In microeconomics, the marginal factor cost (MFC) is the increment to total costs paid for a factor of production resulting from a one-unit increase in the amount of the factor employed.[1][2] It is expressed in currency units per incremental unit of a factor of production (input), such as labor, 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 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 (MFC=MRP).[3]
Marginal factor cost is an important concept in economics, as it helps to determine the optimal level of production for a good or service.
Labour economics, or labor economics, seeks to understand the functioning and dynamics of the markets for wage labour. Labour is a commodity that is supplied by labourers, usually in exchange for a wage paid by demanding firms. Because these labourers exist as parts of a social, institutional, or political system, labour economics must also account for social, cultural and political variables.
In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit. In neoclassical economics, which is currently the mainstream approach to microeconomics, the firm is assumed to be a "rational agent" which wants to maximize its total profit, which is the difference between its total revenue and its total cost.
In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it refers to the rate of change of total cost as output is increased by an infinitesimal amount. As Figure 1 shows, the marginal cost is measured in dollars per unit, whereas total cost is in dollars, and the marginal cost is the slope of the total cost, the rate at which it increases with output. Marginal cost is different from average cost, which is the total cost divided by the number of units produced.
In economics and in particular neoclassical economics, the marginal product or marginal physical productivity of an input is the change in output resulting from employing one more unit of a particular input, assuming that the quantities of other inputs are kept constant.
In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal. The law of diminishing returns states that in productive processes, increasing a factor of production by one unit, while holding all other production factors constant, will at some point return a lower unit of output per incremental unit of input. The law of diminishing returns does not cause a decrease in overall production capabilities, rather it defines a point on a production curve whereby producing an additional unit of output will result in a loss and is known as negative returns. Under diminishing returns, output remains positive, however productivity and efficiency decrease.
In economics, an isocost line shows all combinations of inputs which cost the same total amount. Although similar to the budget constraint in consumer theory, the use of the isocost line pertains to cost-minimization in production, as opposed to utility-maximization. For the two production inputs labour and capital, with fixed unit costs of the inputs, the equation of the isocost line is
The marginal revenue productivity theory of wages is a model of wage levels in which they set to match to the marginal revenue product of labor, , which is the increment to revenues caused by the increment to output produced by the last laborer employed. In a model, this is justified by an assumption that the firm is profit-maximizing and thus would employ labor only up to the point that marginal labor costs equal the marginal revenue generated for the firm. This is a model of the neoclassical economics type.
In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible level of production, and the result is a cost curve. Profit-maximizing firms use cost curves to decide output quantities. There are various types of cost curves, all related to each other, including total and average cost curves; marginal cost curves, which are equal to the differential of the total cost curves; and variable cost curves. Some are applicable to the short run, others to the long run.
In economics, total cost (TC) is the minimum dollar cost of producing some quantity of output. This is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes inputs such as labor and raw materials, plus fixed cost, which is independent of the quantity of a good produced and includes inputs that cannot be varied in the short term such as buildings and machinery, including possibly sunk costs.
In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or to an individual. Supply can be in produced goods, labour time, raw materials, or any other scarce or valuable object. Supply is often plotted graphically as a supply curve, with the price per unit on the vertical axis and quantity supplied as a function of price on the horizontal axis. This reversal of the usual position of the dependent variable and the independent variable is an unfortunate but standard convention.
Within economics, margin is a concept used to describe the current level of consumption or production of a good or service. Margin also encompasses various concepts within economics, denoted as marginal concepts, which are used to explain the specific change in the quantity of goods and services produced and consumed. These concepts are central to the economic theory of marginalism. This is a theory that states that economic decisions are made in reference to incremental units at the margin, and it further suggests that the decision on whether an individual or entity will obtain additional units of a good or service depending on the marginal utility of the product.
In economics, the marginal product of capital (MPK) is the additional production that a firm experiences when it adds an extra unit of capital. It is a feature of the production function, alongside the labour input.
In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity to have market power over all sellers as the only purchaser of a good or service. This is a similar power to that of a monopolist, which can influence the price for its buyers in a monopoly, where multiple buyers have only one seller of a good or service available to purchase from.
In economics, a factor market is a market where factors of production are bought and sold. Factor markets allocate factors of production, including land, labour and capital, and distribute income to the owners of productive resources, such as wages, rents, etc.
In economics, factor payments are the income people receive for supplying the factors of production: land, labor, capital or entrepreneurship.
In economics, the marginal product of labor (MPL) is the change in output that results from employing an added unit of labor. It is a feature of the production function, and depends on the amounts of physical capital and labor already in use.
In any technical subject, words commonly used in everyday life acquire very specific technical meanings, and confusion can arise when someone is uncertain of the intended meaning of a word. This article explains the differences in meaning between some technical terms used in economics and the corresponding terms in everyday usage.
In economics, the labor demand of an employer is the number of labor-hours that the employer is willing to hire based on the various exogenous variables it is faced with, such as the wage rate, the unit cost of capital, the market-determined selling price of its output, etc. The function specifying the quantity of labor that would be demanded at any of various possible values of these exogenous variables is called the labor demand function. The sum of the labor-hours demanded by all employers in total is the market demand for labor.
A monopoly price is set by a monopoly. A monopoly occurs when a firm lacks any viable competition and is the sole producer of the industry's product. Because a monopoly faces no competition, it has absolute market power and can set a price above the firm's marginal cost. Since marginal cost is the increment in total cost required to produce an additional unit of the product, the firm can make a positive economic profit if it produces a greater quantity of the product and sells it at a lower price.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
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