What is the Value of Marginal Product (VMP)?

The Value of Marginal Product (VMP) calculates the amount of a firm's revenue that a unit of productive output contributes. VMP helps to prevent labor exploitation in industries.

The Value of Marginal Product is a calculation derived by multiplying the marginal physical product by the average revenue or the price of the product. More simply, the formula for calculating VMP is:

• Physical Product x Sales Price of the Product. 

A Little More on What is the Value of Marginal Product

The definition of major terms that appear in the calculation of the value marginal product is crucial to the understanding of the term. Here are the terms that are important in VMP and their definition;

1. Marginal Revenue - this is an increase in total revenue generated by increase in production. Marginal revenue can be generated by producing one more unit of output or selling an additional unit of a good.
2. Marginal Product - this refers to the change in output as a result of additional labor or units.
3. Value Marginal Product (VMP) - this is marginal product or output multiplied by the product price.
4. Marginal Revenue Product (MRP) - This is an increase in a firm's revenue resulting from adding one more resource unit is called the marginal product.

As a result of the law of diminishing returns, marginal product and MRP will decline once more inputs are added. This is why many firms continue to use a variable input until it's MRP amounts to the cost of the unit. 

In a bid to maximize profits, firms employ units of a resource of the MRP if the unit exceeds the firm's cost. If the divisibility of units is achievable, a firm with the production units (A, B, C) will experience these conditions; 

• MRPa=Pa Pa (price of resource A) 
• MRPb =Pb Pb (price of resource B) 
• MRPc= Pc Pc (price of resource C)
  

Assuming that A = skilled labor and resource, B= Low-skilled labor, the relationship between MRP and demand in this case will be such that since skilled laborers are more productive than unskilled labor, firms will be willing to pay skilled laborers higher than unskilled laborers. 

For instance, a firm can get more units by hiring skilled labors and less unit by hiring unskilled labors, hiring skilled labor will help in reducing 'per unit costs.' 

Hence, this type of relationship exist between MRP and demand; 

MRPa = MRPb = MRPcinan -------- -------- -------- Pa Pb Pc

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns