Published Oct 25, 2023 Marginal Revenue Product (MRP) is a concept used in economics to measure the additional revenue generated by each additional unit of input, such as labor or capital. It represents the change in total revenue resulting from the employment of one additional unit of input. To better understand MRP, let’s consider a company that produces smartphones. The company currently employs 100 workers and produces 10,000 smartphones per month. The average revenue per smartphone is $500. Now, let’s assume the company hires an additional worker and, as a result, its production increases to 11,000 smartphones per month. The marginal revenue product (MRP) of the additional worker can be calculated by multiplying the change in output (1,000 smartphones) by the average revenue per unit ($500): Therefore, the MRP of the additional worker is $500,000. Marginal Revenue Product is an important concept for firms as it helps them determine the value of additional inputs, such as labor or capital. By comparing the MRP with the cost of employing an additional unit of input, a firm can determine whether hiring more workers or investing in more capital is economically beneficial. MRP is also crucial for workers, as it represents the additional revenue they generate for the firm. It can be used as a benchmark for negotiating wages and understanding the impact their productivity has on the company’s profitability.Definition of Marginal Revenue Product (MRP)
Example
MRP = Change in output × Average revenue per unit
MRP = 1,000 smartphones × $500 = $500,000Why Marginal Revenue Product (MRP) Matters
Economics