Marginal Revenue
The added revenue from selling one more unit of output.
Formula
Variables
Example
Revenue rises $900 for 100 more units: MR = $9
How it works
Marginal revenue tells you how much extra revenue a firm earns when it sells a little more output. It is found by dividing the change in total revenue by the change in quantity because it measures the revenue earned per additional unit sold, whether that unit is one extra item or a small batch. This is especially useful when revenue does not rise by the same amount for every unit, such as when price cuts are needed to sell more.
When to use it
Use this formula when analyzing how sales changes affect revenue, especially in pricing, production, and profit-maximizing decisions. It is also useful in economics problems involving demand curves, imperfect competition, and business revenue forecasting.
Worked example, step by step
A company’s total revenue increases from $4,500 to $5,220 when output rises from 150 units to 180 units. ΔTR = $5,220 - $4,500 = $720 ΔQ = 180 - 150 = 30 units MR = ΔTR / ΔQ = 720 / 30 = $24 per unit Final answer: the marginal revenue is $24 for each additional unit sold.
Common mistakes to avoid
- Using total revenue instead of the change in total revenue
- Forgetting to divide by the change in quantity sold
- Assuming marginal revenue is always equal to the product's selling price
Did You Know?
For a competitive firm marginal revenue equals price, but for a monopolist it falls faster than price.
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