Economics Cost Of Production Questions Medium
The concept of average revenue product (ARP) in production refers to the amount of revenue generated by each unit of input or factor of production employed in the production process. It is calculated by dividing the total revenue generated by a specific input by the quantity of that input used.
The average revenue product is an important measure for firms as it helps them determine the productivity and profitability of each input. By comparing the ARP of different inputs, firms can make informed decisions regarding resource allocation and determine the optimal combination of inputs to maximize their profits.
The formula to calculate average revenue product is as follows:
ARP = Total Revenue / Quantity of Input
For example, if a firm generates a total revenue of $10,000 by employing 100 units of labor, the average revenue product of labor would be $100 ($10,000 / 100). This means that each unit of labor contributes an average of $100 to the firm's total revenue.
The concept of average revenue product is closely related to the concept of marginal revenue product (MRP), which measures the additional revenue generated by employing one additional unit of input. The ARP can be used to determine the MRP by calculating the change in total revenue resulting from the addition of one more unit of input.
Overall, the average revenue product provides valuable insights into the productivity and profitability of inputs in the production process, helping firms make informed decisions to optimize their production and maximize their profits.