Wednesday, May 21, 2014

Marginal Revenue Product

Definition of 'Marginal Revenue Product - MRP'

The change in revenue that results from the addition of one extra unit when all other factors are kept equal. The marginal revenue product is used in marginal analysis to examine the effect of variable inputs, such as labor, and follows the law of diminishing marginal returns. As the number of units of a variable input increase, the revenue generated by each addition unit decreases at a certain point. It is calculated by taking the marginal product of labor and multiplying it by the marginal revenue of a firm.

The marginal revenue product is different than the marginal product in that it is not a measure of quantity but a measure of revenue. The MRP is often used to calculate the affect of adding employees, as companies want to add employees up to the point at which additional labor won't bring in enough revenue to cover costs.

(via Investopedia)