Explicit and Implicit Costs

Costs are expenses, expenses of monetary resources, which must be made for production. For a firm, such expenses act as a payment for purchased factors of production.

Costs are divided into constants, variables andare common. Constant costs are those expenses incurred by the firm within the production cycle. Constant costs are determined by the enterprise independently. These costs will be present at all production cycles of the enterprise. Variable costs are expenses that are transferred in full to the finished product. General costs are the costs that an enterprise incurs during the production stage. That is, total costs represent fixed and variable costs in total.

Also costs are classified into accounting(explicit costs reflected in the balance sheet), as well as alternative ones. Accounting costs represent the price of used resources in the prices of their acquisition. Alternative costs are both explicit and implicit costs together.

In addition, there are external, private andsocial costs. External costs are part of the alternative costs for which the company is not liable. These costs are covered from the funds of other members of society. For example, if an enterprise pollutes its work with nature and is not responsible for it, then the costs of pollution compensation will be the external costs of other enterprises or individuals. Private costs - part of the costs, which is formed directly by those who engage in this activity. Public costs are the sum of external and private costs.

The division of costs into implicit and explicit

As already noted, from the division of costs into accounting and alternative follows the classification of the implicit and explicit.

Explicit activity costs are determinedthe total costs of the firm to pay for the external resources used, that is, resources that are not owned by the enterprise. For example, it could be raw materials, fuel, materials, labor and so on. Implicit costs determine the value of internal resources, that is, resources that are owned by a given firm.

An example of implicit costs may be the salarybusinessman, which he would receive if he worked for hire. The owner of the capital property also carries implicit costs, since he could sell his property and put the proceeds into the bank at a percentage, or lease the property and earn income. When solving current problems, one should always take into account implicit incomes, and if they are large enough, it is better to change the scope of activity.

Thus, explicit costs arealternative costs that take the form of payments to suppliers of intermediate goods and factors of production for the enterprise. This category of expenses includes wages to workers, payment of transportation costs, payment of resource suppliers, utility payments, payment for insurance companies, banks, cash costs for the acquisition and lease of machinery, equipment, structures and buildings.

Under implicit costs understand the alternativeThe costs of using resources that are directly owned by the enterprise, that is, unpaid costs. Thus, implicit costs include cash payments that an enterprise could receive if the resources that belong to it were more profitable. For the owner of capital, the implicit costs include the profit that the property owner could receive by investing in some other field of activity, and not specifically in this area.