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The marginal revenue productivity theory of wages is a model of wage levels in which they set to match to the marginal revenue product of labor, (the value of the marginal product of labor), which is the increment to revenues caused by the increment to output produced by the last laborer employed.
The marginal product of labor is then the change in output (Y) per unit change in labor (L). In discrete terms the marginal product of labor is: . In continuous terms, the MP L is the first derivative of the production function: . [2]
Average physical product (APP), marginal physical product (MPP) In economics and in particular neoclassical economics, the marginal product or marginal physical productivity of an input (factor of production) is the change in output resulting from employing one more unit of a particular input (for instance, the change in output when a firm's labor is increased from five to six units), assuming ...
Because the marginal rate of substitution of leisure for income is also the ratio of the marginal utility of leisure (MU L) to the marginal utility of income (MU Y), one can conclude: =, where Y is total income and the right side is the wage rate.
V. Individual Supply of Labour [including variations in wages from efficiency of labour and effect of wage rates on labour supply] VI. Distribution and Economic Progress [on absolute and relative shares of labour in social income as influenced by elasticity of substitution, an increase in the supply of one factor of production, and invention].
An example diagram of Profit Maximization: In the supply and demand graph, the output of is the intersection point of (Marginal Revenue) and (Marginal Cost), where =.The firm which produces at this output level is said to maximize profits.