Difference between Explicit Cost and Implicit Cost

What is Cost?

Cost refers to the total expenditure made on inputs that are used for the production of final goods or services. The cost is the sum of the Explicit Cost and Implicit Cost.

What is Explicit Cost?

The actual expenditure made on the inputs or the payments made to the outsiders to hire their factor services is known as Explicit Cost.

For example, paying the rent for the hired premises, paying for raw materials, or paying the employee’s wages.

What is Implicit Cost?

The estimated value of the inputs supplied by the owners along with the normal profits is known as Implicit Cost.

For example, interest on own capital, rent of own land, salary for one’s services as an entrepreneur, etc. These are the costs associated with self-supplied factors.

Thus, cost in economics refers to both the actual money spent on inputs (also known as the explicit cost) and the imputed value of the inputs provided by the owners (also known as the implicit cost).