Page 1 of 4
A Firm’s Marginal Product Revenue Curve (MPR)
Labour market
Product market
Demand
Firm
Demand
People
Supply
People
Supply
Firm
Revenue structure
Cost structure
Example: A Firm Provide Car Service to Car Owners in a Competitive Labour and
Service Market.
So, Wage (rate) is fixed, and Marginal Revenue is fixed
TP = Number of car washed
TR = price * number of car washed
MRP = change of TP divided by change of number of labour
TABLE 1
Number of Labour
TP (number of car washed)
MP of Labour
0
1 (Rahim)
2 (Karim)
3 (Abul)
4 (Skawkat)
5 (Ibrahim)
0
5
9
12
14
15
5
4
3
2
1
MRP if car wash is
$5
0
25
20
15
10
5
TP = (number of car washed)
The Firm generates incremental revenue from incremental recruitment of labour.
Total Revenue = 0+25+20+15+10+5 = $ 75 / or $ 5 * 15 = $ 75
But the point is all labour are not contributing equally to the total revenue of the firm.
Page 2 of 4
PLOTING TABLE IN GRAPH PAPER
TP (number of car washed)
16
14
12
10
8
6
4
2
0
1
2
3
4
5
6
TP (number of car washed)
Marginal Revenue Product Curve
30
25
25
20
20
15
15
10
10
5
5
0
1
2
3
4
5
Marginal Revenue Product Curve of a Firm is a demand curve of a Firm
Page 3 of 4
QUESTION : HOW MANY PEOPLE/LABOUR WILL BE HIRED IN A COMPETITIVE
LABOUR MARKET?
This question is answered by the MARGINAL PRODUCTIVITY THEORY.
How much incremental revenue, a firm earns from extra labour? Assume wage in the
labour market is $ 10 per hour. How many people firm will hire ? The decision depends
upon additional cost for additional labour and additional return from labour. According to
the theory a firm will hire until MC=MR of labour. Here MC=wage rate.
TABLE 2
Number of
Labour
MP of
Labour/day
MRP if
car wash is
$5
MC if wage
rate is
$10
0
1 (Rahim)
2 (Karim)
3 (Abul)
4 (Skawkat)
5 (Ibrahim)
0
5
4
3
2
1
0
25
20
15
10
5
0
10
10
10
10
10
Marginal
(incremental)
Benefit for
Firm
0
15
10
5
0
-5
The firm will hire four unit of labour and wash 14 unit of car per day (refer to Table 1).
Here MR=MC and net benefit to the firm is equal to zero from the last employee Shawkat.
So, net benefit is (15+10+5) = $30. Marginal productivity theory ensure that all the workers
receive a wage rate equal to the Marginal Product of the last workers.
Now is this net benefit is profit ?
Answer is not. This net benefit is return to capital investment by the firm. THIS IS KNOWN
AS RENT.
Refer to Table 1. Total Productivity i.e. total number of car washed by the firm is 14. So
total revenue generated is equal to 14*$5 = $70.
Out of this total $70, total wage paid to Rahim, Karim, Abul, and Shawkat is $10*4 = $40
Out of this total $70, total rent is
TOTAL
This is know as MARGINAL PRODUCITIVITY THEORY OF DISTRIBUTION.
= $30
$70
Page 4 of 4
MARGINAL PRODUCITIVITY THEORY OF DISTRIBUTION:(UNDER PERFECT COMPETITION):The theory, illustrates how market allocate national output among two or more factor of
production ?
Marginal product (MP) principles determine factor distribution of national output (national
income). Each factor of production will receive share just equal to its marginal product.
D
S
RENT
W
TOTAL WAGE
E
D
0
S
DD = MRP of labour.
SS = labour supply equal total population aged 16+ above.
Equilibrium wage rate is at E