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7. Production: General Pricing of the Factors > 2. Determination of the Discounted Marginal Value...

B. The Marginal Physical Product

What, then, determines the position and shape of the MVP schedule? What is the marginal value product? It is the amount of revenue intake attributable to a unit of a factor. And this revenue depends on two elements: (1) the physical product produced and (2) the price of that product. If one hour of factor X is estimated by the market to produce a value of 20 gold ounces, this might be because one hour produces 20 units of the physical product, which are sold at a price of one gold ounce per unit. Or the same MVP might result from the production of 10 units of the product, sold at two gold ounces per unit, etc. In short, the marginal value product of a factor service unit is equal to its marginal physical product times the price of that product.6

Let us, then, investigate the determinants of the marginal physical product (MPP). In the first place, there can be no general schedule for the MPP as there is for the MVP, for the simple reason that physical units of various goods are not comparable. How can a dozen eggs, a pound of butter, and a house be compared in physical terms? Yet the same factor might be useful in the production of any of these goods. There can be an MPP schedule, therefore, only in particular terms, i.e., in terms of each particular production process in which the factor can be engaged. For each production process there will be for the factor a marginal physical production schedule of a certain shape. The MPP for a supply in that process is the amount of the physical product imputable to one unit of that factor, i.e., the amount of the product that will be lost if one unit of the factor is removed. If the supply of the factor in the process is increased by one unit, other factors remaining the same, then the MPP of the supply becomes the additional physical product that can be gained from the addition of the unit. The supply of the factor that is relevant for the MPP schedules is not the total supply in the society, but the supply in each process, since the MPP schedules are established for each process separately.

  • 6. This is not strictly true, but the technical error in the statement does not affect the causal analysis in the text. In fact, this argument is strengthened, for MVP actually equals MPP × “marginal revenue,” and marginal revenue is always less than, or equal to, price. See Appendix A below, “Marginal Physical and Marginal Value Product.”