Question

Why do you think we should care about opportunity cost rather than focusing only on explicit...

Why do you think we should care about opportunity cost rather than focusing only on explicit cost?

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Answer #1

An explicit cost is a direct cost of running a business such as a wage, rent. Accounting profit includes only explicit cost. On the other hand, implicit cost means opportunity cost which a firm must give up in order to continue what it already owns. Implicit cost is not a direct cost. Economic profit includes both explicit cost and implicit cost.

Accounting profit= Total revenue- explicit cost

Economic profit= Total revenue-(explicit cost+Implicit cost)

Thus economic profit is lower than accounting profit. A firm can take a decision whether to continue the business or not to continue on the basis of economic profit. If opportunity cost is a big amount then it can be a loss to continue the business if total revenue<(explicit cost+implicit cost). Only explicit cost can lead a misguiding result so we should care about opportunity cost rather than focusing only on explicit cost.

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