What a Worker Is Worth to the Firm

With capital fixed, each extra worker adds less output than the one before: four widgets, then three, then two, then one. That is the marginal product of labor.

What a worker is worth to the firm is that marginal product valued in money. A firm selling in a perfectly competitive market gets the market price for every unit, so the value of the marginal product is marginal product times price: at $4 a widget, $16, $12, $8, $4. A firm with market power must cut its price to sell more, so what counts is marginal revenue, not price, and marginal revenue is falling too. Multiplying two falling numbers gives the marginal revenue product, $16, $9, $4, $1, which drops away much faster. The slider picks which of the three the chart shows.