--- title: "Marginal Revenue Product of Labor | Econ" description: "Marginal Revenue Product of Labor is the extra revenue from one more worker, used in Principles of Economics to set hiring and wage decisions." canonical: "https://fiveable.me/principles-econ/key-terms/marginal-revenue-product-labor" type: "key-term" subject: "Principles of Economics" unit: "Unit 14" --- # Marginal Revenue Product of Labor | Econ ## Definition Marginal Revenue Product of Labor is the extra revenue a firm gets from hiring one more worker. In Principles of Economics, it helps explain labor demand and how firms decide how many workers to hire. ## What It Is Marginal Revenue Product of Labor, or MRPL, is the extra revenue a firm earns from adding one more unit of labor. In Principles of Economics, it is the main measure firms use to decide whether another worker is worth hiring. The term combines two ideas: marginal revenue and marginal product of labor. Marginal product of labor is how much extra output the worker produces. Marginal revenue is how much extra money the firm gets from selling that extra output. When you multiply them, you get the added revenue from the worker, not just the added output. That distinction matters because a worker’s output is not always the same as the worker’s revenue contribution. If a bakery hires one more baker, that person might make 20 more loaves. But the MRPL depends on the price of those loaves too. If loaves sell for $3 each, the extra revenue is much higher than if the market price has fallen to $2. For firms in less competitive product markets, MRPL is not just output times price. The firm may have to lower the price to sell more of its product, so marginal revenue can be below the product price. That makes MRPL smaller than the simple output-based calculation you might first expect. The MRPL curve usually slopes downward because of diminishing marginal returns. As a firm adds more labor while holding other inputs fixed, each additional worker tends to add less extra output than the one before. Since revenue from that worker also falls, firms do not hire forever. They keep hiring until the wage equals MRPL, or until labor becomes too expensive relative to the revenue it brings in. ## Why It Matters MRPL is the bridge between production and hiring decisions in labor market theory. It shows why firms do not choose workers based only on how busy they look or how many hours they can fill. Instead, the firm asks a profit question: how much extra revenue does this worker bring in compared with the wage? This term shows up whenever you study labor demand, especially in imperfectly competitive labor markets. If a firm has market power in hiring, it may face a wage that rises as it tries to attract more workers, so the decision gets more complicated. Even then, MRPL is still the benchmark for whether an additional worker makes sense. It also helps explain why changes in the product market affect jobs. If demand for the firm’s product rises, marginal revenue can rise too, which shifts MRPL upward and can lead to more hiring. If labor becomes more productive, MRPL rises as well. That makes MRPL a useful way to connect shifts in demand, productivity, and employment in one model. If you can read an MRPL graph, you can answer a lot of class questions about hiring, wages, and profit-maximizing behavior without guessing. ## Connections ### Marginal Revenue Marginal revenue is the extra revenue from selling one more unit of output. MRPL uses marginal revenue as one of its two ingredients, so changes in product-market pricing can raise or lower the value of labor even if worker productivity stays the same. ### [Marginal Product of Labor](/principles-econ/key-terms/marginal-product-labor) Marginal product of labor measures the extra output created by one more worker. MRPL takes that physical productivity number and turns it into dollars by multiplying it by marginal revenue, which is why the same worker can be more valuable in one market than another. ### Imperfectly Competitive Labor Market In an imperfectly competitive labor market, firms may have some power over wages or face different hiring costs than in a perfectly competitive market. MRPL still guides hiring, but the wage comparison can look different because the firm may not take wages as fixed. ### [Monopsony Power](/principles-econ/key-terms/monopsony-power) Monopsony power means one employer has unusual buying power in the labor market. That matters because the firm can pay wages below what workers contribute in revenue, so the gap between wage and MRPL can help explain underhiring and lower pay. ## On the AP Exam A problem set or quiz question will usually give you a firm, a wage, and a change in output or product price, then ask how hiring changes. You use MRPL to decide whether the firm should add a worker, keep hiring, or stop. If MRPL is above the wage, hiring one more worker raises profit. If MRPL is below the wage, the firm is overstaffed relative to revenue. You may also be asked to interpret a graph where MRPL slopes downward. The move is to connect that slope to diminishing marginal returns and then explain how a rise in demand for the product shifts MRPL rightward or upward. If the firm is in a monopsony or other imperfect market, you may need to compare MRPL with the wage-setting side of the labor market instead of assuming a perfectly competitive outcome. ## Marginal Revenue Product of Labor vs Marginal Product of Labor Marginal product of labor is measured in units of output, like pizzas or shirts. Marginal revenue product of labor is measured in dollars, because it converts that extra output into revenue. If you mix them up, you can misread a hiring rule or graph. ## Key Takeaways - Marginal Revenue Product of Labor is the extra revenue created by hiring one more worker. - MRPL combines marginal product of labor and marginal revenue, so it depends on both productivity and product-market conditions. - A firm hires labor until MRPL equals the wage, because that is where another worker no longer adds profit. - The MRPL curve usually slopes downward because of diminishing marginal returns to labor. - Changes in demand, output price, or worker productivity can shift MRPL and change hiring decisions. ## FAQs ### What is Marginal Revenue Product of Labor in Principles of Economics? It is the extra revenue a firm gets from adding one more worker. In labor market problems, it is the value of that worker to the firm, and it helps determine how many workers the firm will hire. ### How is Marginal Revenue Product of Labor different from marginal product of labor? Marginal product of labor is the extra output from one more worker, while MRPL is the extra revenue from that output. MRPL adds the money side of the decision, which is why it matters for hiring and wages. ### Why does the MRPL curve slope downward? Because of diminishing marginal returns, each added worker usually contributes less extra output than the previous one. If the extra output falls, the extra revenue from labor tends to fall too, so MRPL declines. ### How do you use MRPL in a labor market problem? Compare MRPL to the wage. If MRPL is higher than the wage, hiring another worker increases profit. If MRPL is lower, the firm should stop hiring or reduce labor. ## Related Study Guides - [14.1 The Theory of Labor Markets](/principles-econ/unit-14/1-theory-labor-markets/study-guide/SebsteXXdmB265MT) - [14.2 Wages and Employment in an Imperfectly Competitive Labor Market](/principles-econ/unit-14/2-wages-employment-imperfectly-competitive-labor-market/study-guide/hSXtyT8EAz9mIYjB) ## About This Document Canonical Fiveable pages are available as Markdown at the same path plus `.md`. - [llms.txt](https://fiveable.me/llms.txt): index of Fiveable's sections and URL patterns - [llms-full.txt](https://fiveable.me/llms-full.txt): complete subject and unit listing - [MCP server](https://fiveable.me/mcp): call Fiveable as tools instead of fetching pages (`https://fiveable.me/api/mcp`) - [MCP server for AP teachers](https://fiveable.me/mcp/teachers): a teacher's classes, assignments and AP-rubric grading (`https://fiveable.me/api/mcp/teacher`) ## Structured Data ```json {"@context":"https://schema.org","@graph":[{"@type":"LearningResource","@id":"https://fiveable.me/principles-econ/key-terms/marginal-revenue-product-labor#resource","name":"Marginal Revenue Product of Labor | Econ","url":"https://fiveable.me/principles-econ/key-terms/marginal-revenue-product-labor","learningResourceType":"Concept explainer","educationalLevel":"AP® / High School","about":{"@id":"https://fiveable.me/principles-econ/key-terms/marginal-revenue-product-labor#term"},"audience":{"@type":"EducationalAudience","educationalRole":"student"},"dateModified":"2026-07-03T02:24:05.230Z","isPartOf":{"@type":"Collection","name":"Principles of Economics Key Terms","url":"https://fiveable.me/principles-econ/key-terms"},"author":{"@type":"Organization","@id":"https://fiveable.me/editorial#content-team","name":"Fiveable Content Team","url":"https://fiveable.me/editorial","parentOrganization":{"@id":"https://fiveable.me/#organization"},"member":[{"@type":"Person","name":"Amanda DoAmaral","sameAs":["https://www.linkedin.com/in/adoamaral"]},{"@type":"Person","name":"Becky Bahr","sameAs":["https://www.linkedin.com/in/becky-bahr-b52743132"]}]},"publisher":{"@type":"Organization","name":"Fiveable","url":"https://fiveable.me"}},{"@type":"DefinedTerm","@id":"https://fiveable.me/principles-econ/key-terms/marginal-revenue-product-labor#term","name":"Marginal Revenue Product of Labor","description":"Marginal Revenue Product of Labor is the extra revenue a firm gets from hiring one more worker. 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