Wednesday, August 24, 2011

How Much Does It Cost You?- Explicit vs. Implicit Costs

How much does it cost you?
Generally, a person's first instinct is to respond by answering with the price. If it's social networking, such as twitter or facebook, it's easy to say "free". If it's an hour of tutoring, you might say $20. But if these are your answers, you're just accounting for explicit costs- a direct payment transaction. But it is also necessary to consider implicit costs- costs that might not necessarily be in the form of a direct transaction, but are still equally- if not more- significant. Examples of implicit costs includes an entity's opportunity cost. For example, twitter may be free, but for that hour you are tweeting, what else could you have done with your time? Babysit for $10? Read and acquire knowledge worth $5? Take a job for $15? Whatever the best alternative of your time is (your opportunity missed), is considered your implicit cost. While implicit costs are often hard to identify in terms of a pure cash transaction (how do you value acquired knowledge in terms of money?), they are ALWAYS important to consider.
Twitter may be costing you more than you think, so you probably shouldn't consider it a free service.

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