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Economic Costs

Definition

Economic costs refer to the total opportunity cost of producing a good or service, including both explicit and implicit costs. It takes into account all the resources used in production, whether they are paid for with money (explicit costs) or not (implicit costs).

Analogy

Think of economic costs as a shopping trip. When you go shopping, you not only consider the money you spend on items (explicit costs), but also the time and effort you put into it (implicit costs). The total cost of your shopping trip is the economic cost.

Related terms

Implicit Costs: Implicit costs are non-monetary opportunity costs that arise from using resources in one way instead of their next best alternative. For example, if an entrepreneur starts her own business, she may forgo a higher salary she could have earned working for someone else.

Explicit Costs: Explicit costs are monetary expenses incurred by a firm in its production process. These include payments for wages, rent, raw materials, utilities, etc.

Accounting Profit: Accounting profit is the difference between total revenue and explicit costs. It only considers explicit monetary expenses and does not take into account implicit opportunity costs.