Total factor cost can be represented in a table or as a curve. For a perfectly competitive 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

The basics of total factor cost can be illustrated by perfect competition. Perfect 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 inputs bought.

Total Factor Cost, Perfect Competition

The table to the right summarizes the total factor cost incurred by a hypothetical buyer, Maggie's Macrame Shoppe, for hiring store clerks in a perfectly competitive labor market. 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 first column in the table is the quantity of workers hired, ranging from 0 to 10 workers. The second column is the price Maggie pays for hiring her workers, which is constant at $10 per worker. The third column is then the total factor cost Maggie incurs for hiring various numbers of workers. If Maggie hires only one worker, then she pays only $10. If she hires five workers, she pays $50. In each case, total factor cost in column three is calculated as the quantity in the first column multiplied by the price in the second column.

Consider a few highlights of these total factor cost numbers.

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


• Second, the price remains unchanged. Maggie can hire 1 worker or 10 workers for the same $10 wage. Presumably, if Maggie hired 100 workers, the wage remains at $10.


• Third, as Maggie hires more workers she incurs more total factor cost.


• Fourth and last, for each extra worker Maggie hires, she pays an extra $10 of cost. This suggests an important role for marginal factor cost in the factor market analysis of a perfectly competitive firm.

Total Factor Cost Curve, Perfect Competition

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, the nature of perfect competition indicates it could go higher.

This curve indicates that if Maggie hires 1 worker, then she pays $10 of total factor cost. Alternatively, if she hires 10 workers, then she pays $100 of total factor cost. Should she hire 100 workers, then she would move well beyond the graph, with $1000 of total factor cost.