EconixaECONOMICS FUNDAMENTALS

Marginal Revenue Product (MRP)

Plain definition

Marginal revenue product is the extra revenue a firm gains from hiring one more unit of a factor, calculated as marginal product times marginal revenue (MR x MP).

In economics

MRP is the firm's factor demand curve: a profit-maximizing firm hires up to the point where MRP equals the marginal cost of the factor (for labor, the wage). In perfect competition, marginal revenue equals price, so MRP = P x MP.

Example

If a 10th barista adds 40 cups per day (MP) sold at 3each(P),theirMRPis3 each (P), their MRP is 120 per day; the shop hires them if the daily wage is below $120.

Common confusion

MRP is often confused with marginal product (MP): MP measures extra physical output, while MRP converts that output into extra revenue using price.