marginal revenue product

Examples of marginal revenue product in the following topics:

• Marginal Revenue Productivity and Wages

  • In a perfectly competitive market, the wage rate is equal to the marginal revenue product of labor.
  • To determine demand in the labor market we must find the marginal revenue product of labor (MRPL), which is based on the marginal productivity of labor (MPL) and the price of output.
  • We know that a profit-maximizing firm will increase its factors of production until their marginal benefit is equal to the marginal cost.
  • Thus, workers earn a wage equal to the marginal revenue product of their labor.
  • The graph shows that a factor of production - in our case, labor - has a fixed supply in the long run, so the wage rate is determined by the factor demand curve - in our case, the marginal revenue product of labor.

• Deriving the Labor Demand Curve

  • Firms will demand labor until the marginal revenue product of labor is equal to the wage rate.
  • The additional revenue generated by hiring one more unit of labor is the marginal revenue product of labor (MRPL).
  • The marginal revenue product of labor (MRPL) is the additional amount of revenue a firm can generate by hiring one additional employee.
  • At a price of $10, the company will hire workers until the last worker hired gives a marginal revenue product of $10 .
  • Explain how a company uses marginal revenue product in hiring decisions

• Marginal Product of Labor (Revenue)

  • The marginal revenue product of labor is the change in revenue that results from employing an additional unit of labor.
  • The marginal revenue product of labor (MRPL) is the change in revenue that results from employing an additional unit of labor, holding all other inputs constant.
  • The marginal revenue product of a worker is equal to the product of the marginal product of labor (MPL) and the marginal revenue (MR) of output, given by MR×MP: = MRPL.
  • Theory states that a profit maximizing firm will hire workers up to the point where the marginal revenue product is equal to the wage rate, because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labor.
  • Define the marginal product of labor under the marginal revenue productivity theory of wages

• Marginal Revenue and Marginal Cost Relationship for Monopoly Production

  • When the marginal revenue of selling a good is greater than the marginal cost of producing it, firms are making a profit on that product.
  • Monopoly production, however, is complicated by the fact that monopolies have demand curves and MR curves that are distinct, causing price to differ from marginal revenue .
  • Production occurs where marginal cost and marginal revenue intersect.
  • Production occurs where marginal cost and marginal revenue intersect.
  • Analyze how marginal and marginal costs affect a company's production decision

• Monopoly Production Decision

  • If we assume increasing marginal costs and exogenous input prices, the optimal decision for all firms is to equate the marginal cost and marginal revenue of production.
  • Because of this, rather than finding the point where the marginal cost curve intersects a horizontal marginal revenue curve (which is equivalent to good's price), we must find the point where the marginal cost curve intersect a downward-sloping marginal revenue curve.
  • Like non-monopolies, monopolists will produce the at the quantity such that marginal revenue (MR) equals marginal cost (MC).
  • Calculate and graph the firm's marginal revenue, marginal cost, and demand curves
  • Monopolies produce at the point where marginal revenue equals marginal costs, but charge the price expressed on the market demand curve for that quantity of production.

• Marginal Analysis

  • Specifically, firms tend to accomplish their objective of profit maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve.
  • In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output is known as marginal-cost pricing.
  • Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
  • In some cases, a firm's demand and cost conditions are such that marginal profits are greater than zero for all levels of production up to a certain maximum.

• Marginal Cost Profit Maximization Strategy

  • In order to maximize profit, the firm should set marginal revenue (MR) equal to the marginal cost (MC).
  • Marginal revenue is the additional revenue that will be generated by increasing product sales by one unit.
  • Marginal revenue is calculated by dividing the change in total revenue by the change in output quantity.
  • Firms will produce up until the point that marginal cost equals marginal revenue.
  • This graph shows a typical marginal cost (MC) curve with marginal revenue (MR) overlaid.

• The Supply Curve in Perfect Competition

  • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
  • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
  • The marginal revenue-marginal cost perspective relies on the understanding that for each unit sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
  • If the marginal revenue is greater than the marginal cost, then the marginal profit is positive and a greater quantity of the good should be produced.
  • Likewise, if the marginal revenue is less than the marginal cost, the marginal profit is negative and a lesser quantity of the good should be produced .

• Operating Margin

  • The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue.
  • For example, an operating margin of 0.5 means that for every dollar the company takes in revenue, it earns $0.50 in profit.
  • A company that is not making any money will have an operating margin of 0: it is selling its products or services, but isn't earning any profit from those sales.
  • Furthermore, the operating margin is simply revenue.
  • The operating margin is found by dividing net operating income by total revenue.

• Profit

  • In launching new products or considering the pricing of current products, managers often start with an idea of the dollar profit they desire and ask what level of sales will be needed to reach it.
  • An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC).
  • Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
  • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.