Implicit Cost Analysis

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Introduction: Companies strive to improve and maximize profits in various ways. Some are successful while others are not very successful. The strategy that initially works for some companies, if not properly and effectively managed becomes their undoing. In this paper, we explain the difference between implicit and explicit costs and provided two examples of when an explicit cost is different from an implicit cost. Furthermore, this paper explores the difference between accounting and economic profit while giving two examples of when they differ. These examples led us in this paper to explain the difference between economies and diseconomies of scale. Finally, we provided examples of when an actual firm might benefit from economies of scale …show more content…
Implicit costs do not require a company or business to make direct expenses to actualize a production. This is because; the company already has the resources incurred so why using the resources, they are seen as implied in nature and therefore, does not involve a cash payment. Conversely, explicit costs involve direct costs that are actually incurred by a company to implement a production process. In explicit costs, a company directly bears the expenses or costs, but in implicit costs, a company makes use of the opportunity cost equal to the amount that it must sacrifice to use those factor of productions for which it already owns (Khan Academy, …show more content…
The first example would be an individual working in a company and earns $50, 000 per year and decided to start a personal company. The startup cost the company incurred total $70,000 but at the end of the first year, the company earns a profit of $90,000. The accounting profit of the company is $20,000 or $90,000 - $70,000. However, because the company owner could have made $50,000 per year in a different workplace, the company is regarded to have recorded an economic loss of $30,000 or $50,000 - $20,000. So the difference is that accounting profit considers the total profit of the business while economic profit looks at the opportunity costs. The second example of when they differ would be an individual who gave up a job of $20,000 monthly to start a lucrative coffee shop. While the business drew in the first year, its accounting and economic profit recorded a reasonable profit. However, two coffee shops came to the same environment and they became three coffee shops. The presence of the later coffee shops reduced the inflow of customers to the first coffee shop. By the end of the business season, the accounting profit remains while the economic profit has suffered a misfortune; therefore, the individual or company took a large opportunity cost. So the accounting profit may be high because it does not consider the opportunity cost; however, the economic profit will be low because it considers the
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