What is the difference between explicit and implicit costs?


Quick Answer

According to CNX.com, the difference between explicit and implicit costs is whether or not a direct payment or cash exchange is made. Explicit and implicit costs are used when determining economic profit, which takes into consideration the monetary value of transactions over a specific period of time.

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What is the difference between explicit and implicit costs?
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Full Answer

According to the Houston Chronicle, explicit costs are direct payments made in regards to production or business transactions. This type of cost requires businesses to pay out money. Examples of explicit costs include wages, rent or mortgage payments, and cost of supplies and equipment. Explicit costs include both variable and fixed costs. Variable costs change according to increases in production and output, while fixed costs stay the same regardless of any increases.

The Houston Chronicle describes implicit costs as costs associated with using internal resources without paying to use the resources. Implicit costs are opportunity costs or costs that come from using assets rather than renting or selling them, with the company thereby giving up the opportunity to make money on the assets or resources used. Examples of implicit costs include business owners forgoing earning a salary or utilizing a place of business instead of renting it to earn more income. Businesses can choose whether or not to include implicit costs as potential sources of income.

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