top of page Economics notes

# Definition And Calculation Of Marginal Revenue Product

➡️ MRP theory states that the value of a factor of production (e.g. labour) is determined by the marginal revenue product (MRP) it generates. This is calculated by multiplying the marginal physical product (MPP) of the factor by the marginal revenue (MR) of the output.
➡️ MRP theory is used to explain the demand for factors of production, and how firms decide how much to pay for them. It suggests that firms will pay a factor of production up to the point where the MRP is equal to the factor's price.
➡️ MRP theory is also used to explain the distribution of income in an economy, as it suggests that the factors of production that generate the highest MRP will receive the highest incomes.

### What is marginal revenue product and how is it calculated?

Marginal revenue product (MRP) is the additional revenue generated by hiring one more unit of a factor of production, such as labor. It is calculated by multiplying the marginal product of labor (MPL) by the marginal revenue (MR) of the output produced. MRP = MPL x MR.

### Why is marginal revenue product important in labor markets?

Marginal revenue product is important in labor markets because it helps firms determine the optimal level of employment and wage rates. If the MRP of labor is greater than the wage rate, the firm should hire more workers to increase profits. If the MRP of labor is less than the wage rate, the firm should reduce employment to avoid losses.

### How does marginal revenue product affect income distribution?

Marginal revenue product affects income distribution by determining the wages paid to workers. If the MRP of labor is high, workers can demand higher wages and receive a larger share of the income generated by the firm. If the MRP of labor is low, workers may have to accept lower wages or face unemployment. Therefore, MRP plays a crucial role in determining the distribution of income between labor and capital.

bottom of page