Chapter 7, Problem 1QP

To determine

The difference between the explicit cost and implicit cost and the difference between economic profit and accounting profit.

Explanation of Solution

The total economic cost is the sum total of the explicit cost and the implicit cost. In this, the economic cost is the cost directly paid to an economic entity; whereas, an implicit cost indicates the opportunity cost of consuming resources that belong to the organizations.

The accounting profit is calculated by deducting the explicit cost from the total revenue, while an economic profit is calculated by deducting the sum total of explicit cost and the implicit cost from the total revenue.

Economics Concept Introduction

Explicit costs: Explicit cost refers to the direct payment made by a firm to others in the course of running a business such as wages, rents, materials, and so on. These costs are taken into account along with implicit ones when considering the firm’s economic profit.

Implicit costs: Implicit costs refer to any cost that has already occurred but is not initially shown or reported as a separate expense. It represents an opportunity cost that arises when a firm allocates internal resources.