Question

Definition of economic costs Gilberto lives in San Diego and runs a business that sells pianos. In an average year, he receives $701,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $420,000; he also pays wages and utility bills totaling $247,000. He owns his showroom; if he chooses to rent it out, he will receive $9,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Gilberto does not operate this piano business, he can work as a financial advisor, receive an annual salary of $32,000 with no additional monetary costs, and rent out his showroom at the $9,000 per year rate. No other costs are incurred in running this piano business.

Answer 1

The wholesale cost for the pianos that Tim pays the manufacturer, wages and utility bills that Tim pays are counted as explicit cost. On the other hand, the salary that Tim could earn if he worked as an accountant and the rental income that Tim could earn from renting his showroom fall under implicit cost.

Difference between Implicit Cost and Explicit Cost:

These two expenses, implicit cost and explicit cost, both represent company activity. The connection between cost and business is what distinguishes these two.

An explicit cost is one that the owner bears directly; an implicit cost is one that the owner bears indirectly without paying or utilizing its own resources. However, the organization or corporation takes into account both expenses while making management decisions.

Learn more about explicit cost here:

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