Question

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

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.