In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting, selling, or lending it. The term also applies to forgone income from choosing not to work.
Implicit costs also represent the divergence between economic profit (total revenues minus total costs, where total costs are the sum of implicit and explicit costs) and accounting profit (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's current value.
Famous quotes containing the words implicit and/or cost:
“The true colour of life is the colour of the body, the colour of the covered red, the implicit and not explicit red of the living heart and the pulses. It is the modest colour of the unpublished blood.”
—Alice Meynell (1847–1922)
“Life! Life! Don’t let us go to life for our fulfilment or our experience. It is a thing narrowed by circumstances, incoherent in its utterance, and without that fine correspondence of form and spirit which is the only thing that can satisfy the artistic and critical temperament. It makes us pay too high a price for its wares, and we purchase the meanest of its secrets at a cost that is monstrous and infinite.”
—Oscar Wilde (1854–1900)