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April 26, 2018 

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MARGINAL REVENUE PRODUCT CURVE: A curve that graphically illustrates the relation between marginal revenue product and the quantity of the variable input, holding all other inputs fixed. This curve indicates the incremental change in total revenue for incremental changes in the variable input. The marginal revenue product curve plays in key role in the economic analysis of factor markets and the quantity of inputs employed.

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FREE GOOD:

A good that provides satisfaction of wants and needs without imposing an opportunity cost on society by preventing the production or consumption of other consumer-satisfying goods or services. Production using free goods is generally undertaken using free resources.
A good is free if it can satisfy all of existing wants and needs... and then some. In other words, the use of the good to satisfy one want or need does not prevent the satisfaction of other wants and needs. There is more than enough of the good to do everything that everyone wants it to do.

Free, Not Unlimited

Being free, however, does not mean that a good is unlimited. Free goods are inevitably produced from limited resources. Goods are free because the available quantity exceeds the desired use. This situation can exist for a couple of interrelated reasons.
  • One, society has little use for the good. Many scarce goods in today's modern economy were once free. They were free because society had very little use for the goods. Petroleum is an example. Before the development of the internal combustion engine, society had limited use for petroleum. There was more than enough to satisfy those uses.

  • Two, the good is useful, but extremely abundant. A few goods are quite useful and even essential to the modern economy, but are free because the available quantity far exceeds the desired use. Air offers the best example. Although air is extremely useful (human life could not exist without it), abundance makes it a free good in most circumstances (exceptions being an airtight bank vault, an orbiting spacecraft, or a sunken submarine).
In both cases the good is limited and provides some use to society. It is free only because it is abundant relative to the desired use.

No Market, Zero Price

Being free has one important, practical interpretation. The market price of the good is zero. In fact, free goods are not traded through markets. Market trades are not possible. If a good is sufficiently abundant to satisfy all existing wants and needs, then no one can sell it, no one can charge a price to transfer ownership. The bottom line: A free good is quite literally free.

Moreover, efficiency is served if the price of a free good is zero. Efficiency is achieved by the equality between price and cost. Because a free good is abundantly available, the use by one does not impose an opportunity cost on other users. With zero opportunity cost, a zero price achieves efficiency.

However, while a good might be free today, should conditions change, it might not be free tomorrow. A good is free as long as the available quantity exceeds its desired use. Should its availability become limited or its use expanded, then a free good becomes a scarce good. Again, while air is a free good most of the time across most of this planet, if pollution reduces availability or population growth increases the need, free air would cease to be.

A Word About Surpluses

At first glance, a free good would seem to be equivalent to a market surplus, that the two are one and the same thing. A closer look, though, reveals otherwise. A surplus depends on the existing market price. If the market price is above the equilibrium price, then the quantity supplied exceeds the quantity demanded AT THE MARKET PRICE, and a surplus results. However, at a different price, the surplus vanishes. In contrast, a free good exists if the available quantity exceeds the desired use at a ZERO price. Because there is no market for a free good, the notion of market surplus really has no relevance.

In contrast, a scarce good exists if the desired use exceeds available quantity at a zero price. However, because a scarce good is generally traded through a market, it can experience either a shortage or surplus depending on the market price relative to the equilibrium price.

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Recommended Citation:

FREE GOOD, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: April 26, 2018].


Check Out These Related Terms...

     | free resource | free lunch | scarce good | scarce resource |


Or For A Little Background...

     | scarcity | limited resources | unlimited wants and needs | efficiency | opportunity cost |


And For Further Study...

     | first rule of scarcity | factors of production | government functions | three questions of allocation | distribution standards | ownership and control | production possibilities |


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