Opportunity Cost, Again

In economics, all costs are included -- whether or not they correspond to money payments. If we have opportunity costs with no corresponding money payments, they are called implicit costs. The implicit costs (as well as the money costs) are included in the cost analysis we have just given.

There is some correlation between implicit costs and fixed or variable costs, but this correlation will be different in such different kinds of firms as

a factory owned by an absentee investor

This is the easiest case to understand. All of the labor costs to the absentee investor are money costs, including the manager's salary. If the investor has borrowed some of the money he invested in the factory, then there are some money costs of the capital invested -- interest on the loan. However, we must consider the opportunity cost of invested capital as well. The investor's own money that he has used to buy the factory is money that she could have invested in some other business. The return she could have gotten on another investment is the opportunity cost of her own funds invested in the business. This is an implicit cost, and in this case the implicit cost is part of the cost of capital and probably a fixed cost.

a "mom-and-pop" store

A "mom-and-pop" store (family proprietorship or partnership) is a store in which family members are self-employed and supply most of the labor. Typically, "Mom" and "Pop" don't pay themselves a salary -- they just take money from the till when they need it, since it is their property anyway. As a result, there are no money costs for their labor. But their labor has an opportunity cost -- the salary or wages they could make working similar hours in some other business -- and so, in this case, the implicit costs include a large component of variable labor costs.

a large modern corporation

The corporation has relatively few implicit costs, but generally will have some. All labor costs will be expressed in money terms (though benefits and bonuses have to be included), since the shareholders don't supply labor to the corporation as "Mom and Pop" do in a family proprietorship. It will pay interest to bondholders and dividends to shareholders. But the dividends aren't really a cost item -- they include profits distributed to the shareholders. Moreover, the typical corporation will retain some profits and invest them within the business, a "plowback" investment. Conversely, shareholders may take a large part of their payout in appreciation of the stock value -- and plowback investment is one reason for the appreciation. Thus we would say that the corporation has a net equity value, that is, that the corporation "owns" a certain amount of capital that it invests in its own business (very much like the absentee owner in the first example). This capital has an opportunity cost, and that opportunity cost is an implicit cost. The stockholders, who own the corporation, ultimately receive (as dividends or appreciation) both the opportunity cost of the equity capital and any profit left over after it is taken out.