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Marginal revenue

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Marginal revenue - definition

Marginal revenue is the additional income generated from the sale of one more unit of a good or service. It can be calculated by comparing the total revenue generated from a given number of sales (e.g. 11 units), and the total revenue generated from selling one extra unit (i.e. 12 units).

Example:

Output Total revenue (£) Marginal revenue (£)
10 500  
11 700 200
12 800 100

In this case, the marginal revenue from selling the 12th unit is £100 - the difference in the total revenue between selling 11 units and 12. Marginal revenue can become negative if total revenue declines, as shown below:


Output Total revenue (£) Marginal revenue (£)
10 500  
11 700 200
12 800 100
13 800 0
14 700 - 100

Marginal revenue is significant in economic theory because a profit maximising firm will produce up to the point where marginal revenue (MR) equals marginal cost (MC).

Profit maximising image

A second rule, where MR=0, is used to establish the output where total revenue is maximised. Changes in marginal revenue give us the gradient of the total revenue curve.

Marginal revenue image

The relationship between the MR and average revenue (AR) curve is also significant – whenever the AR curve falls, the MR curve falls at twice the rate.


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