Santhosh · updated · flag

A cost is a value that is given up in order to produce or get something. For example, the time it takes to create something, represents a cost. In economics, every decision we make comes with a cost.

Explicit cost

Explicit cost is the amount spent on a good or a service. Cost involving monetary payment. These costs have a definite readily identifiable value.

Employee wages, utilities, equipment are all examples of explicit costs. An easy way to remember explicit costs is that there’s probably a receipt for the item.

Implicit cost (opportunity cost)

The implicit cost is a value that is given up or sacrificed to pursue a course of action. An implicit cost does not always need a monetary value to it.

For example, say you have one scarce hour, in this hour, you can choose to either work or sleep. Let’s say you chose to work. The opportunity cost for this course of action would be sleeping. This is because you gave up your sleep to pursue work.

If you were to have spend that one hour sleeping, then the opportunity cost of that choice would be working because you sacrificed a hour of work. Employee training and maintenance activities are also examples of implicit costs.

Cost, price, and profit

Economic cost is the sum of explicit and implicit costs. It is the total expense incurred for creating a product or service being sold by a firm. The cost involved in production might include the raw materials used in making the product, labour, etc.

The amount of cost it takes to produce a good or a service can have a direct impact on both the price of the product and the profit earned from the sale.

Price is the amount a consumer is willing to pay for a good or service. The difference between the price paid and the costs incurred is the profit. For example, if a customer paid ₹20 for a product that cost ₹14 to produce and sell, the company earned ₹6 in profit.