Question

Please type an original answer.

Implicit costs are defined by economists as nonmonetary opportunity costs. Why is it important for a firm to take these costs into consideration when evaluating a potential activity, when they don’t involve any monetary expense?

Answer 1

ANSWER:-

All the factors of production owned by the owner or the firm must be taken in the accounts as implicit cost of the firm

Implicit cost is the opportunity cost of the factors of productions owned by the firm. It is an nonmonetry opportunity cost as a business was not getting paid for the resources earlier but it can get paid for it, if it want to be.

1. Labour

Working as a labour in own business also have the implicit cost. The wages which we can get in the market for the same work must be taken in the accounts as the implicit cost of the firm. For example:- Working in own shop raises the implicit cost. The the market rate of wage/salary of same kind of work is the implicit cost.

2. Capital

The interest on own capital is the implicit cost. The market rate at which the owner can lend his money in the market is the implicit cost. For example:- Own money spent for opening a garage.

3. Land

If on owner uses his own land in business, in that case he must take the rent/revenue of the land as implicit cost. It is because if the land is not used for business purpose, it must be earning some rent. The actual market rent should be taken in account. For example:- using a room of house for opening a shop. The rent of that room is implicit cost for the owner.

4. Entrepreneur

The entrepreneur should also consider his fees for entrepreneurship for the firm. The fees he may earn in the open market for the same entrepreneurial work shuld be considered. For example:- The fees for entrepreneurial duties of a person in his own firm.

• Firstly let us try to know the meaning of the implicit cost. it is an opportunity cost which is always present but not shown in records.
• every firm must take implicit cost into the consideration due to the following reasons-
• It provides a basic root for any organization for growth, let's take an example for this. Suppose in a company which hired20 new employees and before joining final into the job, they must need training of 3 months. The company will give them training but this training cost and time will come under implicit cost but they are very important for better performing for the company
• It is generally nonmonetary and opportunity cost. For example, suppose a gym trainer who gives training at home but when he finds a new better job then he quits his home training job for opportunity cost from the new job