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Average physical product (APP), marginal physical product (MPP) In economics and in particular neoclassical economics, the marginal product or marginal physical productivity of an input (factor of production) is the change in output resulting from employing one more unit of a particular input (for instance, the change in output when a firm's labor is increased from five to six units), assuming ...
The marginal profit per unit of labor equals the marginal revenue product of labor minus the marginal cost of labor or M π L = MRP L − MC L A firm maximizes profits where M π L = 0. The marginal revenue product is the change in total revenue per unit change in the variable input assume labor. [ 10 ]
The marginal product of a factor of production is the change in output when that factor of production changes, holding constant all the other factors of production as well as the total factor productivity. The marginal product of capital, corresponds to the first derivative of the production function with respect to capital:
An example would be a factory increasing its saleable product, but also increasing its CO 2 production, for the same input increase. [2] The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory. [5]
To simplify the interpretation of a production function, it is common to divide its range into 3 stages. In Stage 1 (from the origin to point B) the variable input is being used with increasing output per unit, the latter reaching a maximum at point B (since the average physical product is at its maximum at that point).
In the theory of marginality, the marginal product of an input is the extra output obtained by adding one unit to a specific input. [11] This assumes all the other factors contributing to the output remain constant. For example, the marginal product of labour would be the added production when increasing a unit of labour, such as hours worked.
On the other hand, if the marginal revenue is less than the marginal cost (<), then too its total profit is not maximized, because producing one unit less will reduce total cost more than total revenue gained, thus giving the firm more total profit. In this case, a "rational" firm has an incentive to reduce its output level until its total ...
Thus, the marginal product of capital is the difference between the amount of output produced with K + 1 units of capital and that produced with only K units of capital. [ 2 ] Determining marginal product of capital is essential when a firm is debating on whether or not to invest on the additional unit of capital.