Opportunity cost

Opportunity cost, or alternative cost, is the loss of potential gain from other alternatives when one particular alternative is chosen over the others. For example, an owner has a building and she/he can use it by two ways. (i) Either, she/he can use it for own business or (ii) she/he can rent it. If owner uses it for own business purposes, she/he may loss rent and she/he would have to invest capital for business too. If she/he prefer to rent it over doing business, she/he may loss potential profit from business that may be more than earned rent. So, opportunity cost is potential loss of building owner. There are two types of opportunity costs:

Explicit Costs

Explicit costs are the direct cost of an action, executed either through a cash transaction or a physical transfer of resources. For example, purchase of land or infrastructure, wages, rent, overhead, material etc. Practically, if a malfunctioning machine is repaired, then explicit cost for the company is equal to the cost of repair of the machine. If machine worked well then this expenditure was saved.

Implicit Costs

Implicit costs are the opportunity costs of utilising resources in other way other than actually they were supposed to be utilised. These costs are often hidden and they are intangibles in nature. Implicit cost is computed as money equivalent to time, labour, work method, process etc. Practically, if a person intended to do clerical job in a company, cleans own desk for one hour (i.e. performs peon's job) then difference of work productivity of clerk and peon for one hour is implicit cost to the company. Similarly, if a machine malfunctions for three hours, then total lost of productive time is implicit cost to the company.