Marginal Revenue Product (MRP)

What Is Marginal Revenue Product (MRP)?

Marginal revenue product is the additional revenue a firm expects to earn from using one more unit of an input, such as one more worker, machine, acre, or hour of labor. It connects production decisions to revenue, not just output.

The idea is central to labor and input markets. A business hires an additional worker or buys another input when the extra revenue generated by that input is worth at least as much as its extra cost. If the input costs more than the revenue it adds, profit falls.

The Basic Formula

Marginal revenue product is commonly expressed as:

MP is marginal product, or the additional output from one more unit of input. MR is marginal revenue, or the additional revenue from selling one more unit of output. In a perfectly competitive output market where price is constant, marginal revenue equals price, so MRP can be read as marginal product multiplied by price.

Example

Suppose one more worker helps a bakery produce 20 additional loaves per day, and each additional loaf adds $4 of revenue. The worker's marginal revenue product is $80 per day. If the daily cost of hiring that worker is $70, the hire adds profit before other constraints. If the cost is $95, the hire reduces profit unless there are strategic or long-term reasons not captured in the simple model.

How Businesses Use It

MRP helps explain why wages and input demand depend on customer demand. A worker's value to the firm is not only how hard the worker works; it also depends on the product's price, the worker's productivity, and whether additional output can be sold. If demand for the final product falls, MRP can fall even if the worker's physical productivity is unchanged.

The concept also applies to machines, advertising, farmland, and software. A company should spend on an input until the additional revenue from the next unit no longer justifies the cost. Real life is messier because training, morale, fixed costs, capacity constraints, and uncertainty matter, but the marginal logic remains useful.

How Businesses Use MRP

MRP gives a hiring or input decision a concrete economic test. If one more worker, machine hour, salesperson, or acre of land adds more revenue than it costs, using more of that input can make sense. If the additional revenue falls below the additional cost, the business has likely reached the point where expansion is no longer profitable under current prices and productivity.

The concept is especially helpful because it connects productivity to market demand. A worker can be physically productive, but if the extra output sells at a low price, MRP may still be modest. Conversely, a small productivity gain can be valuable in a high-margin market. That is why wages, equipment spending, and resource allocation depend not only on effort or output, but on the revenue generated by the next unit of input.

Example

Suppose a bakery hires one more employee and expects that worker to produce 40 additional pastries per day. If each pastry adds $3 of marginal revenue, the worker’s MRP is $120 per day. If total daily compensation and related costs are $100, hiring may add value. If demand weakens and marginal revenue falls to $2 per pastry, the same worker’s MRP drops to $80, making the decision less attractive.

The Bottom Line

Marginal revenue product translates an input into revenue terms. It asks what one more worker, machine, or unit of input contributes financially, helping firms decide whether the next dollar of input spending is worth it.