In economics, an implied cost is described as the financial risk incurred by a company in the absence of a direct or implicit cost. An implicit cost refers to a monetary cost that is not paid by a company unless the company pays it and an implied price is equal to what the company must give up in terms of cash in order to buy a factor of production that it already possesses. Both the implied cost and the implied price are included as an important part of the analysis of an economic model.
In many cases where there are no prices of goods and services then a cost may be considered to be implied. This implies price competition are both constant and there is a tendency for prices to rise above their implied prices. Therefore an implied price can be considered to describe a certain economic entity such as a corporation. When a company does not charge any price for something that it is selling then this implies no price competition is implied.
The difference between an implied and a price is based on the type of economic entity that is being modeled. In a price model, the company only charges its customers for the value of what it supplies. The cost of the product is charged to the customer based on its market price. This model indicates a price, or implied cost. In an implied cost model, the price of a product is determined and a cost is charged to the customer to cover the cost of the product.
An implied price is the price a company is able to charge for a product. If the price of a product is determined and charged by the company then this implies a market price. However, if the price of a product is determined by a third party then this implies a cost that is not paid by the customer. Implicit costs refer to a monetary cost that is not paid by the customer.
Implied costs have an effect on the level of business activity. If a company can afford to charge a price for a product then it will tend to invest in the creation of more products. When it has an implied price then the company can also increase the supply of products to reduce the implied price.
A market price is the price that a consumer pays for a product. This is determined by the pricing mechanism of the firm and the market price depends on the demand and supply. of the product in the marketplace.
A firm should not charge an implied price for a product unless the firm believes the price that consumers will pay for the product is the right price and this is a belief that is based on market research. The cost of manufacturing a product is usually the first priority. The company should determine the cost of manufacturing a product in terms of raw materials, labor, overhead expenses, equipment, plant and buildings, and depreciation. However, the price that the firm charges to manufacture a product does not reflect the true cost of manufacturing a product since many costs such as marketing, advertising and distribution are not accounted for.
The price that a firm charges for a product reflects only one aspect of manufacturing and this is the price of raw materials, labor, overhead expenses, plant and buildings, and equipment, etc. If these factors are considered together, the firm uses the cost of production to set the market price. A firm can make a profit if its cost of manufacturing a product is less than the price of the product, but it cannot make a loss if its cost of manufacturing is greater than the market price.