explicit cost

(noun)

A direct payment made to others in the course of running a business, such as wages, rent, and materials, as opposed to implicit costs, which are those where no actual payment is made.

Related Terms

Examples of explicit cost in the following topics:

  • Difference Between Economic and Accounting Profit

    • Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs; accounting profit consists of revenue minus explicit costs.
    • The accounting profit would be $40,000 ($100,000 in revenue - $60,000 in explicit costs).
    • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
    • Explicit costs are costs that involve direct monetary payment.
    • These consist of the explicit costs a firm has to maintain production (for example, wages, rent, and material costs).

  • Cost

    • The concept of "efficiency" is also related to cost.
    • The relevant concept of cost is "opportunity cost."
    • Worker earns a wage based on their opportunity cost.
    • The opportunity costs associated with any activity may be explicit, out of pocket, expenditures made in monetary units or implicit costs that involve sacrifice that is not measured in monetary terms.
    • In economics both implicit and explicit opportunity costs are considered in decision making.

  • Individuals Face Opportunity Costs

    • Individuals face opportunity costs when they choose one course of action over another.
    • The value of the next best choice forgone is called the opportunity cost.
    • Rational individuals will try to minimize their opportunity costs.
    • As economic actors, individuals face opportunity costs as well.
    • This is an opportunity cost.

  • Sources and Determinants of Profit

    • In one year, the firm earns a total revenue of $50,000, while spending $15,000 on production (explicit costs) and having $10,000 in foregone wages, rent, and interest (opportunity costs).
    • Eventually, the firm's revenue will fall as market price decreases, until the total revenue just covers production costs and opportunity costs, and economic profit equals zero.
    • Economic profit is total revenue minus explicit and implicit (opportunity) costs.
    • In contrast, accounting profit is the difference between total revenue and explicit costs- it does not take opportunity costs into consideration, and is generally higher than economic profit.
    • Graphically, this is seen at the intersection of the price level with the minimum point of the average total cost (ATC) curve.

  • Price Leadership

    • After all, in a perfectly competitive industry, economists expect prices to move together because all firms face similar changes in demand and the cost of inputs.
    • Without any way to communicate, all three will lower their prices in an attempt to capture the entire market, stopping only when marginal cost equals marginal revenue.
    • If the firms could cooperate, however, they would be better off if all set the price of gas at $0.20 above marginal cost.
    • Although explicit communication about prices is illegal, the firms might tacitly agree that whenever one station raises its prices, the other two will follow suit.

  • Institutions and Costs

    • In the case of eminent domain, there are costs (opportunity costs) to the authority that defines and enforces the transfer of ownership of goods (property rights).
    • There are also costs of using exchange.
    • The costs of using exchange are referred to as "transaction costs" (see Coase, "Nature of the Firm," 1937).
    • It should be noted that these human creations might be intentional and explicit or unintentional and implicit.
    • These vested interests may use their positions and power to prevent institutional change and to work to alter institutions (particularly explicit institutions such as law) in their interests.

  • Economic Decisions

    • Rules may by implicit or explicit.
    • Explicit rules often take the form of law and maybe imposed by governments or organizations.
    • Generally, explicit rules are conscious creations and must be communicated and enforced.
    • Social groups may also use explicit rules.
    • Every action has a cost and a benefit (the cost or benefit may be zero).

  • Private Property Rights

    • Part of the cost of acquiring or selling a good is the risk an punishment of violating the law.
    • Explicit laws enforced by the state are often used to define and determine the nature of property rights.
    • There may be costs or benefits that impact individuals who are not engaged in the actual use of the good.
    • Externalities can be positive (a benefit is conferred on a third party) or negative (a cost is imposed on individuals).
    • The process of capture and use of these goods imposes cost on others.

  • Average and Marginal Cost

    • Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.
    • Marginal cost is not related to fixed costs.
    • When the average cost declines, the marginal cost is less than the average cost.
    • When the average cost increases, the marginal cost is greater than the average cost.
    • This graph is a cost curve that shows the average total cost, marginal cost, and marginal revenue.

  • Social Insurance

    • Explicit provision is made to account for income and expenses (often through a trust fund);
    • FUTA covers the costs of administering the Unemployment Insurance and Job Service programs in all states.
    • In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.