Macroeconomics - Components of Marginal Product and Marginal Revenue
I. Components of Marginal Product and Marginal Revenue
The marginal product is the change in output that occurs when one more unit of input (such as a unit of labor) is added.
Marginal revenue is the increase in total revenue that occurs with the production of one more unit of output.
Value of Marginal Product
For a particular resource, the value of marginal product (VMP) is the resource's marginal product multiplied by the product price.
Marginal Revenue Product
The marginal revenue product of a resource is defined as the increase in a firm's total revenue attributable to employing one more unit of that resource. The increase in output due to adding one more resource unit is called the marginal product. The marginal revenue product is calculated as the marginal product times the marginal revenue.
The Relationship Between MRP and Demand
Due to the law of diminishing returns, we expect that both the marginal product and the marginal revenue product for an input will decline as more of the input is deployed.
A firm seeking to maximize profit will increase employment of a variable input unit until the MRP of that input is just equal to what it pays for the input. This rule will be followed by price takers and price searchers.
As the price of an input goes up, fewer units of that resource will generate the MRP needed to entice the firm to employ that resource. The demand curve for a resource will be downward sloping, as shown in figure 4.1 below:
Figure 4.1: Results of Regulating Price and Output
Values for the demand curve will depend upon the price of the good being produced, the productivity of the resource in question, and the amount of other resources used by the firm.
A profit-maximizing firm will continue to employ units of a resource as long as the MRP associated with the unit exceeds the firm's cost. If we assume the units of each resource are perfectly divisible, then the following conditions will apply to a firm with 3 production inputs (A, B, and C).
Pa is equal to the price (or wage rate) of resource A, Pb is equal to the price (or wage rate) of resource B, and Pc is equal to the price (or wage rate) of resource C.
Suppose resource A represents highly skilled labor and resource B represents labor with low skills. If a firm can get 100 units of additional output by purchasing $500 worth of highly skilled labor and only 50 additional units of output by hiring $500 worth of labor with low skills, then per unit costs will be reduced by hiring the highly-skilled labor. Expenses can always be reduced by substituting resources with relatively high marginal product per dollar spent for resources that have a relatively low marginal product per dollar. This substitution will continue to occur if per unit costs are to be minimized until the following relationship is achieved:
MRPa = MRPb = MRPcinan
-------- -------- --------
Pa Pb Pc
Note that this relationship also implies that if skilled laborers are three times as productive as unskilled labor, then firms will be willing to pay skilled laborers three times as much as unskilled labor.The Demand and Supply of Financial and Physical Capital
EconomicsMarginal revenue product (MRP) accounts for the change in revenue that results from the addition of one extra unit, keeping all other factors equal.
InvestingIn microeconomics, marginal revenue is the additional revenue generated by increasing sales revenue by one unit. Another way of saying this is that the marginal revenue is the revenue generated ...
EconomicsMarginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
Investing BasicsContribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.
Investing BasicsETFs and futures are just some of the various investment options available to natural resource investors.
EntrepreneurshipSurprisingly, the younger your company is, the better its numbers may look.
MarketsTake a deeper look at a company's profitability with the help of profit margin ratios.
EntrepreneurshipFind out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
InvestingWhen an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
TermTo calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
The change in revenue that results from the addition of one extra ...
Marginal profit is the profit earned by a firm or individual ...
A cost accounting concept that allows a company to determine ...
The increase in revenue that results from the sale of one additional ...
An economic measure of output per unit of input. Inputs include ...
The rate at which one good must be sacrificed in order to produce ...
Learn about the marginal cost of production and marginal revenue and how the two measures are related when determining the ... Read Answer >>
Understand what marginal revenue is and what it's used to measure. Learn how a company should use marginal revenue in its ... Read Answer >>
Learn what marginal revenue seeks to measure and understand why a company would want to stop increasing its marginal revenue ... Read Answer >>
Find out how and why companies rely on marginal analysis, particularly when developing a cost-benefit approach for future ... Read Answer >>
Understand how a company uses marginal analysis in its spending decisions. Learn the benefits of marginal revenue and marginal ... Read Answer >>
Find out the differences between a company's gross profit margin, net profit margin and operating margin, and what each metric ... Read Answer >>