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Marginal revenue is the incremental gain produced by selling an additional unit. It follows the law of diminishing returns, eroding as output levels increase.
The marginal revenue formula is a financial ratio measuring the change in total revenue from the additional products or units sold. It affects product price and production level depending on the industry.
All you need to remember is that marginal revenue is the revenue obtained from the additional units sold. The formula above breaks this calculation into two parts: one, change in revenue (Total Revenue – Old Revenue) and two, change in quantity (Total Quantity – Old Quantity).
Marginal revenue is equal to the ratio of the change in revenue for some change in quantity sold to that change in quantity sold. This can be formulated as: [ 12 ] M R = Δ T R Δ Q {\displaystyle MR={\frac {\Delta TR}{\Delta Q}}}
The calculation of marginal revenue involves several steps including determining a business's total revenue, performing a market analysis before calculating alt revenue, applying the marginal cost equation and analyzing the data.
By analyzing marginal revenue, businesses can better understand their pricing strategies, profit maximization points, and when to stop production. In this article, we will explain marginal revenue, its formula, how it is calculated, and why it matters in various industries.
In this article, we will demystify the marginal revenue formula using a simple example and shed some light on the shape of the marginal revenue curve, for both competitive and monopoly markets. Let's dive right in!