Google
Friday 
March 29, 2024 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
LEISURE: The portion of time workers and other people spend not being compensative for work performed when they actively engaged in the production of goods and services. In other words, this is the time people sent off the job. Leisure activities can include resting at home, working around the house (without compensation), engaging in leisure activities (such as weekend sports, watching movies), or even sleeping. Leisure time pursuits becomes increasingly important for economies as they become more highly developed. As technological advances reduce the amount of time people need to spend working to generate a given level of income, they have more freedom to pursue leisure activities. Not only does this promote sales of industries that provide leisure related goods (sports, entertainment, etc.) it also triggers an interesting labor-leisure tradeoff and what is termed the backward-bending labor supply curve.

Visit the GLOSS*arama


AVERAGE FACTOR COST AND MARGINAL FACTOR COST:

A mathematical connection between average factor cost and marginal factor cost stating that the change in the average factor cost depends on a comparison between average factor cost and marginal factor cost. For perfect competition, with no market control, marginal factor cost is equal to average factor cost, and average factor cost does not change. For monopsony and other firms with market control, marginal factor cost is greater than average factor cost, and average factor cost rises.
The relation between average factor cost and marginal factor cost is one of several that reflect the general relation between a marginal and the corresponding average. The general relation is this:
  • If the marginal is less than the average, then the average declines.

  • If the marginal is greater than the average, then the average rises.

  • If the marginal is equal to the average, then the average does not change.
This general relation surfaces throughout the study of economics. It also applies to average and marginal product, average and marginal cost, average and marginal revenue',500,400)">marginal revenue, average and marginal propensity to consume, and well, any other average and marginal encountered in economics.

Marginal Equals Average

Perfect Competition
Factor Cost Curves
The equality between average factor cost and marginal factor cost occurs for a firm hiring an input in a perfectly competitive factor market. This is illustrated by the exhibit to the right. This exhibit contains the average factor cost curve and marginal factor cost curve for labor hired by Maggie's Macrame Shoppe, a hypothetical store in Shady Valley. Maggie's Macrame Shoppe is one of thousands of small retail stores in the greater Shady Valley metropolitan area that hires labor with identical skills. As such, Maggie pays the going wage for labor.

The primary observation from this exhibit is that (apparently) only one curve is displayed. This single horizontal line, labeled MFC = AFC, is actually two curves, the marginal factor cost curve and the average factor cost curve. They appear to be one curve because each overlays the other.

They coincide because marginal factor cost is equal to average factor cost at every input quantity. The equality between marginal factor cost and average factor cost is the result of perfect competition. Because Maggie pays the same per unit wage for every worker, incremental factor cost is equal to the per unit factor cost.

Marginal Greater Than Average

Monopsony
Factor Cost Curves
Marginal factor cost exceeding average factor cost occurs for a firm hiring an input in a monopsony factor market. This is illustrated by the exhibit to the right. This exhibit contains the average factor cost curve and marginal factor cost curve for labor hired by another hypothetical firm, OmniKing Island Resort. This firm is the only employer of labor on a small tropical island. As the only employer on the island, OmniKing is a monopsony with extensive market control, and it faces a positively-sloped supply curve. To employ more workers, OmniKing pays a higher price.

The primary observation from this exhibit is that the positively-sloped marginal factor cost curve lies above the positively-sloped average factor cost curve. The juxtaposition of these two curves illustrates the marginal-greater-than-average aspect of the general relation. Because marginal factor cost is greater than average factor cost, the average factor cost curve increases.

With market control, OmniKing faces a positively sloped factor supply curve and must pay a higher price to employ more labor. Suppose, for example, that OmniKing increases the quantity of labor hired from 5 to 6. To do so, it must increase the wage paid from $10 to $11 per worker. The average factor cost for six workers is $11, the new wage.

However, the increase in the wage is paid to all workers. What happens to OmniKing's marginal factor cost when it pays a higher the wage? Two forces are at work: (1) the extra factor cost by paying the new worker and (2) the extra factor cost of the higher wage paid to other workers. Marginal factor cost is the combination of both.

  • First, by raising the wage, OmniKing increases the quantity employed from 5 to 6 workers. This extra worker adds an extra $11 to factor cost, the wage paid the sixth worker. This is $11 of extra cost that OmniKing did NOT incur at the lower price. If this was all to the story, then OmniKing would have a marginal factor cost of $11 for the sixth worker, equal to the wage.

  • Second, by raising its price, OmniKing incurs a greater cost from its other 5 workers. Without the wage increase, it pays $10 per worker for a total of $50. But with the higher $11 price it pays $55 to these workers, an increase of total factor cost by $5, or $1 per worker.
The $11 cost incurred by hiring the extra worker is combined with the $5 additional cost paid to the other workers. Overall, total factor cost increases by only $16. The extra cost paid to existing workers is the key reason that marginal factor cost is greater than factor price and average factor cost.

<= AVERAGE FACTOR COSTAVERAGE FACTOR COST CURVE =>


Recommended Citation:

AVERAGE FACTOR COST AND MARGINAL FACTOR COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 29, 2024].


Check Out These Related Terms...

     | average product and marginal product | average revenue product and marginal revenue product | average revenue and marginal revenue |


Or For A Little Background...

     | average-marginal relation | average factor cost | marginal factor cost | average factor cost curve | marginal factor cost curve | graphical analysis | marginal analysis | economic analysis | monopsony | perfect competition |


And For Further Study...

     | factor market analysis | total-marginal relation | short-run production analysis | factor supply | factor supply curve | supply by a firm | supply to a firm | mobility |


Search Again?

Back to the WEB*pedia


APLS

BROWN PRAGMATOX
[What's This?]

Today, you are likely to spend a great deal of time searching for a specialty store seeking to buy either software that won't crash your computer or any book written by Stephan King. Be on the lookout for the last item on a shelf.
Your Complete Scope

This isn't me! What am I?

A U.S. dime has 118 groves around its edge, one fewer than a U.S. quarter.
"The mediocre teacher tells. The good teacher explains. The superior teacher demonstrates. The great teacher inspires."

-- William Ward ‚ Texas Wesleyan University Administrator

FV
Face Value
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2024 AmosWEB*LLC
Send comments or questions to: WebMaster