Production Theory

Explicit and Implicit Costs Definition

Explicit and Implicit Costs Definition

An explicit cost is the clearly stated costs that a business incurs. For example, employee wages, inputs, utility bills, and rent, among others. These are the costs which are stated on the businesses balance sheet.

By contrast, implicit costs are those which occur, but are not seen. In other words, these are the costs that are not directly linked to an expenditure. For example, a factory may close down for the day in order for its machines to be serviced.

fixed cost and variable cost graph

Fixed Cost Definition

A fixed cost is a cost that a business must pay whether it produces one good or a million. Regardless of output, it must pay the same amount.