QS Study

Average revenue product

Average revenue product is the unit revenue generated by the use or employment of different quantities of a variable input. It is mostly related to the concept of average product (or average physical product). Average physical product indicates our unit total production from employing a given quantity of a variable input. However, it indicates per unit total revenue from employing a given quantity of a variable input. It is also mostly related to the concept of average revenue, per unit total revenue that results from producing a given quantity of output.

Average revenue product can be derived by dividing total revenue by the quantity of variable input as specified by this equation.

Average revenue product (MRP) = Change in total revenue / Change in variable input

Marginal Revenue Product

Marginal revenue product is the additional revenue generated by the use or employment of an extra variable input. It is mostly related to the concept of the marginal product. Marginal physical product indicates how much total production changes by employing another unit of variable input. It is also costs related to the concept of marginal revenue, the change in total revenue that results from changing the quantity of output produced.

Marginal revenue product is an essential component of factor market analysis and marginal productivity theory. The extra revenue generated by an input is the key influence on the price an employer is willing and able to pay to hire the input. An input with a greater marginal revenue product is bound to receive a higher price, payment or income than one with a lower marginal revenue product.

Key to the analysis of factor demand, marginal revenue product is guided by the law of diminishing marginal returns. As marginal product decreases so too does marginal revenue product. But as marginal revenue product declines employers are willing to pay less. This gives rise to the primary implication of marginal revenue product the factor demand curve is negatively sloped.

Marginal revenue product can be derived from the change in total revenue due to a change in the variable input as specified by this equation.

Marginal Revenue Product = Change in total revenue / Change in total variable input