Question

Please share an example of a business with which you are familiar. It could be producing any good or service. For that business first describe the good or service produced and then give a specific example of:

1. Explicit fixed cost

2. Explicit variable cost

3. Implicit fixed cost

4. Implicit variable cost

Answer 1

Explicit cost are out-of-pocket costs, that is, payments that are actually made. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs.

Implicit cost are more subtle, but just as important. They represent the opportunity cost of using resources already owned by the firm. Often for small businesses, they are resources contributed by the owners; for example, working in the business while not getting a formal salary, or using the ground floor of a home as a retail store. Implicit costs also allow for depreciation of goods, materials, and equipment that are necessary for a company to operate.

Fixed cost

Fixed cost are expenditures that do not change regardless of the level of production, at least not in the short term. Whether you produce a lot or a little, the fixed costs are the same. One example is the rent on a factory or a retail space. Once you sign the lease, the rent is the same regardless of how much you produce, at least until the lease runs out.

for example, the cost of machinery or equipment to produce the product, research and development costs to develop new products, even an expense like advertising to popularize a brand name. The level of fixed costs varies according to the specific line of business: for instance, manufacturing computer chips requires an expensive factory, but a local moving and hauling business can get by with almost no fixed costs at all if it rents trucks by the day when needed.

Variable cost

Variable cost on the other hand, are incurred in the act of producing the more you produce, the greater the variable cost. Labor is treated as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs would also include raw materials.

Explicit cost can also be variable or fixed, depending on how these costs change as the company increases output. Fixed costs don't change as the company increases production, whereas variable costs can fluctuate as company output increases.

Example for explicit variable cost

Which include employee wages because the cost of paying workers increases as the business ramps up production. Equipment maintenance costs and utility payments for retail store locations can also increase as a business raises production level.

Fixed cost

payments and fees related to purchasing manufacturing equipment. Of these explicit costs, a business considers rent/mortgage payments and the cost of purchasing manufacturing equipment as fixed costs.

Implicit cost

Implicit costs represent opportunity costs that use a company's internal resources without any explicit compensation for utilizing those resources. Implicit costs are opportunity costs because the business forgoes any chance of earning money for allowing consumers or other companies the chance to purchase those internal resources.

Example for implicit variable cost and fixed cost

  The business owner's salary is an implicit cost. In the case of a small business, an owner forgoing a salary in the early days of the company is common. This decreases the cost burden on the company and provides a greater chance to maximize revenue during the company's inception when every dollar is crucial to sustaining success.