Hidden costs

The hidden costs are the expenses that not normally included in the purchase price of an equipment or machine, such as for maintenance, supplies, training, and upgrades. The total opportunity costs of an action can never be known with certainty are sometimes called "hidden costs" or "hidden losses" as what has been prevented from being produced cannot be seen or known.

Hidden costs are the charges that are difficult to notice, as they are not included in the basic price of the product. The opportunity cost means a cost of something in terms of the opportunity foregone or it is the most valuable alternative that is foregone. The opportunity costs play an important in understanding the key differences between the concepts of economic cost and the accounting cost. The costs which are not immediately apparent because there is no explicit accounting or monetary cost (price) attached, there may even be an illusion that its benefits cost nothing at all. This is known as a hidden cost.

The hidden costs are the opportunities that are forgone in the choice of expenditure over others. For example if a consumer has a fixed income, the opportunity cost of buying a new dishwasher might be the value of a vacation trip never taken or several suits of clothes that are not bought. The concept of opportunity cost enables economists to examine the relative monetary values of various goods and services.

The hidden cost is that which could have been earned on an alternative investment. The hidden costs are the difference in return between the chosen investment and the one that is necessarily passed. For example if a person invests in a stock and gives an interest of 2% every year. In placing the money in that stock, the person may give up an opportunity of another investment like a risk free government bond that would be yielding an interest of 5%. Hence the opportunity cost here is 3% (5%-2%)

Questions

• What is a hidden cost?
• Why is the hidden cost an important concept? Explain with an example.