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Explicit and Implicit Costs on Firms in an Efficient Informational Environment - Essay Example

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Explicit and Implicit Costs on Firms in an Efficient Informational Environment

Implicit costs are costs that are not directly paid for but measured in units of money. These costs are the costs of non purchased inputs which are not purchased in a market transaction but they have cash value. Implicit costs occur when a firm uses its capital, inventories or owner's resources. Goodwill is also a good example of implicit cost.
The term of efficiency assumes an informational dimension here, which refers to productive efficiency that it high lights the development of informationally efficient finncial markets.In fact, these markets not only consist of the usual attributes of financial market- notably a large number of investors who have a interst of effective access in to the rich necessary information, but also the important additional assets that have ending points of well defined certain value. It is the most important question faced by economists todays to what extent firms incorporate their environmental information for achieving market efficiency. In this era of Information Technology, information is the key factor to evaluate a firm's stock price as well as its ultimate value.Investors, customers and all other stakeholders need all necessary information to take proper decision regarding investment, trading etc.So a firm should decide to disclose proper information to reach its ultimate goal.
Part 02: Measuring a Firm's costs and its goal of Profit Maximization
Measuring A Firm's Costs (Opportunity Costs):
Economists consider the opportunity costs of all resources of a firm to calculate its costs whether they are paid or not. Opportunity cost is of any action is the highest valued alternative foregone. Opportunity cost of a firm is the value of the firm's best alternative use of resources. Opportunity costs includes both explicit and implicit costs, and it is known as economic cost which is our concern. So economic cost indicates to the value of all resources used to produce a good or service, whether the resources are paid or unpaid.
Economic cost = Opportunity Cost= Explicit cost + Implicit Cost = Total cost of a Firm.
We have discussed in the introductory part about explicit and implicit costs. Explicit cost is directly paid in money whereas implicit cost is the value of resources used even when no direct monetary payments are made to these resources. Implicit cost is incurred when a firm gives up an alternative action. For example, when a firm uses its own capital, and/or uses its' owner's resources, implicit costs are incurred.
So there are two main aspects of a firm's implicit cost:
i)The cost of a firm's own capital: If a firm ...Show more


An Explicit cost is the familiar as money cost as it is paid directly in money. Explicit costs occur when a firm pays for its factors of production when it uses those for producing its products and services. So an Explicit cost is a business expense that is transparent that can be easily identified such as wage, rent and materials…
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Explicit and Implicit Costs on Firms in an Efficient Informational Environment essay example
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