marginal revenue product (MRP) theory: definition and calculation of marginal revenue product
Labour Market Forces & Government Intervention: MRP Theory
What is Marginal Revenue Product (MRP)?
MRP is the extra revenue a firm earns by hiring one more unit of labour. Think of it as the “bonus money” a worker brings to the business.
Mathematically: $$\text{MRP} = \text{MP} \times \text{MR}$$
- MP – Marginal Product (extra output from one more worker)
- MR – Marginal Revenue (price of the extra output)
Why MRP Matters
🔍 Firms decide how many workers to hire by comparing MRP to the wage. If MRP > wage, hiring more workers increases profit. If MRP < wage, hiring reduces profit.
📈 In a competitive market, firms hire until MRP equals the wage, ensuring resources are used efficiently.
Calculating MRP – Step by Step
- Determine the Marginal Product (MP) of labour. Example: If the 4th barista adds 10 cups of coffee per hour, MP = 10 cups.
- Find the Marginal Revenue (MR). Example: If each cup sells for $2, MR = $2.
- Multiply: $$\text{MRP} = \text{MP} \times \text{MR} = 10 \times 2 = \$20$$ per hour.
- Compare MRP to the hourly wage. If wage < $20, hire the worker.
Example: Coffee Shop Hiring Baristas
| Worker # | Output (cups/hr) | MP (cups) | Price ($/cup) | MR ($) | MRP ($/hr) | Wage ($/hr) |
|---|---|---|---|---|---|---|
| 1 | 30 | 30 | $2 | $2 | $60 | $50 |
| 2 | 55 | 25 | $2 | $2 | $50 | $55 |
| 3 | 70 | 15 | $2 | $2 | $30 | $45 |
🔎 Notice how the 3rd barista’s MRP ($30) is less than the wage ($45). The shop should stop hiring after the 2nd barista.
Exam Tips & Quick Facts
?? Key point: MRP = MP × MR. Remember to calculate MP first (difference in output), then multiply by the price (MR).
?? When to hire? Hire until MRP ≥ wage. If MRP < wage, stop hiring.
?? Common exam trick: They may give you total output and ask for MP. Use the difference between successive workers.
?? Remember: In a perfectly competitive labour market, firms hire until MRP = wage. In a monopsony, the firm may hire less because it faces a higher marginal cost of labour.
📌 Tip: Draw a quick table or graph to visualise MRP and wage comparison. It saves time and reduces errors.
Quick Summary
- MRP tells us the extra revenue from hiring one more worker.
- Calculate MP (extra output) and MR (price of that output).
- Compare MRP to the wage to decide on hiring.
- Use tables or diagrams to show the decision process clearly.
Revision
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