I've tried to wrap my head around this one before, but finally this weekend in Ecological Economics we reviewed it and it makes sense to me, I guess. I will endeavor to explain it in "Layman's terms."
MU is Marginal Utility, this is the subjective value a consumer places on a product or service when purchasing it. P is the basic Market Price, and MPP is the marginal physical product of a factor (a) when used to make the good (X or Y). That is, the extra output produced with one more unit of input, one more pound of dough makes 12 cookies, or something like that.
The use of a ratio of X/Y is basically Product X, compared to Product Y, so this equation is only comparing two products, but is extrapolated to contain every product found on the market today.
What this Means, among other things, is that prices will reflect the consumer's perceived utility of a product, and the value of the inputs, and that all prices are relative to each other, and other product's perceived utilty.
Now, this is of course one of those theoretical economic principles that sounds good but falls apart as soon as reality is acknowledged, and it explodes into shards of nonsense once you apply any environmental values or principles of ecological economics.
For example, Utility is highly influenced by Advertising, just ask my Lady Friend what she spends on blue jeans, compared to the utility of the jeans I bought six years ago which are just fine despite the hole in the crotch thank you very much.
Second, prices don't often reflect the environmental impact of the products in question, somewhere someone or someplace is being impacted by the pesticides used on the cotton grown to make my blue jeans, but the mitigation of those toxins are not factored into the price.
Finally, what is the market price of a lungful of air? What is the value of that Air? What if the Air was unavailable?
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