Although the phrase Discounted Marginal Value Product may seem intimidating, the ideas of which it is composed are simple and logical. Let us consider how the phrase applies to a labor factor, considering the four words in reverse order:

Product: The labor is useful to the producer because it contributes to a final product that can be exchanged in the market.
Value: The utility of the labor depends on the money value that will be realized when the final product is sold.
Marginal: The value of each unit of labor depends on how much that incremental unit adds to the money value of the final product. For instance, if another hour of labor will increase output of the consumers's good by two units, which can be sold for $10 each, then its Marginal Value Product is $20.
Discounted: Since the producer must purchase the labor first, receiving the $20 Marginal Value Product only later, the value of that labor is discounted by the interest cost of his or her investment. If the interest rate is 6% and the period of production is one year, the DMVP is $20 / 1.06 = $18.87. The interest discount increases with the period of production. If that period is two years, for instance, DMVP = $20 / 1.06 / 1.06 = $17.80.