Marginal Revenue Product

Sarah runs a bakery and is deciding whether to hire a sixth baker. Her fifth baker added 30 loaves to daily output. Bread sells at 4 dollars a loaf. So the fifth baker pulled in an extra $30\times 4=120$ dollars of revenue — that’s what the fifth baker is worth to the bakery in money terms. The sixth baker, in a kitchen that’s getting crowded, would add only 22 loaves: $22\times 4=88$ dollars. Sarah hires the sixth baker if and only if that 88 dollars exceeds the wage.

That number — the extra revenue one more worker brings in — is the marginal revenue product ($MRP$).

The derivation is short. One more worker produces $MP$ extra units of output (the marginal product). Each of those units sells for $MR$ extra revenue (the marginal revenue). So the worker’s contribution to revenue is:

Two things move $MRP$. Price scales every worker’s contribution by the same factor — double $P$ and every worker is worth twice as much. Marginal product falls as the firm hires more workers (the kitchen is fixed, the workers aren’t), so $MRP$ declines worker-by-worker. That declining shape is exactly the firm’s downward-sloping demand curve for labor.

The widget shows the two levers explicitly: price stretches every bar by the same factor, technology raises the underlying productivity of every worker. The downward slope (diminishing returns) survives both — it’s a property of fixed capital, not something a higher price or better tech can fix. The whole staircase IS the firm’s labor demand curve. We will use it as such in the next lesson.