implicit cost

  

Definition

The costs associated with an action's tradeoff. It is related to explicit costs, which represent the actual costs of an activity, and represents a cost that is not recorded but instead implied. For example, an employee could take a vacation and travel. The explicit costs would include travel expenses, the cost of a hotel room, and costs related to entertainment. The implicit costs relate to the tradeoff, namely the wages that the employee could have earned if the vacation was not taken.

As another example, not paying rent on the self-owned property (called implicit rent) is an implicit cost, because rent is a tax deductible expense but implicit rent is not. Similarly, implicit cost of liquid assets or stockholders' (shareholders') capital is the maximum interest that would be earned on them as a fixed deposit or as an investment in a mutual fund (unit trust). Implicit costs must be added to actual cash outlays to establish a true estimate of the cost of production or of running a business. Also called imputed cost, implied cost, or notional cost.


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