Implicit Cost- it's one of your resources like labor that you are sharing with your company. Sometimes we share our savings in the form of capital expenditures and we forgo interest. We can also share our rental apartment with our company and forgo lost rent.

Resources you own .

Accounting profit=TR-Explicit costs

Explicit-out of pocket expenses. Amounts actually withdrawn from your bank account, wallet, purse, Wechat, etc.

Depreciation- Wearing out of capital like machinery or a factory. Explicit expense.

Economic profit= TR- opportunity cost(explicit and implicit expenses)

Capital such as a dump truck could be either an explicit cost if you lease it or an implicit cost if you own it. If you own it then you will not have the explicit cost of the loan payments or rent but you will have the implicit expense of it's next best alternative such as renting it out to another person. If you own the capital you'll have both an implicit expense noted above and an explicit expense of depreciation.

Normal profits-

Should you keep your day job or start the business?

If you either have a normal or above normal profit you should start the business. Even at normal profit, which is break-even, at least you are covering your salary and other forgone items like interest, rent, and your entrepreneurial skills. This person is better off opening the business than using his or her resources in any other option.

Normal profits= The formula definition for normal profits is when total revenue equal total economic costs. If you have normal profits then the difference between accounting profits and normal profits is normally your forgone salary. And this is why some textbooks describe normal profits as a scenario where you can not use your resources in any better manner so you might as well start the business. In other words, your normal profits are zero but you are covering all your implicit costs. You're making the same salary and other things like implicit rent and capital if you start the business. If you were just to focus on accounting profit you would have a profit equal to your salary, forgone interest, rent, and capital. This concept is often tested on the AP exam.

Assume total revenue is $100,000 and explicit cost is $40,000 and all your implicit expenses is your salary of $60,000.

Your accounting profit is $60,000. The econ profit is zero and the implicit cost of your salary is equal to the accounting profit. This is what the workbook was trying to explain with question # 3 , Act 3-3. Another way to say it is when a company has normal profits then the implicit costs are the accounting profits and you are at least paying yourself for the use of your own resources like land, labor, capital, entrepreneurial ability.

-If accounting profits are equal to implicit costs then you have normal profits.

The workbook says “her normal profit, which is equal to her implicit costs, indicates the income Pat’s resources would have earned had they been used in their best alternative occupations.”

Assume you are covering your explicit costs, then whether you make normal economic profits will be determined if you can meet your implicit costs. There is an assumption that explicit costs are being covered in the question above.

The accounting profits were $80,000 and implicit costs were $70,000.

If acct.profits > Implicit costs , then start the business and quit your job. In the above scenario you have accounting profits of $80,000 which you use $70,000 to pay yourself and the remaining $10,000 is above normal profit.

Assume the accounting profits were $70,000 and implicit costs were the same.

If acct.profits=implicit costs, then start the business and quit your job because you are making normal profits. You are making enough money to cover your salary and other implicit income possibilities. While you’d rather have above normal, this amount is enough because the next best alternative is no better.

Assume accounting profits were $60,000 and your implicit costs were $70,000.

If acct profits < implicit costs, then don’t open the business and keep your day job. You are making negative profits and thus you would earn more money in your day job.