The total cost of a factor TFC is the expenditure incurred by a firm in hiring or buying that factor. It is further divided into average and marginal factor cost.
- Average Factor Cost – AFC is the per unit cost of variable factor employed by a firm. It is obtained by dividing total factor cost by the units of the factor employed, i.e.
- Marginal Factor Cost – MFC is the addition to the total factor cost by hiring or purchasing an extra unit of that factor:
AFC = TFC
Units
of Factor Employed
MFC = TFCn – TFCn-1
Let us see an illustration which explains the aspects of Factor Cost.
Illustration 2
Given tablet represents the units of factor service and the price of factor. You have to determine the following.
- Total Factor Cost
- Average Factor Cost
- Marginal Factor Cost
Units of Factor Service |
Price
of Factor |
1 |
8 |
2 |
8 |
3 |
8 |
4 |
8 |
5 |
8 |
Solution
Factor Cost
Units of Factor Service |
Price
of Factor |
Total
Factor Cost |
Average
Factor Cost |
Marginal
Factor Cost |
(a) |
(b) |
(c) = (a x b) |
(d) = (c / a) |
(e) = (c – cn-1) |
1 |
8 |
8 |
8 |
- |
2 |
8 |
16 |
8 |
8 |
3 |
8 |
24 |
8 |
8 |
4 |
8 |
32 |
8 |
8 |
5 |
8 |
40 |
8 |
8 |
Association between AFC and MFC
The relation between AFC and MFC is different in a perfectly competitive factor Market and monopolistic factor market. In a perfectly competitive factor market, the price of that factor is determined by its demand and supply. The price of that factor is given for the firm at which it buys as many units as are required by it.
Hence the supply of that factor is perfectly elastic at the given price and the supply curve of the factor of the straight line paralleled to the X-axis. As the price of the factor is assumed to be given and constant, hence its average factor cost and marginal factor cost equal the price of the factor i.e. AFC = MFC = Price of the factor.
This is represented in the below pictorial representation and in the illustration 2 of the columns (b), (d) and (e).
The supply curve of factor is P = AFC = MFC at which its OQ quantity is bought by the firm. In a monopolistic (imperfect) factor market, a firm had monopsony, being the sole buyer of a factor. So its factor curve AFC is upward inclined to the right and its MFC curve is above its AFC curve as represented in the below diagram.
It means that if the firm wants to employ more units of that factor say for instance labour, it will have to spend more that is wage not only on additional units but on its all units, workers.
As a result, MFC of that factor will be more than its AFC (Actual Cost). Hence the MFC curve will be above its AFC curve.
Online Live Tutor Association between AFC and MFC:
We have the best tutors in Economics in the industry. Our tutors can break down a complex Association between AFC and MFC problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Association between AFC and MFC concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Association between AFC and MFC tutoring and experience the quality yourself.
Online Concept of Factor Cost Help:
If you are stuck with a Concept of Factor Cost Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide Concept of Factor Cost help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing Concept of Factor Cost Homework Help. Please do send us the Concept of Factor Cost problems on which you need help and we will forward then to our tutors for review.
- Break Even Analysis
- Contribution Margin, Limitations of Break Even Analysis
- Criticism, Clark's Product Exhaustion Theorem
- Distributive Shares: The Product Exhaustion Theorem
- Inequality of Income, Effects of Inequality
- Interest, Gross and Pure Interest
- Investment Analysis and Social Cost Benefit
- Measurement of Inequality, Lorenz Curve
- Meaning of Minimum Wages, Benefits of Minimum Wages
- National Income Meaning and Measurement
- Net Present Value Method, Internal Rate of Return Method
- Price Level, Social Prestige, Conditions of Work
- Profit, Gross Profit and Net Profit
- Rent, Meaning of Economic Rent
- Time Preference Theory
- Theories of Distribution
- Theories of Profit, Rent Theory of Profit
- Value Added Approach to GNP
- Quasi Rent, Distinction Between Rent and Quasi Rent
