Economics – Labour market forces and government intervention | e-Consult

Definition: Marginal Revenue Product (MRP) is the additional revenue generated by employing one more unit of a factor of production (e.g., labour, capital). It is calculated as the change in total revenue resulting from a one-unit increase in the quantity of the factor used.

Significance: The MRP theory suggests that firms will employ factors of production up to the point where the MRP of the factor equals its marginal cost (MC). This is because as a factor is added, its MRP increases (due to diminishing returns), while its MC also increases. The optimal level of input is where these two forces intersect, maximizing profit.

Diagram:

A typical MRP diagram would show a downward-sloping MRP curve. The MC curve would also be upward-sloping. The point where the MRP and MC curves intersect represents the optimal level of input.

Illustration: Consider a firm employing labour. As the firm hires more workers, the MRP of each additional worker initially rises (due to specialization and division of labour). However, eventually, the MRP will fall as workers become less productive (due to overcrowding or coordination problems). The firm will hire workers up to the point where the additional revenue generated by the last worker equals the cost of hiring that worker (wages).