In
microeconomics, the marginal factor cost (MFC) is the increment to total costs paid for a
factor of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the re ...
resulting from a one-unit increase in the amount of the factor employed. It is expressed in
currency units per incremental unit of a factor of production (input), such as
labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the labour ...
, per unit of time. In the case of the labor input, for example, if the wage rate paid is unaffected by the number of units of labor hired, the marginal factor cost is identical to the
wage
A wage is payment made by an employer to an Worker, employee for work (human activity), work done in a specific period of time. Some examples of wage payments include wiktionary:compensatory, compensatory payments such as ''minimum wage'', ''p ...
rate. However, if hiring another unit of labor drives up the wage rate that must be paid to all existing units of labor employed, then the marginal cost of the labor factor is higher than the wage rate paid to the last unit because it also includes the increment to the rates paid to the other units.
Thus for any factor the MFC is the change in total amount paid for all units of that factor divided by the change in the quantity of that factor employed.
A firm that wants to optimize its profits hires each factor up to the point at which its marginal factor cost equals its
marginal revenue product
Marginal may refer to:
* ''Marginal'' (album), the third album of the Belgian rock band Dead Man Ray, released in 2001
* ''Marginal'' (manga)
* '' El Marginal'', Argentine TV series
* Marginal seat or marginal constituency or marginal, in polit ...
(MFC=MRP).
Marginal factor cost is an important concept in economics, as it helps to determine the optimal level of production for a good or service.
References
Costs
Marginal concepts
{{microeconomics-stub