The marginal cost of resources is the cost of purchasing one unit of resources used to produce a good. Companies must balance this cost with revenue to make a profit, and management must be aware of it. In less competitive markets, the MRC slope will rapidly increase up or down depending on demand.
The marginal cost of resources is the cost that a firm would incur to purchase one unit of the resources used to produce a good. In most cases, these additional resources are considered sources of labor and the costs incurred are wages paid to employees. Firms try to set it up so that their marginal resource cost, or MRC, is exactly equal to or less than the amount it takes to produce one more unit of product, also called marginal physical product, or MPP. This only occurs when the market is considered perfectly competitive.
To make a profit, companies must balance the costs they incur to make their products with the revenue they earn from those products. Failing to do so is an example of business inefficiency, which can hurt any chance of success. For that reason, companies need to be aware of what it takes to secure the labor that is their primary resource, especially in terms of how the cost of that labor compares to the revenue that is earned. Since that is the case, management must be aware of the marginal cost of resources it incurs.
Simply put, the marginal cost of resources is the amount of costs incurred to secure a single unit of resources. For example, if it costs a company $500 US dollars (USD) to hire an employee for one hour of work, that $500 USD is the MRC. The company would then need to see if the employee produced at least $500 worth of products to compensate for her employment.
Of course, it’s rare for a company to simply hire each worker for the same amount. For that reason, the marginal cost of resources must take into account all the different salaries paid to your employees. Totaling all of that up and comparing it to the total marginal product emanating from that labor force will give an idea of the company’s financial footing.
Economists like to study the marginal costs of resources of different companies to see how market factors have an effect on those costs. Many markets are less competitive, considering that they are dominated by one or a few major companies. For those markets, the slope of the MRC, when plotted on a chart, will rapidly increase up or down depending on the demand for the product. This represents how these companies can hire fewer employees at lower wages than those companies in a perfectly competitive market.
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