Marginal Revenue Product vs Marginal Resource Cost
Marginal Revenue Product and Marginal Resource Cost are two Factor Markets concepts in AP Economics that students often mix up. In short: marginal revenue product is marginal Revenue Product (MRP) is the additional revenue a firm earns by employing one more unit of a factor of production. Meanwhile, marginal resource cost is marginal Resource Cost (MRC) is the additional cost a firm incurs by employing one more unit of a factor of production. Here is how they compare side by side.
Marginal Revenue Product (MRP) is the additional revenue a firm earns by employing one more unit of a factor of production.
MRP is calculated by multiplying the marginal product of a factor (the extra output from one more unit) by the marginal revenue from selling that output. Firms will hire a factor up to the point where its MRP equals its marginal resource cost (MRC); in a perfectly competitive factor market, MRC equals the factor's price. MRP is the firm's demand curve for a factor.
Marginal Resource Cost (MRC) is the additional cost a firm incurs by employing one more unit of a factor of production.
MRC is the change in total cost from hiring one more unit of a factor, such as labor. It includes all additional costs, not just the factor's price. Firms hire a factor up to the point where its MRP equals its MRC. In a perfectly competitive factor market the firm faces a horizontal factor supply curve and MRC equals the market price; under monopsony, MRC lies above the upward-sloping supply curve.
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