The Marginal Productivity Theory

The Marginal Productivity Theory explains how wages and returns are determined in a competitive market. It states that a worker's paycheck is based on the additional value they generate for their employer—called their marginal productivity. In other words, if a worker's extra output increases a company's sales or profit by a certain amount, their wage tends to be equal to that additional contribution. This theory helps explain why more skilled or efficient workers tend to earn higher wages, as they add more value per hour worked compared to less skilled workers.