What is the marginal cost of resources?

The marginal cost of resources is the cost that a firm would incur to buy 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 the wages paid to employees. Companies try to configure it so that its marginal cost of resources, or MRC, is exactly equal to or less than the amount needed to produce one more unit of output, also as marginal physical product, or MPP. This only happens when the market is considered perfectly competitive.

To make a profit, companies must balance the costs incurred to manufacture their products with the revenue earned from those products. Failure to do so is an example of business inefficiency, which can jeopardize any chance of success. For this 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 earned. Therefore, management must be aware of the marginal cost of the resources it incurs.

In a nutshell, 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 an hour of work, that $500 dollars is the MRC. Therefore, the company would need to verify that the employee produced at least $500 worth of products to compensate for his or her employment.

Of course, it's rare for a company to simply hire every worker for the same amount. Therefore, the marginal cost of resources must take into account all the different salaries paid to your employees. Adding all this up and comparing it to the total marginal product that emanates from this workforce, you will have an idea of ​​the company's financial situation.

Economists like to study the marginal resource costs of different firms to see how market factors affect those costs. Many markets are less competitive as they are dominated by one or a few large companies. For these markets, the slope of the MRC, when plotted on a graph, will rapidly increase or decrease depending on the demand for the product. This represents how these companies can hire fewer employees at lower salaries than companies in a perfectly competitive market.