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Study notes

Marginal Revenue Product of Labour (Labour Markets)

  • Levels: A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

The demand curve for labour tells us how many workers a business will employ at a given wage rate in a given time period. In the theory of competitive labour markets, the demand curve for labour comes from the estimated marginal revenue product of labour (MRPL)

Marginal Revenue Product - revision video

Marginal revenue product of labour (MRPL) is the extra revenue generated when an additional worker is employed

Formula for MRPL is:

MRPL = marginal product of labour x marginal revenue

Marginal Revenue Product Calculation

In this example, we are assuming here that the firm employing labour is operating in a perfectly competitive market so that each unit of output sold generates a revenue of $20.

MRPL calculation

Firms are assumed to be profit maximisers and they will choose a level of employment that maximises profit. The MRPL curve is the demand curve for labour. MRPL falls when diminishing returns set in.

Let us assume that each extra worker employed costs the firm $160 per day – this is called the marginal cost of labour

At this wage rate of $160 the firm should employ 6 workers

A profit maximising firm should employ workers up to the point where the marginal revenue product of labour = the marginal cost of labour. In this case, when 6 people are employed MRPL and MCL both equal $160.

Employing the 7th worker would lead to a fall in total profits.

Evaluating Marginal Revenue Product

MRPL is taken as the basis for the labour demand curve

Problems:

  • Measuring labour efficiency / productivity can be difficult
  • Relatively easy to measure productivity in the construction industry and in call-centres
  • Much harder to measure productivity in consultancy, education
  • Collaborative work makes it difficult to establish the productivity of individual workers
  • Many products are the result of inputs drawn from different countries – each contributing to value added (e.g. the iPhone has parts made from more than 200 manufacturers)
  • Many people have the ability to set their own pay e.g. the self-employed and directors of businesses


Test your knowledge - Marginal Revenue Product MCQ Revision Video

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