How to Calculate Marginal Factor Cost
Marginal factor cost equals the change in total factor cost divided by the change in units hired: MFC = ΔTFC ÷ ΔQ.
The Marginal Factor Cost formula
Calculator
Enter the wage and headcount before and after one more hire to get total factor cost and marginal factor cost.
The starting quantity of the input.
What every worker is paid before the extra hire.
The larger quantity of the input.
A monopsonist must pay this higher wage to everyone, not just the new hire.
Each extra unit of the input costs $20, against a wage of $12.
- Total factor cost before
- $40
- Total factor cost after
- $60
- Raises to workers already hired
- $8
- MFC versus the wage
- Above the wage (monopsony)
Wage times headcount at the starting quantity.
Wage times headcount once the extra unit of labor is on the payroll.
Attracting the extra worker lifts pay for everyone already on staff, adding $8 on top of the new worker's own wage.
A single buyer of labor must raise the wage for everyone, so the MFC curve sits above labor supply.
How to calculate Marginal Factor Cost, step by step
- 1Build the total factor cost column. Multiply each quantity of the input by the price paid per unit; for labor, total factor cost = wage × number of workers.
- 2Take the change in total factor cost. Subtract total factor cost at the smaller quantity from total factor cost at the larger quantity.
- 3Divide by the change in units hired. MFC = ΔTFC ÷ ΔQ, the extra cost of employing one more unit of the input.
- 4Check the market structure. A wage-taking firm can hire as many workers as it wants at the market wage, so MFC equals that wage at every quantity.
- 5Handle monopsony separately. A single buyer of labor must raise the wage for everyone to attract one more worker, so MFC exceeds the wage and rises faster than the supply curve.
Worked example: Marginal Factor Cost
A monopsonist can hire 4 workers at $10 each, so total factor cost = 4 × 10 = $40. Hiring a 5th requires raising the wage to $12 for everyone, so total factor cost = 5 × 12 = $60. MFC of the 5th worker = (60 − 40) ÷ (5 − 4) = $20, far above the $12 wage, because the firm pays the new worker $12 plus $2 more to each of the 4 already on staff (4 × 2 = $8, and 12 + 8 = 20). In a competitive labor market where the firm could hire everyone at $12, total factor cost would rise from $48 to $60 and MFC would equal the $12 wage.
Marginal Factor Cost questions
Is marginal factor cost the same as the wage?
Only in a perfectly competitive labor market, where the firm hires any number of workers at the going wage, so MFC = W. Under monopsony the firm must raise the wage for all workers to attract one more, so MFC is greater than the wage.
What is the difference between MFC and MRP?
MFC is the extra cost of hiring one more unit of an input, while MRP is the extra revenue that unit brings in. The firm hires up to the quantity where MRP = MFC.
Why does the monopsonist's MFC curve lie above the labor supply curve?
Because the supply curve shows the wage needed to attract each worker, and hiring one more forces the firm to pay that higher wage to everyone already hired. Those extra raises push marginal factor cost above the wage shown on supply.
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