A firm can decide to sell or rent out its resource instead of utilizing the resource for production purpose. This means that a firm will be earning some income at an agreed interval. The decision to sell or use the resource depends on implicit and explicit costs involved. When an item is bought, explicit costs are incurred. On the other hand, the implicit cost does not entail any monetary exchanges but is the dollar value of benefits forgone.
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The first example
The first example is a decision to venture into a fulltime business instead of seeking fulltime formal employment. Revenues and costs involved were laid out as follows:
|Revenue earned from a business venture||$ 50,000.00|
|Explicit cost||$ 25,000.00|
|Total cost||$ 28,000.00|
|Accounting profit||$ 22,000.00|
|Income that I could have earned from full-time employment||$ 30,000.00|
|Economic profit||$ (8,000.00)|
By taking note of both implicit and explicit cost, it is rather obvious that notwithstanding the fact that the business was making an accounting profit of $22,000, another engagement was much better. The reason is that economic profits were negative standing at -$8,000.
The second example
As a second example, I had to choose between progressing with my university education or building my career as an athlete. If I had chosen university education, it would have taken me four years to complete my education then another few months to secure a job. Besides spending a lot of time studying, I had to part with the explicit cost in the form of school fees. In total, university education expenditures come to $7,000. As a talented athlete, I could have stated earning more than $10,000 in a single performance. By choosing to pursue higher education at the expense of venturing into athletics, benefits that were forgone were very high. In summary, the implicit cost of proceeding with education at the university was very high. The best alternative was to go into sports, which promised high returns.