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

It is true that implicit costs are not monetary costs so their involvement seems to be unnecessary from the accounting view. however from in economic point of view it is necessary to include them as the cost of all the lost opportunities that an economic activity has faced.

Note that any economic activity uses the resources that are already scarce and can be put on multiple alternatives. When they are used in one economic activity, their usage in other activities is restricted. To analyse the true costs and benefits open economic activity, it is necessary to include the cost of lost opportunities in order to ascertain if the economic activity is desirable.

Production of a particular good by a firm is also an economic activity and firm diverts the available resources from the production of other goods towards this good. It then becomes inevitable to include the opportunity cost of producing this good to see if production is desirable or not.