What is an Implicit Cost?

D. Messmer

Implicit cost is a term in economics that refers to the costs of an enterprise that do not require direct expenditure but, instead, result from a loss in potential revenue. This concept can have important ramifications for businesses and business owners when they decide how to divide tasks among their labor force and how much to charge for their services. It also is an important concept for individuals to understand when they choose how to best budget their time on a variety of projects.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The implicit cost of some enterprises usually is a result of the amount of time that it takes someone to complete the enterprise and the value of that person's time. For instance, if someone hires an independent contractor to complete a plumbing job, that contractor must charge enough to cover both his explicit and implicit costs in order to make a profit. The explicit costs will be the cost of the necessary materials, which is easy enough to calculate.

The implicit cost can be harder to determine because it depends on how much that plumber's time is worth. If that plumber could work for a company and make $40 US Dollars per hour, then he must add $40 US Dollars to the overall cost of any independent contract for each hour that he works in order to truly profit from the work. This is because every hour that he works on the contract is an hour that he can't work for the company, thus each hour implicitly costs him $40 US Dollars in the form of lost wages.

This concept also is important to businesses when determining the cost of completing certain jobs. If a small business owner needs to wash the windows of her storefront, for instance, she might do the work herself, or she might hire someone to do the work. If she hires someone to wash the windows for $10 US Dollars per hour and the job takes two hours, then she has incurred an explicit cost of $20 US Dollars and no implicit cost. However, if she does the work herself, she incurs no explicit cost but does incur an implicit cost: her time. If she is able to generate $50 US Dollars per hour in profits when working in the store, then washing the windows has incurred an implicit cost of $100 US Dollars, which means that hiring someone else to do the work actually saves her money.

This also is an important concept for workers to understand. If someone makes $20 US Dollars per hour, then each hour that person takes off from work has an implicit cost of $20 US Dollars. So, if that person takes an unpaid day off from an eight-hour-a-day job in order to relax and go to the movies, that person incurs an expense far greater than the explicit cost of the movie ticket. He or she also incurs an implicit cost of $160 US Dollars in lost wages.

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