A marginal factor cost curve is the relation between the marginal factor cost a firm incurs from employment of a given resource and the quantity of the resource used. The marginal factor cost curve reflects the degree of market control held by a firm. For a perfectly competitive firm with no market control, the marginal factor cost curve is a horizontal line. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average factor cost (and supply) curve.
For firms with more market control, especially monopsony, the marginal factor cost curve is positively-sloped. Because a firm with market control is a price maker and faces a positively-sloped supply curve, its marginal factor cost curve is also positively sloped and lies above its average factor cost (and supply) curve.
Perfect CompetitionPerfect competition is a market structure with a large number of small participants (buyers and sellers). The good exchanged in the market is identical, regardless of who sells or who buys. Participants have perfect knowledge and perfect mobility into and out of the market. These conditions mean perfectly competitive buyers are price takers, they have no market control and must pay the going market price for all good sold.
Marginal factor cost is commonly represented by a marginal factor cost curve, such as the one labeled MFC and displayed in the exhibit to the right. This particular marginal factor cost curve is that for labor hired by Maggie's Macrame Shoppe.
|Marginal Factor Cost Curve,|
The vertical axis measures marginal factor cost and the horizontal axis measures the quantity of input (workers). Although quantity on this particular graph stops at 10 workers, the nature of perfect competition indicates it could easily go higher.
First and foremost, the marginal factor cost curve is horizontal at the going factor price of $10. This indicates that if Maggie hires the first worker, then her total factor cost increases by $10. Alternatively, if she hires the tenth worker, then her total factor cost increases by $10. Should she hire a hundredth worker, then she might move well beyond the graph, but her total factor cost increases by $10.
The "curve" is actually a "straight line" because Maggie is a price taker in the labor market. She pays $10 for each worker whether she hires 1 worker or 10 workers or 100 workers. Her extra factor cost of hiring an extra worker is always $10. The constant price is what makes Maggie's marginal factor cost curve a straight line, and which indicates that Maggie has no market control.
Monopsony, Oligopsony, and Monopsonistic CompetitionFor market structures like monopsony, oligopsony, and monopsonistic competition that have some degree of market control on the buying side and are price makers rather than price takers, marginal factor cost is a little different. Market control means these market structures face positively-sloped supply curves. As such, the price received is not fixed, but depends on the quantity of the good bought.
The marginal factor cost curve for firms with market control looks a little different than that for perfect competition. The marginal factor cost curve (MFC) for OmniKing Island Resort is displayed in the exhibit to the right. Key to this curve is that OmniKing is a monopsony buyer of workers and thus faces a positively-sloped supply curve. Larger quantities of input can be had only with higher prices.
|Marginal Factor Cost Curve,|
The vertical axis measures marginal 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 the first worker, then marginal factor cost is $6. Alternatively, if it hires the tenth worker, then marginal factor cost is $24.
For reference, the factor supply curve (and average factor cost curve, AFC) is also presented in the exhibit. The key observation is that the positively-sloped marginal factor cost curve (MFC) lies above the supply curve (AFC) facing OmniKing for hiring labor. The positioning of the marginal factor cost curve above the average factor cost curve reflects the mathematical relation between an average and a marginal.
Although this marginal factor cost curve is based on the employment activity of OmniKing Island Resort, a well-known monopsony firm, it works for any buyer with market control. Monopsonistic competition and oligopsony firms that also face positively-sloped supply curves generate comparable marginal factor cost curves.
MARGINAL FACTOR COST CURVE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: October 26, 2021].