# Marginal Productivity Theory. Marginal Physical Product Extra Output from each additional unit of resource.

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Marginal Productivity Theory

Marginal Physical Product Extra Output from each additional unit of resource

Marginal Revenue Product Price x Extra Output Change in Total Revenue Resulting from the use of each additional unit of resource

See Overhead 4.3 Perfect competition Adding one variable resource – labor Columns 3 and 6 demonstrate the law of diminishing returns

Law of Diminishing Returns As successive increments of a variable resource (labor) are added to a fixed resource, the marginal product of the variable resource will eventually decrease.

Marginal Resource Cost Amount which each additional unit of resource adds to a firms total (resource) cost

MRP=MRC Rule It is profitable for a firm to hire additional units of a resource up to that point at which that resources MRP=MRC

MRP=MRC and MR=MC Rationale the same BUT point of reference is now inputs of a resource

Purely Competitive Labor Market Wage rate established by market supply and demand Firm is a wage taker

Imperfect Labor Market Firm is a price maker Pure monopoly, oligopoly, monopolistic competition Downward sloping demand curve

MRP of competitive seller falls for one reason: Marginal Product diminishes

MRP of Imperfectly competitive seller falls for two reasons: 1- Marginal Product diminishes 2- Product price falls as output increases

Conclusions For review check out chapter 27 pages 564-569 Tables 27-1 and 27-2 same as overheads