March 23, 2018 

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MACROECONOMIC THEORIES: Scientific theories that seek to explain phenomena associated with the macroeconomy. The primary phenomena investigated are unemployment, inflation, and the level of aggregate production. Macroeconomic theories also inevitably provide policy recommendations intended to improve the performance of the economy and to correct macroeconomic problems. A few of the more noted macroeconomic theories are: Classical economics, Keynesian economics, aggregate market (AS-AD) analysis, IS-LM analysis, Monetarism, and New Classical economics.

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An opportunity cost that does not involve a monetary payment or any other form of compensation. The monetary payment that is often made to compensate the person who initially foregoes the satisfaction is not made for implicit cost. There is no payment to transfer the burden of the opportunity cost from the original person to someone else. Implicit cost is also occasionally termed implicit opportunity cost.
Opportunity cost is the highest valued foregone alternative. In some cases the opportunity cost involves a monetary payment or compensation. In other cases there is no compensation, monetary or otherwise. This distinction gives rise to two types of opportunity cost--explicit and implicit.

Cost and Payment

An implicit cost results if the person who initially foregoes the satisfaction in the pursuit of an activity and is not compensated by money or another form of payment. The opportunity cost begins and ends with the person foregoing the satisfaction.

A common perception, especially among those not trained in the subtleties of economics, is that the terms "cost" and "payment" are synonymous. In other words, a cost is incurred only when money trades hands. And whenever money trades hands, a cost occurs.

Cost, however, is synonymous with foregone satisfaction, and may or may not involve a money payment. When an opportunity cost does NOT involve a money payment, it is an implicit cost.

Consider an example.

  • The Activity: Suppose that Edgar Millbottom, a typical fun-loving Shady Valley teenager, is working part-time at Waldo's TexMex Taco World in the Shady Valley Sprawling Hills Shopping Mall. Edgar spends four hours each afternoon making tacos and running the cash register.

  • The Opportunity Cost: The four hours Edgar spends at the Waldo's TexMex Taco World is time that cannot be spent pursuing other activities. Edgar's best, most satisfying alternative, is playing video games with his friends at Alicia Hyfield's house. The opportunity cost of working at Waldo's TexMex Taco World is this foregone satisfaction.

  • No Payment: Unfortunately, Edgar receives no payment for his effort. Waldo's TexMex Taco World is owned by his father, Waldo Millbottom. Edgar stops by the restaurant each afternoon to lend a hand, to help out the family, to be a good son. But he is not a paid employee. He is not compensated for his foregone satisfaction. As such, Edgar's foregone satisfaction is an implicit cost.

No Compensation

The key to an implicit cost is that no explicit transaction occurs, money does not trade hands. There is no record of a transaction, especially the type of record used by business firms to track expenses. But a cost is incurred nonetheless.

While it might seem as though almost every opportunity cost involves a payment of some sort, the existence of implicit cost is quite prevalent in the economy. Consider two examples:

  • Normal Profit: The standard textbook example of implicit cost is normal profit, the opportunity cost of entrepreneurship. Normal profit is the profit that entrepreneurship foregoes from one production activity by engaging in another production activity. For example, Manny Mustard uses his entrepreneurial skills in the production of sandwiches by operating Manny Mustard's House of Sandwich. He foregoes profit that could be earned in an alternative business venture, such as Manny Mustard's Pet Store. As the proprietor of this establishment, he does not pay himself an explicit profit. The unpaid profit that Manny forgoes and is an implicit cost.

  • Externalities: A second noted example of implicit cost comes under the heading of externalities, which includes any cost or benefit external to market transactions. An external cost, in particular, is inevitably an implicit cost. Because an external cost is external to the market, there is no explicit payment. For example, the Mona Mallard Duct Tape factory tends to spew noxious chemicals into the air when producing duct tape. These chemicals make it difficult for nearby residents to breath, hence imposing an opportunity cost on these folks. Mona Mallard does not compensate these neighbors for their foregone satisfaction, making this external cost an implicit cost.

An Explicit Alternative

The counterpart of implicit cost is explicit cost. Explicit cost is an opportunity cost that does involve a monetary payment or some form of compensation. If, for example, Edgar Millbottom is a paid employee of Waldo's TexMex Taco World and receives a wage for his efforts, then the opportunity cost of his foregone satisfaction is compensated and the result is be an explicit cost.


Recommended Citation:

IMPLICIT COST, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 23, 2018].

Check Out These Related Terms...

     | explicit cost | cost | economic cost | free good | free resource |

Or For A Little Background...

     | opportunity cost | scarcity | limited resources | unlimited wants and needs | satisfaction | value |

And For Further Study...

     | economics | dismal science | three questions of allocation | division of labor | economic good | first rule of scarcity | opportunity cost, production possibilities | total cost | normal profit | accounting cost | normal profit | total cost | short-run production analysis | efficiency |

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     | American Accounting Association |

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