What Is Marginal Resource Cost?
The marginal resource cost is the cost a company would incur to purchase one unit of the resources used to produce a good. In most cases, these extra resources are considered sources of labor and the costs incurred are the salaries paid to employees. Companies 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 as the marginal physical product, or MPP. This only occurs when the market is considered to be perfectly competitive.
In order to make profits, companies must balance the costs it incurs to make its products with the revenues it gains from those products. Failure to do so is an example of business inefficiency, which can cripple any chances for success. For that reason, companies must be aware of just what it takes to secure the labor that is their main resource, especially in terms of how the cost of that labor compares to the revenues being earned. Since that is the case, management must be aware of the marginal resource cost it incurs.
To put it simply, the marginal resource cost is the amount of cost incurred to secure a single unit of resource. For example, if it costs a company $500 US Dollars (USD) to hire an employee for an hour of work, that $500 USD is the MRC. The company would then need to see if the employee produced at least $500 USD worth of product to compensate for his employment.
Of course, it is rare that a company can simply hire every worker at the same amount. For that reason, the marginal resource cost must take into account all of the different salaries paid to its employees. Totaling all of that and comparing it to the total marginal product that emanates from that labor will give an idea about the company's financial footing.
Economists like to study the marginal resource costs of different companies to see how market factors have an effect on those costs. Many markets are less than competitive, considering that they are dominated by one or a few major firms. For those markets, the slope of the MRC, when plotted on a graph, will rise rapidly upwards or downwards depending on the demand for product. This represents how these firms may hire fewer employees at lower wages than those firms in a perfectly competitive market.
If you are assuming that MRC includes all variable costs of production, then a firm would not want MRC to be less than it's marginal product cost (product price). If that were the case the firm would be under producing.
Post your comments