Labour demand, marginal revenue product and supply
Labour demand, marginal revenue product and supply: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 8.3; A Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is marginal revenue product calculated?
What you will learn
- Explain derived demand for labour
- Analyse factors affecting a firm’s labour demand
- Distinguish shifts in and movements along labour demand
- Calculate marginal revenue product and derive a firm’s labour demand
- Analyse wage and non-wage factors affecting labour supply
Core model and terms
Labour demand is derived from demand for the output workers help produce. A firm’s marginal revenue product is MRP = marginal product of labour × marginal revenue from the extra output. If the product market is competitive, marginal revenue is the product price. With a competitive labour market and profit-maximising assumptions, the firm hires up to the point where MRP equals the wage; successive workers may have lower marginal product.
Apply and evaluate
Product demand, output price, worker productivity, technology, the prices of complementary or substitute inputs and a firm’s revenue conditions can shift labour demand. A change in the wage itself causes a movement along the demand curve. Labour supply to a firm or occupation depends on pay and non-wage factors such as conditions, flexibility, location, training costs, job security and career prospects; a wage change moves along supply, while these other factors can shift it.
Pause and explain
Which statement best applies labour demand, marginal revenue product and supply?
Worked example
A café worker adds 5 drinks per hour. Each drink sells for $6 and has no additional variable cost. Find the worker’s marginal revenue product and state the hiring rule in a competitive labour market.
Show the worked solution
- MRP = 5 × $6 = $30 per hour
- The firm compares each worker’s MRP with the hourly wage
- It hires up to the point where the next worker’s MRP equals or falls below the wage
Answer MRP = 5 × $6 = $30 per hour → The firm compares each worker’s MRP with the hourly wage → It hires up to the point where the next worker’s MRP equals or falls below the wage
Try a topic test
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A café worker adds 5 drinks per hour. Each drink sells for $6 and has no additional variable cost. Find the worker’s marginal revenue product and state the hiring rule in a competitive labour market.
Give me a hint
Multiply marginal product by marginal revenue, then compare it with the wage.
Compare my reasoning
- MRP = 5 × $6 = $30 per hour
- The firm compares each worker’s MRP with the hourly wage
- It hires up to the point where the next worker’s MRP equals or falls below the wage
MRP = 5 × $6 = $30 per hour The firm compares each worker’s MRP with the hourly wage It hires up to the point where the next worker’s MRP equals or falls below the wage
Look for these in your work
- MRP = 5 × $6 = $30 per hour
- The firm compares each worker’s MRP with the hourly wage
- It hires up to the point where the next worker’s MRP equals or falls below the wage
A firm’s product becomes more popular while the wage is unchanged. Explain the likely labour-demand change.
Give me a hint
Trace output demand through revenue from an extra worker.
Compare my reasoning
- Demand for the firm’s product rises
- The value of extra output can rise
- MRP and labour demand may shift right, other conditions equal
Demand for the firm’s product rises The value of extra output can rise MRP and labour demand may shift right, other conditions equal
Look for these in your work
- Demand for the firm’s product rises
- The value of extra output can rise
- MRP and labour demand may shift right, other conditions equal
An hourly wage rises while worker productivity, product demand and technology stay fixed. Is this a movement or a shift in labour demand?
Give me a hint
Change only the wage and hold the demand determinants constant.
Compare my reasoning
- The wage is the price of labour
- A higher wage changes quantity demanded along the existing labour-demand curve
- It does not by itself shift that curve
The wage is the price of labour A higher wage changes quantity demanded along the existing labour-demand curve It does not by itself shift that curve
Look for these in your work
- The wage is the price of labour
- A higher wage changes quantity demanded along the existing labour-demand curve
- It does not by itself shift that curve
A remote-work option attracts qualified workers to an occupation even at the same wage. Identify the likely labour-supply change and one factor that could offset it.
Give me a hint
Consider a non-wage job characteristic and the direction it changes participation.
Compare my reasoning
- Flexibility can make the occupation more attractive
- Labour supply may shift right
- A long commute requirement, training cost or weaker job security could offset the effect
Flexibility can make the occupation more attractive Labour supply may shift right A long commute requirement, training cost or weaker job security could offset the effect
Look for these in your work
- Flexibility can make the occupation more attractive
- Labour supply may shift right
- A long commute requirement, training cost or weaker job security could offset the effect
Common mistakes
- Using total product instead of marginal product or calling a wage change a shift of labour demand.
What can you explain now?
How is marginal revenue product calculated?
Compare with the explanation
Marginal product of labour multiplied by marginal revenue
It values the extra output generated by a worker at the revenue it earns.
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Make it stick
Before moving on, explain the central idea in labour demand, marginal revenue product and supply and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.