In short-run production function, we have some fixed factors and some variable inputs. In a two – factor model, we assume capital to be the fixed factor while labour is the variable input. The total quantity of produced by using a given combination of fixed and variable factors is called Total Physical Product (TPP). This total product when divided by the number of units (n) of the variable factor used, gives Average Physical Product APP. Thus,
APP = TPP/n.
The Marginal Physical Product (MPP) is the additional mode to total product by the use of the last unit of the variable input. Thus,
MPP = TPPn – TPPn – 1.
However, from the point of view of the profit maximizing firm, more important than physical output is the revenue that this output generates or the revenue productivity of the factor. The total revenue earned by a firm by sale of total physical product is called Total Revenue Productivity (TRP), which at a given price (p) per unit is found out as follows:
TRP = TPP x P.
Average Revenue Productivity (ARP) is equal to TRP divided by the number of units (n) of a variable factor used or
ARP = TPP/n.
ARP can also be found, if APP is known as
ARP = APP x P.
Marginal Revenue Productivity is the addition mode to the total revenue by employment of the last unit of the variable factor used. Thus,
MRP = TRPn – TRPn – 1.
When MPP is known and market price (P) remains constant, thus
MRP = MPP x P.
Based on the law of variable proportions, the ARP and MRP curves first rise upwards and then slope downwards making an inverted U-slope. The MRP intersects the ARP curve at its maximum point.
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