Value of marginal product of capital

(noun)

The marginal product of capital multiplied by its price.

Related Terms

Examples of Value of marginal product of capital in the following topics:

  • Capital and Technology

    • Firms add capital to the point where the value of marginal product of capital is equal to the rental rate of capital.
    • It can be used to derive the marginal product for capital, which is the increase in the amount of output from an additional unit of capital.
    • The value of marginal product (VMP) of capital is the marginal product of capital multiplied by price.
    • A firm will continue to add capital up to the point where the rental rate is equal to the value of marginal product of capital , which is the point of equilibrium.
    • Firms will increase the quantity of capital hired to the point where the value of marginal product of capital is equal to the rental rate of capital.

  • Conditions of Equilibrium

    • The marginal revenue product of labor (MRPL) is equal to the MPL multiplied by the price of output.
    • Firms use the marginal decision rule in order to decide what combination of labor, capital, and other factors of production to use in the creation of output.
    • The cost of that action will be the output lost from cutting back on capital, which is the ratio of the marginal product of capital (MPK) to the price of capital (the rental rate, PK).
    • The curved line represents the falling marginal product of labor, the y-axis is the marginal product/wage rate, and the x-axis is the quantity of labor.
    • Most firms need a combination of both labor and capital in order to produce their product.

  • Deriving the Labor Demand Curve

    • Firms will demand labor until the marginal revenue product of labor is equal to the wage rate.
    • The additional revenue generated by hiring one more unit of labor is the marginal revenue product of labor (MRPL).
    • Changes to the marginal productivity of labor: Technology, for instance, may increase the marginal productivity of labor, shifting the demand curve to the right.
    • For example, computer technology has increased the productivity (marginal product) of many types of workers.
    • For example, is capital becomes more expensive relative to labor, the demand for labor will increase as firms seek to substitute labor for capital.

  • Marginal Utility

    • The idea of marginal value is an important consideration when making production or purchasing decisions.
    • If you are a producer of potato chips, your marginal value might be defined by a pallet of potato chips.
    • In general, marginal value should be measured based on the smallest unit of consumption or production related to the product in question.
    • Since utility is rarely measured using cardinal means, it may seem difficult to determine a product's marginal value.
    • The marginal utility of owning a second house is likely less than the marginal utility of owning the first house.

  • The Marginal Cost of Capital

    • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
    • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
    • Generally we see that as more capital is raised, the marginal cost of capital rises .
    • This happens due to the fact that marginal cost of capital generally is the weighted average of the cost of raising the last dollar of capital.
    • The Marginal Cost of Capital is the cost of the last dollar of capital raised.

  • Production Inputs and Process

    • Capital, otherwise known as capital assets, are manufactured goods that are used in production of goods or services.
    • While capital may refer to funds invested in a business in other disciplines such as accounting, cash is not included in capital in terms of a production input in economics.
    • In production, a worker will only be hired when the marginal revenue s/he brings in exceeds or equals the marginal cost of hiring that worker.
    • The value of labor varies based on the skills and talents that the individual worker brings to that job.
    • Other elements that influence the perception of the value of a specific type of labor in production include the amount of training necessary to execute the task and the barriers to conducting that type of work.

  • Marginal Productivity and Resource Demand

    • Firms will demand more of a resource if the marginal product of the resource is greater than the marginal cost.
    • The marginal product of a given resource is the additional revenue generated by employing one more unit of the resource.
    • In the case of labor, for example, the marginal product of labor is the additional value generated for the company by hiring one additional worker.
    • If each firm has a positive marginal productivity of using more water in their manufacturing process, they will use more water since it's free (there is no, or limited, marginal cost).
    • When firms have positive net marginal productivity from using more oil, demand for oil will rise.

  • Marginal Productivity and Income Distribution

    • Demand for the type of workers that can provide positive marginal productivity over marginal cost will see an increase in their wages.
    • Firms will hire workers if the marginal productivity of the worker is greater than the marginal cost.
    • Suppose there are many firms with positive net marginal productivity of skilled labor.
    • Taken in aggregate, the marginal productivity of one type of worker influences the income that they earn in comparison to other types of workers.
    • Explain how the marginal productivity of different factors can affect income distribution

  • Measuring Productivity

    • Labor: The human skills, time and efforts necessary to add value to the production process.
    • This will include the derivation of a marginal product for each factor (see ), or essentially the extra output that can be created for each additional unit of input.
    • Naturally, this is theoretically subjected to the concept of diminishing marginal returns, where the marginal product of a given input (in the figure we are illustrating labor) will fall as the starting points for quantity rise.
    • In the equation, 'Y' is total production while 'L' is labor, 'K' is capital, 'A' is total factor productivity and the alpha and beta are the elasticity of the two inputs.
    • This takes into account marginal and average product, which are indicative of the change in efficiency based upon inputs.

  • Introduction to Markets for Inputs and Distribution of Income

    • The marginal product of each factor describes the contribution of each factor to the production of the output.
    • The marginal product of a factor can be described as:
    • Q = ALαKβ , the marginal products of the factors is:
    • If the marginal products are known and the relative prices of goods in the markets reflect the values of the outputs, the value of each factors contribution can be calculated as the product of MPF and the price of the output.
    • The change in the value of the output associated with a change in an input is called the value of marginal product (VMP) or the marginal revenue product (MRP).