In our Guide to Wage Differentials, we looked at supply and demand. But how does a boss (or a football manager) decide the exact number on your paycheck?
In A-Level Economics, we use Marginal Revenue Product (MRP). Whether you are a barista or a Ballon d’Or winner, the maths is exactly the same. Let’s find out why Messi’s left foot is worth more than a fleet of private jets.
What is the definition of MRP?
The Answer: Your “Financial Footprint.”
MRP is the addition to a firm’s total revenue resulting from employing one additional unit of labour.
To calculate it, we use this formula:
MRP = MPP × MR
- MPP (Marginal Physical Product): The extra physical output you produce (e.g., the extra 30 goals Ronaldo scores).
- MR (Marginal Revenue): The price that output sells for (e.g., the ticket sales, shirt deals and TV rights those goals generate).
Why is Messi’s MRP so much higher than a Sunday League player?
The Answer: The Multiplier Effect.
A Sunday League striker might score 30 goals a year. This is a high MPP. However, the Marginal Revenue (MR) of those goals is £0. No one is buying a ticket to see them.
When Messi scores 30 goals:
- Ticket prices rise because demand is huge.
- Sponsorship deals double in value.
- Broadcasting rights skyrocket.
As his MR is in the hundreds of millions, his MRP is off the charts. A firm (or club) will keep hiring/paying as long as your MRP is greater than your Wage (W ≤ MRP).
Why do wages eventually drop?
The Answer: The Law of Diminishing Returns.
Imagine a coffee shop. One barista is great. Two are better. However, if you hire 20 baristas in a tiny shop, they start bumping into each other. They get in each other’s way.
This is the Law of Diminishing Marginal Productivity. As you add more workers to a fixed factor like a kitchen or a pitch, initially, output increases. However, the MPP (extra output) eventually falls. This is why the demand curve for labour (the MRP curve) always slopes downwards.
What are the flaws in the MRP Theory?
The Answer: It is hard to measure!
While it works for Ronaldo (you can count the shirts sold), it is harder in other jobs:
- The “Nurse” Problem: How do you measure the MR of a nurse saving a life? There is no “price tag” on the output.
- The “Team” Problem: Did the striker score because of his skill, or because the midfielder gave him a perfect pass? Separating individual MRP is often impossible.
Summary for A-Level Students
- The Demand for Labour = The MRP Curve.
- Wages are determined by Productivity (MPP) and Market Value (MR).
- If you cannot measure the output (Public Sector), MRP theory starts to break down.
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