Total factor cost can be represented in a table or as a curve. For a firm with no market control hiring inputs under perfect competition, the total factor cost curve is a straight line that emerges from the origin. For firms with market control, including monopsony, oligopsony, or monopsonistic competition, the total factor cost curve increases at an increasing rate. The shape of the total factor cost curve thus indicates the degree of market control possessed by the factor buyer.

Whichever market structure is involved, total factor cost is calculated as the factor price times the quantity of the factor purchased, as illustrated by this equation:

total factor cost

=

factor price

x

factor quantity

For a market structure like monopsony that has some degree of market control and is a price maker rather than a price taker, total factor cost increases at an increasing rate. Although total factor cost is also calculated as price times quantity, market control means monopsony faces a positively-sloped supply curve. As such, the price received is not fixed, but depends on the quantity of the input bought.

Total Factor Cost, Monopsony

The table to the right summarizes the total factor cost received by a hypothetical firm, OmniKing Island Resort. This firm is the only employer of labor on a small tropical island. As the only employer of labor on the Island, OmniKing is a monopsony with extensive market control, and it faces a positively-sloped supply curve. To employ more workers, OmniKing must pay a higher price.

Consider a few tidbits of information about total factor cost for a firm with market control, such as OmniKing Island Resort.

• First, total factor cost is zero if OmniKing hires no labor. This makes sense. If nothing is bought, no factor cost is incurred.


• Second, the price changes with the quantity of output bought. OmniKing can hire 1 worker for $6. However, if it choses to hire 5 workers, then it must raise the price to $10.


• Third, as OmniKing hires more labor it pays more total factor cost.


• Fourth and last, the extra factor cost incurred from hiring more labor is not constant nor is it equal to the price. For example, the fifth worker adds a extra $14 to factor cost (the difference between $50 and $36) even though the price is $10.

Total Factor Cost Curve, Monopsony

The vertical axis measures total factor cost and the horizontal axis measures the quantity of input (workers). Although quantity on this particular graph stops at 10 workers, it could go higher.

This curve indicates that if OmniKing hires 1 worker (at $6 per worker), then it pays $6 of total factor cost. Alternatively, if it hires 10 workers (at $15 per worker), then it pays $150 of total factor cost.

For OmniKing the total factor cost "curve" really is a "curve." The slope of this curve rises as more labor is hired. The changing slope of this curve is due to the changing price.