Increasing Marginal Cost
Increasing Relative Cost refers to a situation where the costs associated with producing each marginal (i.e., additional) product are growing. This state of affairs is a natural consequence of diminishing returns, as illustrated by using another example from the furniture factory:
- In the first stage, one carpenter produces one bookcase per day.
- His salary is $100 per day. Enter produces one bookcase per day.
- Raw materials required for production of the bookcases cost $50 for each bookcase. Originally, the total cost to produce a bookcase is $150 ($100 salary for an experienced carpenter + $50 raw materials).
- The company receives a large order, and it must hire three more carpenters to fill it. The salary of these new workers will be $90 each since they are less skilled than the experienced carpenters already working.