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- Opportunity costs

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Opportunity costs

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Instead of buying something, we could have spent the same amount of money on something else. This is  the essence of opportunity cost. There are two kinds of opportunity cost:

  • explicit costs
  • implicit costs

Explicit costs

Explicit costs are those that are paid in money.

Implicit costs

Implicit costs are not paid in money. They occur when a company  uses an asset instead of renting, selling, or lending it. Examples of implicit costs include

  • Economic depreciation
  • Forgone interest
  • Normal profit

Economic depreciation is the changing market value of capital measured over a given period. Normal profit is the return that an entrepreneur could earn on average.

Beispiel

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Susan runs a business. She could earn $30,000 a year if she was employed at Todo Ltd.


Therefore, her normal profit is $30,000. If she wants to compute the cost of her own business, she has to keep in mind this amount – the normal profit – as part of the implicit costs.