What is total factor cost

what is total factor cost

A variable cost is a company's cost that is associated with the amount of goods or services it produces. In a perfectly competitive factor market, the price of that factor is determined by its demand and supply.


We have the best tutors in Economics in the industry. I cannot even describe how much Course Hero helped me this summer. For firms with market control, including monopsony , oligopsony , or monopsonistic competition , the total factor cost curve increases at an increasing rate.

what is total factor cost

The most common examples of fixed costs include lease and rent payments, utilities, insurance, certain salaries, and interest payments. 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: How to Calculate Marginal Factor Cost.

How to Calculate Marginal Factor Cost

This measure of cost needs to be contrasted with a similar, better known term, total cost. So, when production increases, the fixed cost drops. The formula for calculating marginal factor cost MFC is: The reason is that long-run aggregate supply is full-employment real production, which is unaffected by the price level.

So it's better to compare the variable costs between two businesses that operate in the same industry, such as two car manufacturers.

Concept Of Factor Cost

For a firm with no market control hiring inputs under perfect competition , the total factor cost curve is a straight line that emerges from the origin. Total factor cost is predominately used in the analysis of the factor market.

Like what you see? The comparison allows businesses to understand the most profitable quantity of resources to employ.

what is total factor cost

Let us know. 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.

Two derivative factor cost measures are average factor cost and marginal factor cost.

what is total factor cost

User Feedback. This is the total cost associated with the use of a particular resource or factor of production--it is the total cost of the factor. Check Out These Related Terms... The more fixed costs a company has, the more revenue a company needs in order to break even, which means it needs to work harder to produce and sell its products.