Unit 5
Table of Contents
May 01, 2026
Explicit Cost
Explicit costs are direct, out-of-pocket payments that a business or individual makes for the use of resources or services. These costs are tangible, measurable, and recorded in accounting books, including expenses like rent, utility bills, wages, raw materials, and interest on borrowed capital.
Implicit Cost
Implicit costs are not directly paid out or recorded in financial statements, but represent the opportunity costs of using resources owned by the firm or individual. Examples include the forgone salary if an entrepreneur works in their own business instead of being employed elsewhere, or the interest income sacrificed by investing personal funds in the business rather than elsewhere.
Ecnonomic Profit
Economic Profit = Total Revenue − (Explicit Costs + Implicit Costs)
Short Run Costs
The short run refers to a time period in which at least one factor of production (such as capital, plant size, or equipment) is fixed and cannot be easily altered. During this period, firms face two types of costs:
- Fixed Costs (FC): These are expenses that do not change with output—such as factory rent, salaried staff, or depreciation of machinery. They remain constant regardless of the level of production.
- Variable Costs (VC): These costs fluctuate with the level of output produced, including raw materials, hourly wages, energy, and packaging. As output increases, variable costs rise; as output falls, they decline.
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)
Different types of Cost
A) Real Cost
B) Economic Cost
C) Accounting Cost
D) Social Cost
E) Private Cost
F) Opportunity Cost
G) External Cost
H) Replacement Cost
Cost Function
𝐶 = 𝐹 + 𝑉(𝑄)
where F is the fixed cost, and V(Q) is the variable cost depending on the output level Q
Total Cost
TC = Total Fixed Cost (TFC) + Total Variable Cost (TVC)
Average Cost
AC = TC / Quantity (Q)
Marginal Cost
TC = Change in Total Cost / Change in Quantity