marginal revenue product

(noun)

The change in total revenue earned by a firm that results from employing one more unit of labor.

Related Terms

Examples of marginal revenue product in the following topics:

  • Marginal Revenue Productivity and Wages

    • In a perfectly competitive market, the wage rate is equal to the marginal revenue product of labor.
    • To determine demand in the labor market we must find the marginal revenue product of labor (MRPL), which is based on the marginal productivity of labor (MPL) and the price of output.
    • We know that a profit-maximizing firm will increase its factors of production until their marginal benefit is equal to the marginal cost.
    • Thus, workers earn a wage equal to the marginal revenue product of their labor.
    • The graph shows that a factor of production - in our case, labor - has a fixed supply in the long run, so the wage rate is determined by the factor demand curve - in our case, the marginal revenue product of labor.

  • 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).
    • The marginal revenue product of labor (MRPL) is the additional amount of revenue a firm can generate by hiring one additional employee.
    • At a price of $10, the company will hire workers until the last worker hired gives a marginal revenue product of $10 .
    • Explain how a company uses marginal revenue product in hiring decisions

  • Marginal Product of Labor (Revenue)

    • The marginal revenue product of labor is the change in revenue that results from employing an additional unit of labor.
    • The marginal revenue product of labor (MRPL) is the change in revenue that results from employing an additional unit of labor, holding all other inputs constant.
    • The marginal revenue product of a worker is equal to the product of the marginal product of labor (MPL) and the marginal revenue (MR) of output, given by MR×MP: = MRPL.
    • Theory states that a profit maximizing firm will hire workers up to the point where the marginal revenue product is equal to the wage rate, because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labor.
    • Define the marginal product of labor under the marginal revenue productivity theory of wages

  • Marginal Revenue and Marginal Cost Relationship for Monopoly Production

    • When the marginal revenue of selling a good is greater than the marginal cost of producing it, firms are making a profit on that product.
    • Monopoly production, however, is complicated by the fact that monopolies have demand curves and MR curves that are distinct, causing price to differ from marginal revenue .
    • Production occurs where marginal cost and marginal revenue intersect.
    • Production occurs where marginal cost and marginal revenue intersect.
    • Analyze how marginal and marginal costs affect a company's production decision

  • Monopoly Production Decision

    • If we assume increasing marginal costs and exogenous input prices, the optimal decision for all firms is to equate the marginal cost and marginal revenue of production.
    • Because of this, rather than finding the point where the marginal cost curve intersects a horizontal marginal revenue curve (which is equivalent to good's price), we must find the point where the marginal cost curve intersect a downward-sloping marginal revenue curve.
    • Like non-monopolies, monopolists will produce the at the quantity such that marginal revenue (MR) equals marginal cost (MC).
    • Calculate and graph the firm's marginal revenue, marginal cost, and demand curves
    • Monopolies produce at the point where marginal revenue equals marginal costs, but charge the price expressed on the market demand curve for that quantity of production.

  • Long Run Market Equilibrium

    • The long-run equilibrium of a perfectly competitive market occurs when marginal revenue equals marginal costs, which is also equal to average total costs.
    • The demand curve also represents marginal revenue, which is important to remember later when we calculate quantity supplied.
    • So a firm will produce goods until the marginal costs of production equal the marginal revenues from sales.
    • In a perfectly competitive market, long-run equilibrium will occur when the marginal costs of production equal the average costs of production which also equals marginal revenue from selling the goods.
    • The market is productively and allocatively efficient.

  • 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.
    • A firm will continue to employ more of the resource until the marginal revenue equals the marginal cost to the firm.
    • 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 Cost Profit Maximization Strategy

    • In order to maximize profit, the firm should set marginal revenue (MR) equal to the marginal cost (MC).
    • Marginal revenue is the additional revenue that will be generated by increasing product sales by one unit.
    • Marginal revenue is calculated by dividing the change in total revenue by the change in output quantity.
    • Firms will produce up until the point that marginal cost equals marginal revenue.
    • This graph shows a typical marginal cost (MC) curve with marginal revenue (MR) overlaid.

  • The Supply Curve in Perfect Competition

    • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
    • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
    • The marginal revenue-marginal cost perspective relies on the understanding that for each unit sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
    • If the marginal revenue is greater than the marginal cost, then the marginal profit is positive and a greater quantity of the good should be produced.
    • Likewise, if the marginal revenue is less than the marginal cost, the marginal profit is negative and a lesser quantity of the good should be produced .

  • Average and Marginal Cost

    • Marginal cost includes all of the costs that vary with the level of production.
    • An example of calculating marginal cost is: the production of one pair of shoes is $30.
    • Average cost can be influenced by the time period for production (increasing production may be expensive or impossible in the short run).
    • Average cost and marginal cost impact one another as production fluctuate :
    • This graph is a cost curve that shows the average total cost, marginal cost, and marginal revenue.