Wednesday, June 6, 2007

Marginal Revenue Product Theory

Marginal Revenue Product Theory: This states that demand for labour depends upon 2 things; Productivity of labour, and the demand for the Good they produce (which determines price)

MRP = MPP * MR

MPP = marginal physical product (output produced by an extra worker)
MR = Marginal Revenue (this is the revenue from selling an extra unit of output - determined by price of a good)

Therefore, MRP is important in the determining wages. Workers with higher productivity will tend to get higher wages. Also, workers who help produce profitable goods will get higher salaries. For example, lawyers and professional footballers get high salaries because the Marginal revenue of their goods are high.

In practise, it can be difficult to determine the MRP of workers, for example, many in the service sector do not produce a tangible output e.g. nurses and teachers.

see also: mrp and determination of wages - essay
Wages are also determined by supply of labour.

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