Wednesday, June 29, 2022

Managerial Economics: Explicit vs. Implicit Costs

Hi everyone my name is sarah and today we're going to be talking about explicit versus implicit cause before we get started i wanted to tell you guys a little bit about my background i have a bachelor's degree in finance from the university of findlay as well as a minor in business administration.

I am also certified in principles of economics accounting principles financial performance and investment fundamentals from the international business management institute out of berlin germany so now that we've talked about my background let's go ahead and get started.

First of all let's turn off by defining what our explicit costs versus what are implicit costs explicit costs are the monetary opportunity cost of using market supplied resources in other words these are going to be your accounting costs examples may include rent cost of.

Supplies salaries etc your implicit costs are going to be your non-monetary opportunity cost of using owner supplied resources for example let's say that you invested 200 000 in a business instead of investing in the stock market the potential losses or opportunity.

Costs from that stock market investment would be your implicit cost now let's look at an example a company's new building downtown which cost a hundred and fifty thousand dollars four years ago is now worth and twenty thousand dollars.

The company has paid off its bank loan used to purchase the building and now owns it assume the owner of the business could have invested money and earned four point five percent annually is this an explicit or implicit cost and what is the annual opportunity cost to answer the question of whether this.

Is an explicit or implicit cost we must look again at the definition of each an explicit cost is the monetary opportunity cost of using market supplied resources looking at this example we see that the market isn't necessarily providing these resources however the owner is and that meets the.

Definition of an implicit cost which is the non-monetary opportunity cost of using owner-supplied resources so now that we've eliminated explicit cost as an option and we know that this is actually an implicit cost it's time to calculate the annual opportunity cost to calculate the annual opportunity cost.

We're going to look at the worth of the building which is and twenty thousand dollars and we're going to multiply that by 4.5 percent since that's the amount that we could have earned annually if we had invested that money instead once we multiply those together we can.

See that the annual opportunity cost is equal to five thousand four hundred dollars thank you for watching my video hopefully this helped you guys with explicit versus implicit costs if you have any questions please feel free to leave them in the comments below and if you liked what you saw and would.

Like to learn more please feel free to check out my website at thanks everyone and hope you have a great day


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