What Is Marginal Revenue?

Marginal revenue (MR) is a term used in economics and finance to describe the change in total revenue when an additional unit of a good or service is sold. This concept is closely related to the concept of marginal cost, which is the additional cost of producing an additional unit of a good or service. The difference between marginal revenue and marginal cost indicates whether increasing output will result in a profit or a loss.

Understanding Marginal Revenue for College Students

To better understand the concept of marginal revenue and its implications for a business, it helps to look at an example. Consider a business that manufactures and sells widgets. The business currently produces and sells 10 widgets a month at a price of $100 each, for a total of $1,000 in revenue. The marginal cost of each additional widget produced is $20. This means that if the business were to produce and sell 11 widgets, the total revenue would be $1,100 and the total cost would be $220, meaning that the additional unit of output was sold for a profit of $880.

When the business raised the price of the widgets from $100 to $110, the marginal revenue would increase by $10 for each unit of widget produced and sold. Therefore, for 11 widgets sold, total revenue would increase to $1,210 and total cost would remain at $220. In this case, the marginal revenue was $10 for each additional unit sold, and the additional profit generated by the higher price was $990.

In summary, marginal revenue is a key concept in economics and finance that helps to determine whether increasing output leads to additional profit. It takes into consideration both the additional cost of producing an additional unit of a good or service as well as the amount that the additional unit is sold for when determining profit.