Marginal factor cost (MFC) is the additional cost a firm pays to hire one more unit of an input, like labor. In a perfectly competitive labor market, MFC equals the market wage. In a monopsony, MFC is greater than the wage because the firm must raise pay for all existing workers too.
Marginal factor cost (sometimes called marginal resource cost) answers one question for a firm: "If I hire one more worker, how much does my total cost of labor go up?" Firms compare MFC to the marginal revenue product (MRP), the extra revenue that worker generates, and keep hiring as long as MRP is at least as big as MFC. The profit-maximizing hiring rule is MRP = MFC.
What MFC actually equals depends on the market structure, and that's the whole game in Unit 5. In a perfectly competitive labor market (Topic 5.3), the firm is a wage taker, so hiring one more worker just costs the market wage. MFC = wage, and the MFC curve is a horizontal line at the market wage (EK PRD-4.C.1). In a monopsony (Topic 5.4), the firm is the only buyer of labor and faces the upward-sloping market supply curve. To attract one more worker it must offer a higher wage, and per EK PRD-4.D.1, it must pay that higher wage to every existing worker as well. So the cost of the marginal hire is the new worker's wage plus the raise given to everyone else, which means MFC is greater than the supply price of labor (EK PRD-4.D.2) and the MFC curve sits above the labor supply curve.
MFC lives in Unit 5 (Factor Markets) and is the backbone of Topics 5.3 and 5.4. Learning objectives 5.3.A-C and 5.4.A-C all require you to define, explain, and calculate the profit-maximizing hiring decision, and that decision is always "hire where MRP = MFC." The competitive case and the monopsony case use the exact same rule with a different MFC. That's why this term matters more than it looks. If you only memorize "hire where MRP = wage," you'll get monopsony questions wrong, because in monopsony the firm hires where MRP = MFC but pays a wage read off the supply curve, which is lower. That wage-MFC gap is the source of monopsony's lower employment, lower wages, and the surprising result that a minimum wage can raise both.
Keep studying AP® Microeconomics Unit 5
MFC equals MRP (Unit 5)
This is the hiring rule MFC exists to serve. A firm keeps adding workers while each one brings in more revenue (MRP) than they cost (MFC), and stops where the two are equal. Memorize the rule once and it works in both Topic 5.3 and Topic 5.4.
Monopsonistic labor market (Unit 5)
Monopsony is where MFC gets interesting. Because the single buyer must raise everyone's wage to hire one more person, the MFC curve splits off from the supply curve and rises above it. That gap is what lets the monopsonist pay workers less than their MRP.
Supply of labor (Unit 5)
In monopsony, the supply curve tells you the wage needed to attract each quantity of workers, while MFC tells you the true cost of the marginal hire. The firm picks quantity using MFC, then drops down to the supply curve to find the wage it actually pays.
Price floor (Unit 2)
A minimum wage is a price floor, and in monopsony it flattens the firm's labor supply and MFC at the floor wage. That's why a well-placed minimum wage can increase employment in a monopsony, the opposite of what it does in a competitive market. This is a classic exam twist.
MFC shows up in both MCQs and FRQs, and you're expected to read it off graphs and tables, not just define it. The 2025 FRQ Q2 gave a monopsony labor market graph (Quartz Excavations, the only employer of miners in a small town) and asked for the profit-maximizing quantity of labor and wage. The trap is built in. Quantity comes from where MRP crosses MFC, but the wage comes from the supply curve at that quantity. The 2021 FRQ Q2 tested the competitive version, where a firm hiring in a perfectly competitive labor market treats the market wage as its MFC. Multiple-choice stems often ask what the MFC curve represents, why it lies above the supply curve in monopsony, or how a minimum wage changes a monopsonist's MFC. Be ready to draw a correctly labeled graph with supply, MFC, and MRP, and to calculate MFC from a table by computing the change in total labor cost as one more worker is hired.
These are identical in a competitive labor market and different in monopsony, which is exactly why they get mixed up. In perfect competition, hiring one more worker costs the market wage, so MFC = wage. In monopsony, the firm must raise the wage to attract an additional worker and give that raise to all current workers too, so MFC exceeds the wage. On a monopsony graph, quantity hired comes from MRP = MFC, but the wage paid comes from the supply curve. Pulling the wage off the MFC curve is one of the most common point-losers on this FRQ.
Marginal factor cost is the increase in a firm's total input cost from hiring one more unit of an input, such as one more worker.
In a perfectly competitive labor market, the firm is a wage taker, so MFC equals the market wage and the MFC curve is horizontal.
In a monopsony, MFC is greater than the wage because hiring one more worker requires raising the wage for all existing workers, so the MFC curve lies above the labor supply curve.
Every profit-maximizing firm hires labor up to the point where marginal revenue product equals marginal factor cost (MRP = MFC).
A monopsonist finds its quantity of labor where MRP = MFC but pays the lower wage found on the supply curve at that quantity, which is why monopsonies hire fewer workers at lower wages than competitive markets.
A binding minimum wage flattens a monopsonist's MFC curve at the minimum wage, which can actually increase both the wage and employment.
Marginal factor cost (MFC) is the extra cost a firm incurs from hiring one more unit of an input, usually labor. Firms maximize profit by hiring where MFC equals marginal revenue product (MRP), per EK PRD-4.C.1 and PRD-4.D.1.
No, only in a perfectly competitive labor market where the firm takes the wage as given. In a monopsony, MFC is greater than the wage because the firm must give the new higher wage to all of its existing workers, not just the new hire.
MC measures the cost of producing one more unit of output, while MFC measures the cost of hiring one more unit of an input like a worker. MC pairs with marginal revenue in product markets (Units 3-4); MFC pairs with marginal revenue product in factor markets (Unit 5).
The supply curve shows the wage needed to attract each worker, but the monopsonist must pay that higher wage to everyone already employed. So the true cost of the marginal worker is their wage plus all those raises, putting MFC above supply at every quantity beyond the first.
Find the quantity where MRP intersects MFC, then drop straight down to the labor supply curve and read the wage there. The 2025 FRQ on Quartz Excavations tested exactly this, and reading the wage at the MRP-MFC intersection instead of the supply curve is the classic mistake.
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