marginal revenue product of labour

Imagine you run a small cafe and are deciding whether to hire one more barista. The sensible question is: how much extra money will this person actually bring in? Not how nice they are, not how busy they look — how much more revenue lands in the till because they are there. That extra revenue from one more worker is the marginal revenue product of labour. It is the heart of how firms decide whom to hire and how much to pay.

It is built from two pieces. First, one more worker produces some extra output — the marginal product of labour (say, 30 more cups of coffee a day). Second, each of those extra units sells for some amount — the marginal revenue (say, 2 dollars a cup). Multiply them: MRPL = marginal product times marginal revenue, here 30 times 2 = 60 dollars a day. That 60 dollars is what the extra barista is worth to the cafe. The profit-maximising rule is simple: keep hiring as long as a worker's MRPL is above their wage, and stop when MRPL has fallen to equal the wage. Because of diminishing returns, each extra worker usually adds a bit less than the last, so MRPL slopes downward — which is exactly the firm's demand curve for labour.

This idea is the bridge from product markets to wages. It says that in a competitive market a worker tends to be paid around the value of what they add at the margin — high pay signals high marginal value, low pay signals low marginal value. It also explains why the same person can be worth far more in one setting than another, and why labour-saving machinery or a fall in product prices can push wages down. Honest caveats: it assumes you can measure each worker's separate contribution (often hard in teamwork), and it describes a tendency in competitive markets, not an iron law in workplaces with bargaining, monopsony, or fuzzy output.