Marginal Revenue
Calculate marginal revenue with MR = Change in TR / Change in Q.
Understand how additional sales affect total revenue.
The Formula
Also: MR = P × (1 + 1/Ed)
Marginal revenue is the additional income a firm earns from selling one more unit of a product. It is calculated by dividing the change in total revenue (ΔTR) by the change in quantity sold (ΔQ). This concept is fundamental to microeconomics and plays a central role in how businesses make pricing and production decisions.
For a firm operating in a perfectly competitive market, marginal revenue equals the market price. This is because a perfectly competitive firm is a price taker — it can sell as many units as it wants at the going market price without affecting that price. However, for firms with market power (monopolies, oligopolies, or monopolistic competitors), marginal revenue is less than price. This happens because to sell an additional unit, the firm must lower its price, which reduces the revenue earned on all previously sold units.
The alternative formula MR = P × (1 + 1/Ed) connects marginal revenue to price elasticity of demand (Ed). When demand is elastic (Ed less than −1), marginal revenue is positive — lowering the price increases total revenue. When demand is inelastic (Ed between −1 and 0), marginal revenue is negative — lowering the price actually decreases total revenue. At unit elasticity (Ed = −1), marginal revenue equals zero, and total revenue is maximized.
The profit-maximizing rule for any firm is to produce the quantity where marginal revenue equals marginal cost (MR = MC). At quantities below this point, producing more adds more to revenue than to cost, increasing profit. At quantities above this point, the extra cost exceeds the extra revenue, reducing profit. This simple rule guides production decisions across all market structures.
Understanding marginal revenue helps businesses avoid a common mistake: assuming that selling more always means earning more. In reality, if a firm must cut prices significantly to sell additional units, the marginal revenue from those extra sales may be very small or even negative.
Variables
| Symbol | Meaning |
|---|---|
| MR | Marginal revenue — additional revenue from one more unit sold (currency) |
| ΔTR | Change in total revenue (currency) |
| ΔQ | Change in quantity sold (units) |
| P | Price per unit (currency) |
| Ed | Price elasticity of demand (negative number, dimensionless) |
Example 1
A company sells 100 widgets at $50 each (TR = $5,000). To sell 110 widgets, it must lower the price to $48 each (TR = $5,280). Find the marginal revenue per additional widget.
ΔTR = $5,280 − $5,000 = $280
ΔQ = 110 − 100 = 10
MR = $280 / 10 = $28 per widget (much less than the $48 price)
Example 2
A monopolist sells a product at $200 and the price elasticity of demand at that point is −2.5. What is the marginal revenue?
MR = P × (1 + 1/Ed) = 200 × (1 + 1/(−2.5))
MR = 200 × (1 − 0.4) = 200 × 0.6
MR = $120
When to Use It
Marginal revenue analysis is essential for any business or economist evaluating pricing and output decisions.
- Determining the profit-maximizing output level (where MR = MC)
- Evaluating whether a price cut will increase or decrease total revenue
- Analyzing market power and pricing strategies for monopolies and oligopolies
- Understanding why firms in competitive markets cannot influence prices
- Making discount and volume pricing decisions in business
- Studying the relationship between elasticity and revenue in economics courses