Marginal revenue product of labour
Also called: MRPL · Topic: Factors of Production, Entrepreneurship and Startups · NCERT: Class 12, Ch 5 "Market Equilibrium"
Meaning
The marginal revenue product of labour (MRPL) is the extra revenue a firm earns by hiring one more unit of labour. The formula is MRPL = MR × MPL, where MR is marginal revenue and MPL is the extra output from one more worker. A profit-maximising firm hires labour until w = MRPL. Under perfect competition, MR equals price (P), so MRPL equals the value of marginal product of labour, VMPL = P × MPL.
Example
Suppose one more worker adds 6 units of output and each unit brings ₹20 of extra revenue. The worker's MRPL is 6 × ₹20 = ₹120. If the daily wage is ₹120, hiring this worker is just worth it. A worker adding only 4 units (₹80) would not be hired.
Don't confuse with
- VMPL (P × MPL): this uses price instead of marginal revenue. MRPL = VMPL only under perfect competition. For a firm with market power, MR is less than P, so MRPL is smaller than VMPL.
Related concepts
- Derived demand
- Demand for labour
- Value of marginal product of labour
- Labour market
- Supply of labour
- Income-leisure trade-off
- Backward-bending labour supply curve
- Equilibrium wage rate
- Wage rate