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I was solving an economic problem (I was calculating explicit and implicit costs) and noticed one interesting thing: In the said problem, the entrepreneur set himself the wage of 10 000 rubles AND in the solution said wage was NOT included in explicit costs. But his old wage (before he started his own business) was included in implicit costs(By the way, his old wage was 12 000 rubles). This puzzles me because although he owns the business, he's also its employee. And if he is his own employee, his wage must be accounted as a wage of any other employee. I don't think that an accountant would make an exception for him. Besides, if he decreased his own wage, then expenses of his business would decrease and consequently, its profit would increase.

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Entrepreneur's wages are his return from his investment (his labour, leisure time, etc.) and his current wages are implicit costs. You need to be able to differentiate between accounting and economic profits to understand why this is so. This can be explained with an example.

Assume that you currently work for a dentistry. You are now considering operning your own practice. You may earn 100,000 per year as an entrepreneur. The running business costs are, say, 40,000.

Step 1. Calculate Explicit costs. Explicit costs: rental, utility, admin etc. costs = 40,000.

Step 2. Accounting profit. Accounting profit = Revenues−Explicit costs = 100,000 - 40,000 = 60,000. Looks good! ​​ But these calculations consider only the explicit costs. Since running your practice means leaving your current job where you are earning $40,000, your current earnings will be opportunity costs or things that you sacrifice to get the next best alternative. Thus, your current salary is an implicit cost to your business. You will compare implicit costs and potential profit from the new business (your net earnings from the new business).

Step 3. You need to subtract both the explicit and implicit costs to determine the true economic profit: 60,000 - 40,000 = 20,000.

Note that, here, your wages are not explicit costs; as the owner of the business you are receiving return on your investment in the form of wages.

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  • $\begingroup$ I understand, but his CURRENT wage as an entrepreneur was neither included in explicit costs nor implicit ones. Although his old wage was included in implicit costs. $\endgroup$ – user161005 Jan 4 '18 at 11:37
  • $\begingroup$ @user161005, updated my answer and also included the missing words. $\endgroup$ – london Jan 4 '18 at 12:00
  • $\begingroup$ Let's remember word "accounting profit". Accountants don't count implicit costs. But would an accountant count the current wage of the business owner? It seems so. So his current wage, by this logic, can't be included in implicit costs. $\endgroup$ – user161005 Jan 4 '18 at 12:05
  • $\begingroup$ Yes, for reporting purses i.e taxation, P&L account etc., you include the owner's wages in explicit costs. However, in the present context, forgone wages are considered as opportunity costs (implicit costs) and entrepreneur's wages are return on his investment. The latter are not explicit costs, in the present context. From an accountant's perspecetive, they are business costs and are recorded in P&L accounts. $\endgroup$ – london Jan 4 '18 at 12:16
  • $\begingroup$ "The latter are not explicit costs" So his current wage (as a business owner) is neither explicit nor implicit cost, right? $\endgroup$ – user161005 Jan 4 '18 at 12:27

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