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. 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

Difference between Implicit Cost and Explicit Cost

Explicit Cost	Implicit Cost
Explicit Costs are the costs which involve an immediate outlay of cash from the business. The cost is incurred when any production process is going on, or activity is conducted in the normal course of business. The cost is a charge for the use of factors of production like land, labour, capital and so on. Therefore Explicit Costs show that payment has been made to outsiders, while business is carried on.	Implicit Cost, is the cost which the company had foregone while employing the alternative course of action. They do not involve any outflow of cash from the business. It is the value of sacrifice made by the entity at the time of exercising some other action. The cost occurs when an asset is used as a factor of production by the entity instead of renting it out. Hence Implicit Cost are the one that arise from using the asset rather than renting it out.
The measurement of Explicit Cost is objective in nature because it is actually incurred	Implicit Cost occurs indirectly and that is why its measurement is subjective.
Explicit Cost is recorded and reported to the management.	The implicit cost is neither recorded nor reported to the management of the company.
Explicit Cost is also known as out-of-pocket cost	Implicit costs are also known as imputed cost.

Examples

A company's explicit costs includes employee wages, payments made to purchase raw materials, business rent/mortgage payments and fees related to purchasing manufacturing equipment.

Implicit costs represent opportunity costs that use a company's internal resources without any explicit compensation for utilizing those resources. A business owner who chooses to work for her company without drawing a salary is forgoing the opportunity to earn a fair wage for her business skills and talents. The business owner's salary is an implicit cost.

Difference between Accounting profit and Economic profit

Accounting Profit	Economic Profit
The actual profit earned by the company during a particular financial year is known as Accounting Profit. The profit is obtained by deducting the total explicit cost from total revenue. Here explicit cost means the directly ascertainable cost spent on account of running a business, i.e. rent on land and building, the wages of labor, salary for employees, interest on capital invested, etc. The Accounting Profit is also known as net income.	Economic Profit is the difference between total revenue earned by the company and the total costs (explicit as well as implicit). Implicit cost is the opportunity cost, i.e. the option forgone by the firm while investing the money somewhere else or using some other option.
Accounting profits is obtained if the revenue exceeds the accounting cost of the firm.	Economic profit is obtained when the revenue exceeds the opportunity’s cost.
Accounting Profit is used to know the company’s profitability.	Economic Profit is used to understand the company’s financial position.
Accounting Profit is usually higher	Economic Profit is usually lower than accounting profit.

Examples

Accounting profit computations are primarily used for income tax purposes, financial statement preparations and to review financial performance.

Economic profit is used more to judge total value of the company somewhat like the performance metric would and is helpful in calculating total production costs.

Difference between economies of scale and diseconomies of scale

Economies of scale	Diseconomies of scale
Economies of scale refer to the idea that as more products are produced the marginal cost, or cost per unit, decreases because of increased efficiencies.	Diseconomies of scale come about when a business or organization becomes so big, or so inefficient, that the cost-per-unit of its products and services starts to rise .
Internal economies arise from within the firm itself as a result of its own decision to become big. As a result of becoming bigger the firm which experiences internal economies of scale is in a situation where average costs per unit of production continues to fall as output increase.Therefore, the firm of course more efficient.	Internal diseconomies are unlikely to arise from purely technical reasons Greater division of labour and increased specialisation, increased dimen­sions the principle of multiples, indivisibilities and so on should continue to offer certain advantages which, individually or conjointly, should con­tinue to offer potential reductions in per unit cost as the scale of production increases. A close look reveals that the major cause of diseconomies is management problems.
External economies which apply to the industry as a whole and each particular firm can enjoy these economies as the industry expands.	External Diseconomies cause of rising costs per unit with an increase in the size of the firm is rising price of factors of production.

Examples

Economies of scale: Suppose there is a capacity of 60 students in a class. Fixed cost like rent , light bill, teacher salary remains the same. Now if a college gets 60 seats full, then it is called economies of scale.

Diseconomies of Scale: This year, the college selects 80 students to earn more revenue but they have to start a new division again that will bear more rent in terms of extra class. Now 2 division will have total 120 seats and then this will create vacant seats of 20 per division and that will result into increased per unit cost of production and decreased per unit of revenue. This is diseconomies of scale.