,000 = $120,000.
Implicit costs are $12,000 + $40,000 = $52,000. Your total economic costs are your explicit plus your implicit costs, or $120,000 + $52,000, or $172,000.
For a video explanation of explicit and implicit cost calculations, please watch: