Value of marginal product of labour

Indian Economy glossary

Also called: VMPL · Topic: Factors of Production, Entrepreneurship and Startups · NCERT: Class 12, Ch 5 "Market Equilibrium"

Meaning

Value of marginal product of labour (VMPL) is the money value of the extra output that one more worker produces. VMPL = P × MPL. Here P is the price of the good and MPL (marginal product of labour) is the extra output from one more worker. Under perfect competition, MR (marginal revenue, the extra money from selling one more unit) equals P, so VMPL = MRPL (marginal revenue product of labour, MR × MPL). A firm keeps hiring while VMPL is above the wage. It stops where VMPL = w.

Example

A firm sells its good at ₹20 a unit and pays a wage of ₹120 a day. The 3rd worker adds 6 units, so VMPL = ₹20 × 6 = ₹120, which equals the wage. The 4th worker adds 4 units, so VMPL = ₹80, which is less than ₹120. The firm therefore hires 3 workers.

Don't confuse with

  • MRPL (MR × MPL): it equals VMPL only under perfect competition. When MR is not the same as price, the two differ, and the firm's hiring rule is w = MRPL.
  • MPL: this is extra output counted in units. VMPL is that extra output counted in rupees.

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