Final answer:
Total cost in economics includes explicit costs, which are direct expenses such as wages and rent, as well as implicit costs, which represent opportunity costs for using resources the firm owns, including depreciation and owners' contributed resources.
Step-by-step explanation:
To the economist, total cost does indeed include both explicit and implicit costs. Explicit costs are direct, out-of-pocket expenses such as wages and rent. On the other hand, implicit costs are the opportunity costs for using resources that a firm already owns, which could include the usage of an owner's property or the owner's unpaid labor. For example, if an owner uses part of their home as a store, the forgone rent from not leasing this space out is an implicit cost. Implicit costs also take into account the depreciation of assets like goods, materials, and equipment necessary for a company's operations.
When assessing the financial health of a business, especially small businesses where resources may be commingled with personal assets, including both explicit and implicit costs is essential to determine the true economic cost of running the business. This comprehensive view of costs is vital for making informed business decisions and for understanding the actual profitability of a business venture.