How wages are determined using marginal productivvity theory..??
The marginal revenue productivity theory of wages, also referred to as the marginal revenue product of labor, is the change in total revenue earned by a firm that results from employing one more unit of labor. It is a neoclassical model that determines, under some conditions, the optimal number of workers to employ at an exogenously determined market wage rate.
The marginal revenue product (MRP) of a worker is equal to the product of the marginal product of labor (MP) and the marginal revenue (MR), given by MR*MP = MRP. The theory states that workers will be hired up to the point where the Marginal Revenue Product is equal to the wage rate by a maximizing firm, because it is not efficient for a firm to pay its workers more than it will earn in profits from their labor.
Marginal utility states that in theory a worker will choose a higher paying job over an existing position.
Depending on inflation this regulates the transitional workforce competing for a given position.
Y=f(K,L). This is a function that explains that we have to use capital and labour to make any thing. If you encrease one unit of labour you also make Y grow. It may grow a lot or it may grow a little. If it grows a lot you get a big production and the marginal productivity of labour is rather high. When you encrease additional units of labour those increments in production will turn lower. What you pay to all workers is the last increment in production of the last worker, a wage.
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