Cambridge International as and a level Economics Ebook

Figure 8.10 
The value of the marginal product of labour
Marginal revenue product: 
the addition to total revenue 
as a result of employing one more worker.
KEY TERM
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Cambridge International A Level Economics

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revenue product than a clerk, who in turn has a lower 
marginal revenue product than a teacher, and so on. 
It also follows that it is actually possible to measure 
marginal revenue productivity. Th
is is a very big 
assumption to make. In a manufacturing fi rm it may 
be possible to do this, but in many occupations this is 
not possible. How, for example, can we measure the 
marginal revenue product of a teacher? Th
e answer 
is ‘with great diffi
culty’. We therefore need to look at 
the other side of the labour market, that involving the 
supply of labour, to give a proper explanation of how 
wages are actually determined.
Scarcity and choice, the margin and change: 
When 
firms are deciding how much labour they need, the 
decision is based on choice at the margin. Any change 
in the wage rate or in the marginal revenue product 
of labour will lead to a change in the firm’s demand 
for labour.
KEY CONCEPT LINK
Supply of labour
Th
e supply of labour is the total number of hours 
that labour is able and willing to work at a particular 
wage rate. Th
e general principles of supply introduced 
in 
Chapter 2
 apply here. However, it is important to 
remember that in this case we are talking about people 
and their willingness to participate (or otherwise) in 
the labour market depending upon the rate or price that 
they are off ered for their services. It is useful to consider 
labour supply at three levels: that of the individual worker, 
that of a fi rm or industry and that of the economy as a 
whole. Diff erent factors aff ect supply depending upon 
which of these levels we are dealing with. Let us look 
briefl y at each in turn.