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In Microeconomics, an implicit cost is a component of an economic cost. From a firm's viewpoint, implicit costs are the opportunity costs of using its self-owned, self-employed resources. The implicit cost is the amount of money that those resources could have made in their best alternative use.

The reader is urged to note the phrase "best alternative use," because this typically denotes what is also known as an opportunity cost. An implicit cost is basically the opportunity cost portion of an economic cost, as opposed to the explicit cost. This is why the implicit cost is thought of as more subtle; an implicit cost does not actually measure a loss, it measures the revenue minus the potential gain.

Example

Bill is an entrepreneur who owns a factory and employs 20 workers. Bill has his factory produce textiles for a year, and brings in $30,000 in total revenue. He could have had his workers produce bicycles, which would have had a total revenue of $70,000. He also could have his workers produce plastic toys, which would have had a total revenue of $20,000. Bill's total implicit costs are equal to $40,000.

This is because when measuring an opportunity cost, one looks for the best forgone decision. Bill's best decision would have been to produce bicycles, because it would have brought him the greatest profits. We ignore the less profitable decisions when calculating implicit cost, so the information regarding the plastic toys was irrelevant.

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