question_answer

A producer invests his own savings in starting a business and employs a manager to look after it. Identify implicit and explicit costs from his information. Explain.

Answer:

In this implicit cost consists of imputed value of the interest on the saving and the explicit cost consists of the salary paid to the manager.

Implicit cost (Imputed cost) 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. It is a difference between the economic profit and accounting profit. On die other hand, explicit costs are those costs that are borne directly by a firm and are paid to the factors of production. Another way of distinguishing the two is that while explicit costs are referred to as out-of-pocket expenses, on the other hand, implicit costs do not result in any cash outlay from the business. Thus, in the case given, the salary is to be paid to the manager, so it is considered as explicit cost, while, the costs of investing (interest) producer?s saving is considered as implicit costs, as no cash is expended for borrowings these funds (savings).