Marginal Revenue (MR)

Definition

Marginal revenue (MR) is the additional revenue a firm earns from selling one more unit of a product or service. It measures how total revenue changes when quantity sold increases by a small amount (often one unit).

How it works

• MR depends on the market demand curve. When a firm must lower price to sell additional units (imperfect competition), MR typically falls as output rises.
• In perfect competition, firms are price-takers: price is constant across output levels, so MR equals price and equals average revenue (AR).
• If MR becomes negative, total revenue falls when more units are sold—this happens when price cuts to sell extra units reduce revenue more than the additional units add.

Graphical intuition

• On a price–quantity graph, the demand (average revenue) curve slopes downward in imperfectly competitive markets. The MR curve also slopes downward and lies below the demand curve.
• The profit-maximizing output is where MR intersects marginal cost (MC). Producing beyond that point makes MC exceed MR and reduces profit.

Formula and calculation

MR = ΔTR / ΔQ
– ΔTR = change in total revenue
– ΔQ = change in quantity

Use the formula to compute the additional revenue per unit over the chosen range (one unit or several units divided by the quantity change).

Example:
– Week 1: 100 units sold, total revenue = $1,000
– Week 2: 115 units sold, total revenue = $1,100
– ΔTR = $100, ΔQ = 15 → MR = $100 / 15 ≈ $6.67 per unit (for units 101–115)

Marginal Revenue vs. Marginal Cost

• Profit increases while MR > MC for additional units. The marginal profit on a unit equals MR − MC.
• The profit-maximizing rule: produce up to the quantity where MR = MC. If MR < MC, producing more reduces profit, and production should be curtailed.
• Example: If MC = $80 and MR = $100 for one more unit, marginal profit is $20. If MC rises to $110 while MR stays $100, the firm loses $10 on that additional unit.

Practical uses

Firms use MR to:
– Forecast how revenue responds to changes in output and pricing
– Set production levels and pricing strategies
– Identify when expanding output will stop increasing profits

Key takeaways

• Marginal revenue measures the revenue change from selling one additional unit: MR = ΔTR / ΔQ.
• In perfect competition MR = price; in imperfect competition MR declines as output rises.
• Firms maximize profit where MR = MC; if MR < MC, further production reduces profit.
• Negative MR indicates additional units reduce total revenue and typically signal the need to stop increasing output.