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Implicit cost refers to costs that result from a loss of potential revenue, rather than out-of-pocket expenditures. It is important for businesses to consider when deciding how to divide tasks and how much to charge for services. It is also important for individuals to understand when budgeting their time.
Implicit cost is a term in economics that refers to a company’s costs that do not require out-of-pocket expenditures but that result from a loss of potential revenue. This concept can have important ramifications for companies and business owners as they decide how to divide tasks among their workforce and how much to charge for their services. It’s also an important concept for people to understand when choosing how best to budget their time on a variety of projects.
The implicit cost of some businesses is usually a result of the amount of time it takes someone to complete the business and the value of that person’s time. For example, if someone hires an independent contractor to complete a plumbing job, that contractor must charge enough to cover their explicit and implicit costs in order to make a profit. Explicit costs will be the cost of necessary materials, which are easy to calculate.
The implied cost can be more difficult to determine because it depends on how much the plumber’s time is worth. If that plumber can work for a company and earn $40 an hour, he must add $40 to the total cost of any independent contract for every hour he works in order to actually profit from the job. This is because every hour he works on the contract is an hour he cannot work for the company; therefore, each hour implicitly implies $40 dollars in lost wages.
This concept is also important for companies when determining the cost of completing certain jobs. If a small business owner needs to wash the windows in her store, for example, she can do the job herself or hire someone to do the job. If she hires someone to wash the windows for $10 an hour and the job takes two hours, she incurs an explicit cost of $20 and no implicit costs. However, if she does the work herself, she does not incur explicit costs, but she does incur an implicit cost: her time. If she manages to generate $50 an hour in profits working in the store, washing the windows has an implicit cost of $100, which means that hiring someone else to do the job saves her money.
This is also an important concept for workers to understand. If someone earns $20 an hour, each hour they take off work has an implicit cost of $20. So if that person takes an unpaid day off from an eight-hour day job to relax and go to cinema, incurs an expense much greater than the explicit cost of the cinema ticket. He or she also incurs an implicit cost of $160 dollars in lost wages.
Asset Smart.
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