9.

An individual is both the owner and the manager of a shop taken on rent. Identify implicit cost and explicit cost from this information. Explain.

An implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It refers to cost of the factor that a producer neither hires nor purchases. Such costs are not actually paid by the producers yet are included in the cost of production. Also implicit costs do not result in any cash outlay from the business.

In this case the implicit cost consists of imputed value of the services provided by the owner who is also the manager. The implicit cost here is in the form of salary to the manager which need not be paid and the explicit cost consists of the rent paid for the shop.

Explicit costs on the other hand, are those costs that are borne directly by a firm and are paid to the factors of production. Explicit costs are referred to as out-of-pocket expenses, which results in outflow of cash. In this case, the rent for the shop paid by the firm is considered as explicit cost, as it results in outflow of cash.