What Is a Marginal Revenue Formula?

A marginal revenue formula is an economic concept used to calculate the additional revenue a company can expect to generate from producing and selling one more unit of a product or service. By using the formula, businesses can understand the effect that producing or selling one more product has on its total revenue. This knowledge can be used to help businesses optimize their production and sales as well as better understand the relationship between production and pricing.

Calculating Marginal Revenue

The basic marginal revenue formula is MR = change in total revenue / change in quantity. This formula is generally used to calculate marginal revenue for a given price. However, there is also a version of the formula for calculating marginal revenue when the price changes. This formula is MR = change in total revenue / change in price. This version of the formula can be used to help determine the most profitable pricing strategy for a given product or service.

Examples of Marginal Revenue Formula

Let’s say a company is selling a product for $5 per unit. Using the marginal revenue formula, they could calculate how much their total revenue would increase if they sold one more unit. If the total revenue increases by $4 when one unit is sold, then the marginal revenue for the product would be 4 / 1 = $4. This would be the marginal revenue for the $5 price. However, if the company increased the price to $6, then the marginal revenue would be 5 / 1 = $5.

Conclusion

The marginal revenue formula is a helpful economic tool used to calculate the increase in total revenue associated with one more unit of a product or service. By using this formula, businesses can understand how the production or sales of one more unit can affect their total revenue, allowing them to better understand the relationship between production and pricing.