How do firms incorporate opportunity costs to calculate economic costs? Discuss and give example using an explicit economic cost and an implicit economic cost

Question

Please provide the best answer for the statement.

Answer 1

All resources used by the firm have an opportunity cost which is the value of the next best alternative use of the resource. Explicit costs for operating a business have an opportunity cost. For example, if a business pays for supplies, that monetary payment has an opportunity cost because those funds could have been used to purchase something else for the business. Implicit cost of running a business also have an opportunity cost. For example, if the owner of a business does not take a salary from the business, there is a still a forgone opportunity cost equivalent to what the owner could have made working on a similar job at another business.