A producer borrows money and opens a shop. The shop premises is owned by him. Identify implicit cost and explicit cost from this information.Explain.
In the above example, interest paid on borrowed money will be explicit cost, whereas, the imputed rent of the shop premises is implicit cost.
Explicit cost:These are those cash payments, which firms make to outsiders for their services and goods, e.g. wages, payment for raw material, rent, interest, etc.
Implicit cost : These are the costs of self-owned and self-employed resources, e.g. entrepreneur may utilise his own building for factory use, interest on self-capital, etc.