3.1 Concepts of Cost

ConceptMeaningExample (a Kathmandu law practice)Explicit costActual money payments to outsidersoffice rent, clerk's salary, bar-registration feesImplicit costThe opportunity cost of self-owned, self- employed resources — no cash changes handsthe salary the advocate could have earned in a firm; return on own capital investedAccounting costExplicit costs only — the bookkeeper's ledgerthe rent and salary actually paidOpportunity costValue of the next-best alternative forgone (Unit 1.4)earnings as in-house counsel, forgoneEconomic costExplicit + implicit costs — the economist's full ledgerbooks + the forgone salary The consequences (two exam lines): 1. Economic profit = revenue − (explicit + implicit costs); Accounting profit = revenue − explicit costs only. Economic profit is therefore smaller — and a firm earning zero economic profit is doing exactly as well as its next-best alternative: it earns normal profit (the minimum return that keeps it in the business — itself an implicit cost). 2. Normal profit is a cost; supernormal (above-normal) profit invites entry. That single sentence drives the whole theory of markets (3.4).