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Explicit & Implicit Cost

  • Explicit costs are the measurable costs of doing business that are reflected on a firm’s accounting statement.
  • Implicit cost include the opportunity of a firm’s equity & owner provided services.
Accounting Profit vs. Economic Profit

Accounting Profit:

  • Include firm’s explicit costs

Economic Profit:

  • Include both explicit & implicit costs (opportunity cost of equity or capital)


Control System vs. Incentive System

  • Command System
  • Incentive System
  • Principal Agent Problem:

1.  Ownership Interest

2.  Incentive Pay

3.  Long Term Contract

Control System vs. Incentive System
  • Technology constraint
  • Information constraint
  • Market constraint

Sample Question



Co. ABC is into business of thermal power generation, because of which it emit lots of green house gases. The cost associated with this pollution will be classified under:

A.  Implicit costs

B.  Explicit costs

C.  Operating costs

Ans: Implicit costs

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