Implicit costs are those costs which are not reflected in monetary payments, such as the salary a person gives up in order to start his/her own business.


Question: Implicit costs are those costs which are not reflected in monetary payments, such as the salary a person gives up in order to start his/her own business.

That is correct. Implicit costs are those costs that are not reflected in monetary payments. They are also known as opportunity costs, because they represent the value of the best alternative forgone when a resource is used in one way instead of another.

In the example you gave, the person starting their own business is giving up the salary they could be earning at a job in order to work for themselves. This salary is an implicit cost of starting the business.

Other examples of implicit costs include:

  • The time that a student spends studying instead of working.
  • The use of a personal car for business purposes.
  • The use of a home office instead of renting office space.
  • The risk of loss that a business owner takes by investing in their business.

Implicit costs are important to consider when making decisions about how to allocate resources. By understanding the implicit costs of different options, decision-makers can make more informed choices.

For example, a business owner may be considering whether to invest in a new machine. The explicit cost of the machine would be the purchase price. However, the implicit cost of the machine would be the value of the other opportunities that the business owner is giving up by investing in the machine. For example, the business owner could use the money to invest in a different project, or they could pay themselves a higher salary. By considering both the explicit and implicit costs of the investment, the business owner can make a more informed decision about whether or not to make the purchase.

It is important to note that implicit costs are not recorded in financial statements. This is because they are not actual cash payments. However, implicit costs are still real costs, and they should be considered when making economic decisions.

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