Final answer:
Implicit costs are non-out-of-pocket expenses like the value of an owner's time or the use of assets they already own, such as a part of their home for business purposes. These costs are the opportunity costs of resources the business uses, which can affect its economic profits negatively.
Step-by-step explanation:
Implicit costs are a critical component in understanding a business's total expenses. Unlike explicit costs, which are direct out-of-pocket payments such as wages and rent, implicit costs represent the opportunity costs of utilizing resources the firm already owns. For instance, if a business owner chooses to work in their business without a formal salary or convert part of their home into a retail space, these represent implicit costs. An important example of this includes the owner's lost leisure time when they commit to working more hours than they might at another job, which subtracts from the economic profits.
Furthermore, depreciation of goods, materials, and equipment necessary for the operation of the company is also considered an implicit cost. These costs, while not always immediately apparent, play a significant role in the calculation of a business's overall profitability and economic health.