Marginal Revenue Product (MRP)

What it is

Marginal Revenue Product (MRP) is the additional revenue generated by employing one more unit of a productive resource (for example, a worker, machine, or input). It equals the marginal physical product (MPP) of the resource multiplied by the marginal revenue (MR) from selling the additional output:

MRP = MPP × MR

MRP guides decisions about how many units of a resource to employ: add a unit if its MRP exceeds (or at least equals) the unit’s cost.

Simple example

A farmer considers buying a tractor. If the additional tractor increases output by 3,000 bushels (MPP) and each extra bushel sells for $5 (MR), then:

MRP = 3,000 × $5 = $15,000

The farmer should pay no more than $15,000 for the tractor (ignoring other dynamic effects).

Key assumptions and implications

• Ceteris paribus: MRP analysis holds other inputs and conditions constant.
• Marginal analysis: MRP is an incremental concept—decisions are based on the value of the next unit, not average values.
• Diminishing marginal returns: As more units of a variable input are added to fixed inputs, the MPP (and often MRP) typically falls.
• Pricing environment: In perfect competition MR equals price, so MRP = MPP × price. In imperfect competition MR < price, so MRP is lower than price × MPP.

Measurement challenges

Estimating MPP and MR in practice can be difficult because output changes may be gradual, affected by multiple inputs, and influenced by market price fluctuations. Firms that estimate MRP more accurately tend to allocate resources more profitably.

MRP and labor markets

MRP is central to understanding hiring decisions and wage determination:
* A firm will hire an additional worker only if the worker’s MRP exceeds the wage.
In practice, wages often reflect a discounted version of MRP (discounted marginal revenue product, DMRP) because employers receive revenue later (when output is sold) while paying wages sooner. Time preferences and cash-flow timing can create a wedge between MRP and observed wages.
Bargaining and worker mobility: If offered wages are below DMRP, workers may seek other employers, pushing wages up; if wages exceed DMRP, firms have incentives to reduce labor or replace workers. Monopsony (a single dominant employer) is a rare exception where market power can depress wages below competitive levels.

Takeaways

• MRP quantifies the revenue value of one additional unit of a resource: MRP = MPP × MR.
• Use MRP to decide whether to hire an input or invest in capital—employ it if MRP ≥ cost.
• The concept relies on marginal analysis and is affected by diminishing returns, market structure, and timing of payments.
• Real-world application requires careful measurement and consideration of market imperfection and discounting.