Stephen J. Vertin MAI
Senior Member
- Joined
- Jan 17, 2002
- Professional Status
- Certified General Appraiser
- State
- Illinois
This question is really messing me up so please read carefully if you reply. The terms economic profit, explicit cost and implicit cost are precisely defined after the following question.
If an asset's highest and best use is “as is”, then would its economic profit be the difference between total revenue received and explicit cost (only)? Under the case of highest and best use why would “implicit cost” be considered (unless ownership believed operations were a personal burden which in truth is immeasurable). The highest and best use would indicate alternative opportunities do not maximize production and thereby warrant no consideration within the calculation. Am I right about this? It seems to be the implicit cost is moot after the highest and best use has been determined and has no place when measuring economic profits. Feedback is greatly appreciated. The terms are defined as follows:
Economic profit is the difference between the total revenue received by a business and the total implicit and explicit costs of a firm.
Explicit costs are expenses that require a payment to be made. They lower the amount of cash and money your business has available and include items like payroll, rent, supplies, marketing, etc. These are expenses that require a check be written or payment made to cover the costs. Explicit costs are numerical, calculable, and can be tracked and balanced. Supplies rent or mortgage payments, payroll, the cost of utilities such as electricity and gas, transportation, and even taxes - all of these are examples of explicit costs. If you can calculate a specific amount spent by the business, it's an explicit cost.
Implicit costs, sometimes called notional, implied, or opportunity costs, are expenses to a company that does not necessarily require additional expenditures but can have an indirect effect on the business. It may be an expense that will be incurred regardless of whether or not revenue is tied to it, or it could be the cost of resources that are not being charged directly to the company. Think of implicit costs as opportunity costs, or 'if things were different' costs. They are opportunities for profits not earned because of the way the company is being run now or they account for products or services that the company is not having to pay for, though that explicit cost would be an expenditure for the company 'if things were different.' To clarify, let's look at an example for each type of implicit cost: lost profits and benefits without expenditures.
If an asset's highest and best use is “as is”, then would its economic profit be the difference between total revenue received and explicit cost (only)? Under the case of highest and best use why would “implicit cost” be considered (unless ownership believed operations were a personal burden which in truth is immeasurable). The highest and best use would indicate alternative opportunities do not maximize production and thereby warrant no consideration within the calculation. Am I right about this? It seems to be the implicit cost is moot after the highest and best use has been determined and has no place when measuring economic profits. Feedback is greatly appreciated. The terms are defined as follows:
Economic profit is the difference between the total revenue received by a business and the total implicit and explicit costs of a firm.
Explicit costs are expenses that require a payment to be made. They lower the amount of cash and money your business has available and include items like payroll, rent, supplies, marketing, etc. These are expenses that require a check be written or payment made to cover the costs. Explicit costs are numerical, calculable, and can be tracked and balanced. Supplies rent or mortgage payments, payroll, the cost of utilities such as electricity and gas, transportation, and even taxes - all of these are examples of explicit costs. If you can calculate a specific amount spent by the business, it's an explicit cost.
Implicit costs, sometimes called notional, implied, or opportunity costs, are expenses to a company that does not necessarily require additional expenditures but can have an indirect effect on the business. It may be an expense that will be incurred regardless of whether or not revenue is tied to it, or it could be the cost of resources that are not being charged directly to the company. Think of implicit costs as opportunity costs, or 'if things were different' costs. They are opportunities for profits not earned because of the way the company is being run now or they account for products or services that the company is not having to pay for, though that explicit cost would be an expenditure for the company 'if things were different.' To clarify, let's look at an example for each type of implicit cost: lost profits and benefits without expenditures.
