Marginal Revenue Product (MRP)

The Marginal Revenue Product (MRP) is an important concept in economics that represents the additional revenue a firm could receive by employing one more unit of input.
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Definition

The Marginal Revenue Product (MRP) is a measure in economics that represents the additional revenue a firm expects to earn from employing one more unit of input. It is calculated by multiplying the marginal product of the input (i.e., the additional output produced by one more unit of input) by the marginal revenue (i.e., the additional revenue received from selling the additional output).

Formula

\[ \text{MRP} = \text{Marginal Product} \times \text{Marginal Revenue} \]

For Example: If an additional unit of labor produces 0.3 units of output, and each unit of output is sold for $100, then the marginal revenue product of the labor would be:

\[ \text{MRP} = 0.3 \times 100 = $30 \]

Examples

  1. Manufacturing Sector: A factory employs additional workers to increase the production of widgets. If each extra worker produces 5 additional widgets and each widget sells for $20, the MRP of hiring another worker is \( 5 \times 20 = $100 \).

  2. Agriculture: A farmer adds more fertilizer to his field, and this results in more crops being produced. If every additional unit of fertilizer increases the crop yield by 2 kilograms and each kilogram is sold for $5, then the MRP of the additional fertilizer is \( 2 \times 5 = $10 \).

Frequently Asked Questions (FAQs)

What is Marginal Product?

Marginal Product (MP) refers to the additional output generated from employing one more unit of a particular input while keeping other inputs constant.

What is Marginal Revenue?

Marginal Revenue (MR) is the additional income obtained from selling one more unit of a good or service.

How does MRP impact hiring decisions?

Firms use MRP to decide how many additional units of an input to hire. If the cost of the additional input is less than the MRP, the firm will benefit from hiring additional units.

Can MRP be applied to all inputs?

Yes, MRP can be applied to both labor and capital inputs, providing a basis for deciding the optimal allocation of resources.

What if the marginal revenue decreases?

If marginal revenue decreases, the MRP will also decrease, which could lead a company to hire fewer additional units of input.

  • Marginal Cost (MC): The cost associated with producing one additional unit of output.
  • Average Revenue (AR): The revenue gained per unit of output sold, calculated as total revenue divided by the number of units sold.
  • Law of Diminishing Marginal Returns: An economic principle stating that as additional units of input are added to a process, the added output will eventually decrease after reaching a certain point.
  • Production Function: A mathematical relationship expressing the output produced by a firm for given inputs of capital and labor.

Online References

Suggested Books for Further Studies

  • “Principles of Economics” by N. Gregory Mankiw
  • “Microeconomics” by Paul Krugman and Robin Wells
  • “Economics: Principles, Problems, & Policies” by Campbell R. McConnell, Stanley L. Brue, and Sean M. Flynn
  • “Intermediate Microeconomics: A Modern Approach” by Hal R. Varian

Fundamentals of Marginal Revenue Product: Economics Basics Quiz

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