Answer
Principle of opportunity cost
Work Step by Step
The computation of economic cost is based on the
principle of opportunity cost.
Economic cost = Explicit cost + Implicit cost
Explicit cost is the monetary payments that are made for procurement of the inputs (means of production like labour, materials, machinery, capital etc). It is an opportunity cost (the cost sacrificed to get something needed).
Implicit cost does not involve monetary payments. It is also an opportunity cost.
Implicit cost is the cost of the personal effort put by an entrepreneur in building their firm by sacrificing the time that could have been invested to earn somewhere else and the personal funds that could have been used for other benefits/purposes (these are few examples).
