Give a short concise definition for the following terms and explain their relationship to the study of economics.
a.
Marginal physical product
b.
Marginal revenue product
c.
Law of diminishing returns
d.
Economies of scale
What will be an ideal response?
| a. | Marginal physical productis the increase in total output resulting from a one-unit increase in the use of an input, holding other input amounts constant. MPP gives a measure of the productivity of a particular input, which may be used in deciding on the optimal use of the input. |
| b. | Marginal revenue productis the additional money revenue that a firm receives when it increases the quantity of some input by one unit and is calculated as MPP times the price per unit of output. The firm determines optimal input where MRP is equal to the price of the input. |
| c. | The “law” of diminishing returns holds that as additional units of a variable input are added to a fixed mix of all other inputs, marginal physical product will eventually decline. The diminishing returns play a crucial role in MRP, since the decline in MPP reduces MRP and leads to a definite point beyond which the firm will not expand. |
| d. | Economies of scaleare experienced by a firm if a doubling of inputs more than doubles output. This tells the firm that long-run average costs are declining. |
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