Marginal factor costs are the additional costs created by adding a single unit of input. Businesses compare the marginal factor cost with the marginal revenue product. The marginal revenue product is the additional revenue produced by employing an extra resource. The comparison allows businesses to understand the most profitable quantity of resources to employ. The marginal factor cost is the change in the total factor cost divided by the change in the factor of quantity.
Calculate the change (or difference) in the total factor cost. The total factor cost is the total cost incurred by the business from the use of a given resource.
Example: Change in total factor cost = $100 - $20
Result: Change in total factor cost = $80
Calculate the change (or difference) in the factor quantity. The factor quantity is the numerical amount of resources used at a given cost.
Example: Change in factor quantity = 10 - 6
Result: Change in factor quantity =4
Divide the change in total factor cost by the change in factor quantity.
Example: $80 / 4
Result: Marginal factor cost = $20