Hi everybody, pls help me differentiate the explicit cost and implicit cost in the following example TOTAL REVENUE: 340,000 __________________ Opportunity costs: * Fiberglass: 100,000 * Electricity: 30,000 * Employee wages paid: 55,000 * Interest paid on borrowed funds: 5,000 Total explicit costs: 190,000 _________________ * Patrick’s forgone wages: 35,000 * Patrick’s foregone interest: 10,000 * Economic depr. on buildings: 5,000 * Normal profit: 60,000 Total implicit costs: 110,000 ________________ TOTAL COST: 300,000 ECONOMIC PROFIT: 40,000 I don’t understand why there is employee wage in both explicit cost and implicit cost. As base on the definition of implicit cost “are not explicitly observable and fall into two categories: (1) the opportunity cost to a firm of using its own capital and (2) the opportunity cost of the time and financial resources of the firm’s owners.”. The implied rental rate including economic depr and foregone interest and normal profit are component of implicit cost. 35,000 implicit cost of employee wages for what opportunity forgone that i don’t know and don’t understand. I know my though surely wrongly but i still think it may be overlapping of implicit cost and explicit cost on above example. As when business named Patrick forgoes the next best opportunity of operating business, it only forgoes one employee wage payment cost. Could you pls make it clear for me. Thanks.
read the sections on normal profit and economic profit. Patrick’s wage is in there because he could be working somewhere else and making that salary, but instead he is an entrepreneur, and needs to be compensated for it.