Question

Explain the difference between implicit and explicit costs. Give two examples of when an explicit cost is different from an implicit cost.

In your own words, explain the difference between accounting and economic profit. Give two examples of when they differ.

Finally, explain the difference between economies and diseconomies of scale. Provide examples of when an actual firm might benefit from economies of scale or be harmed by diseconomies of scale.

Answer 1

Explicit costs are those that require monetary payments like rent, salary, repairs etc. Implicit costs do not require actual monetary payments. Implicit costs are opportunity costs or implied costs. Opportunity cost is the value of the next best alternative. Examples of implicit costs are the salary foregone when attending college, loss of income that a person could have earned if a vacation was availed of.

Accounting profit is total revenue minus explicit costs. Revenue- monetary expenses like rent, wages, insurance are accounting profit.

Economic profit is total revenue minus (explicit costs + implicit costs).  

If you work for yourself it affects the economic profit because then you would have given up some other source of income, which is the opportunity cost.

For example, if you had to give up your employment as a bank manager for which the salary was $10,000 per year, then the opportunity or implicit cost is $10,000. This will be included for calculating economic profit.