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What is Marginal Revenue?
Marginal revenue measures the additional income a business earns from selling one more unit of a product or service. It is essential for determining optimal pricing, output decisions, and profit maximization.
Definition
Marginal revenue is the change in total revenue resulting from the sale of one additional unit of output.
Key Takeaways
- Shows how much extra revenue each additional unit generates.
- Guides firms in deciding how much to produce.
- Profit is maximized when marginal revenue equals marginal cost.
Understanding Marginal Revenue
Marginal revenue is a crucial concept in microeconomics and business strategy. In perfectly competitive markets, marginal revenue typically equals the market price. However, in imperfectly competitive markets—such as monopolies or oligopolies—marginal revenue decreases as firms must lower prices to sell more units.
Businesses examine marginal revenue to determine whether increasing production will enhance profitability. If marginal revenue exceeds marginal cost, producing additional units is beneficial. When marginal revenue falls below marginal cost, reducing output improves profit.
Understanding marginal revenue also helps firms design pricing strategies, especially when facing downward‑sloping demand curves.
Formula (If Applicable)
Marginal Revenue (MR):
MR = ΔTR ÷ ΔQ
- ΔTR: Change in total revenue
- ΔQ: Change in quantity sold
Real-World Example
A company sells shoes. When it increases sales from 500 to 501 pairs, total revenue rises from $50,000 to $50,090. The marginal revenue of the additional pair is $90. This helps the company judge whether producing more pairs remains profitable.
Importance in Business or Economics
Marginal revenue guides pricing, sales targets, and production planning. It also supports competitive strategy, allowing firms to identify the most profitable output level and avoid overproduction or underproduction.
Types or Variations
- Marginal Revenue in Perfect Competition: Equal to market price.
- Marginal Revenue in Imperfect Competition: Decreases with additional output.
- Marginal Revenue Product: Revenue generated by hiring one additional unit of input, such as labour.
Related Terms
- Marginal Cost
- Marginal Analysis
- Total Revenue
Sources and Further Reading
- Investopedia – Marginal Revenue: https://www.investopedia.com/terms/m/marginalrevenue.asp
- Khan Academy – Revenue & Profit: https://www.khanacademy.org/economics-finance-domain
- OECD Economics: https://www.oecd.org/economy/
Quick Reference
- MR = ΔTR ÷ ΔQ
- MR helps determine optimal output.
- Profit is maximized where MR = MC.
Frequently Asked Questions (FAQs)
Why does marginal revenue fall in imperfect markets?
Because firms must reduce prices to sell additional units, this results in a lowering of incremental revenue.
Is marginal revenue always equal to price?
Only in perfectly competitive markets; otherwise, MR is lower than price.
How does marginal revenue affect pricing decisions?
It helps firms decide whether increasing output or adjusting prices increases profitability.
