Derived Demand vs Marginal Revenue Product
Derived Demand and Marginal Revenue Product are two Factor Markets concepts in AP Economics that students often mix up. In short: derived demand is derived demand is the demand for a factor of production that results from the demand for the goods and services it helps produce. Meanwhile, marginal revenue product is marginal Revenue Product (MRP) is the additional revenue a firm earns by employing one more unit of a factor of production. Here is how they compare side by side.
Derived demand is the demand for a factor of production that results from the demand for the goods and services it helps produce.
The demand for a factor of production is derived from the demand for the final goods and services it is used to produce. If demand for the final product increases, the derived demand for the factors used to make it will also increase.
Marginal Revenue Product (MRP) is the additional revenue a firm earns by employing one more unit of a factor of production.
MRP is calculated by multiplying the marginal product of a factor (the extra output from one more unit) by the marginal revenue from selling that output. Firms will hire a factor up to the point where its MRP equals its marginal resource cost (MRC); in a perfectly competitive factor market, MRC equals the factor's price. MRP is the firm's demand curve for a factor.
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