Marginal Revenue Product (MRP)
Candlefocus EditorIn simple terms, MRP is the addition to the total revenue that is achieved through the use of one additional unit of a particular resource in production. It is calculated by multiplying the marginal physical product by the marginal revenue and expressed in the form of total revenue. To calculate MRP, the marginal physical product (MPP) must first be determined. MPP is the number of units produced from the extra unit of the resource.
A business can use MRP to determine where to allocate resources and how to maximize returns. For example, a company producing a product may compare the MPP and MRP when deciding whether to increase the production of one type over another. The company would weigh the increase in MRP against the costs of obtaining and using the additional resource. This can help the company determine which product or resource to prioritize.
In addition to production decisions, MRP can also be used to make expansion and capital investment decisions. Companies can identify projects or investments that generate the most additional revenue by comparing the MRP of competing projects.
It's important to keep in mind that, while MRP is a useful tool in making decisions, businesses must take into account other factors, such as costs associated with acquiring and using the resource, customer demand, and market conditions. MRP should provide a useful starting point in analyzing the potential impacts of allocating resources and maximizing potential profits.