Question

What is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business. (1 mark) Word count 80.

Answer 1

Answer : The difference between implicit and explicit cost is :

Explicit cost : Explicit costs are those costs for any business which are paid to run the business. Three examples are :

(I) Cost of labor wages,

(II) Cost of electricity bill,

(III) Cost of advertisement on television and newspaper.

Implicit cost : Implicit costs are those costs for any business which are not paid to run the business but always the business face it. Simply you can say it as the opportunity cost of the running business. Three examples are :

(I) Business owner's own salary which he/she does not draw for his/her own labor to run the business,

(II) Business owner's cars and computers which are used to run the business,

(III) Invested capital in the business because the business owner can use the invested capital for other purposes.