Marginal Revenue: Definition, Curve, Formula, Equation, Example

In manufacturing, businesses produce an output, which they then sell. The revenue from selling the output is the total amount of money that the business receives from sales. The marginal revenue is the increase in revenue that the business gets from selling one more unit of output.

The marginal revenue is important because it represents the additional revenue that the business can generate by increasing production by one unit. This is the revenue that the business can use to cover the costs of producing the additional output, such as the cost of the raw materials and the labor required to produce it.

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What is Marginal Revenue

Marginal Revenue is the revenue that a company gains from selling an additional unit of its product. This increase in revenue is due to the increased demand for the product as a result of the extra unit being sold.

In simple words, marginal revenue is the revenue that a company gets from selling one more unit of its product. The increase in revenue is because the extra unit being sold creates an additional demand for the product.

What is the marginal revenue curve

The marginal revenue curve is a graphical representation of the relationship between marginal revenue and the quantity of a good or service sold. The marginal revenue curve slopes downward because as more units are sold, the extra revenue generated by each additional unit becomes less and less.

The marginal revenue curve is downward sloping because, as more units are sold, the extra revenue generated by each additional unit declines. The marginal revenue curve is a representation of the law of diminishing returns.

How to Calculate Marginal Revenue

To calculate marginal revenue, divide the change in total revenue by the change in quantity sold, so the formula would look like this:

Marginal Revenue = Change in Revenue ΔTR / Change in Quantity ΔQ

Change in Revenue: The increase or decrease in revenue that results from selling one additional unit.

Change in Quantity: The increase or decrease in quantity sold when one additional unit is sold.

Example of How to Calculate Marginal Revenue

Let’s say a company sells widgets for $100 each. The company sells 100 widgets in the first month, 150 widgets in the second month, and 200 widgets in the third month.

The total revenue for the first month is $10,000 (100 x $100). The total revenue for the second month is $15,000 (150 x $100). The total revenue for the third month is $20,000 (200 x $100).

To calculate the marginal revenue for the second month, we need to find the change in total revenue and the change in quantity sold.

The change in total revenue is $5,000 (the difference between $15,000 and $10,000). The change in quantity sold is 50 (the difference between 150 and 100).

So the marginal revenue for the second month is $5,000/50, or $100. This means that for each additional widget sold, the company’s revenue increases by $100.

Conclusion

Marginal Revenue is an important part of a company’s pricing strategy. It helps companies understand how much revenue they can generate from selling an additional unit of their product. Understanding marginal revenue can help companies make decisions about how to price their products and how many units to produce.

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