Marginal Revenue

Definition:

Marginal revenue is the additional revenue generated by selling one more unit of a product or service. It is calculated by dividing the change in total revenue by the change in the quantity sold.

Formula:

Marginal Revenue = Change in Total Revenue / Change in Quantity Sold

Explanation:

When a company increases the quantity of a product or service that it supplies, it can affect the total revenue earned. Marginal revenue is the measure of how much that revenue changes for each additional unit of product or service supplied.

For example, if a company sells 10 units of a product for a total revenue of $100, and then sells 11 units for a total revenue of $110, the change in total revenue is $10. Dividing this by the change in quantity sold (1 unit) results in a marginal revenue of $10.

Importance:

Marginal revenue is an important concept in pricing and production decisions. It helps businesses determine the optimal quantity of a product or service to produce and sell, as well as the price at which to sell it.

If the marginal revenue is greater than the marginal cost (the additional cost of producing one more unit), it is profitable to produce and sell that additional unit. On the other hand, if the marginal revenue is less than the marginal cost, it is not profitable to produce and sell that additional unit.

Conclusion:

Therefore, marginal revenue is a key metric for businesses to understand and use when making pricing and production decisions. It enables businesses to optimize their revenue and profitability by producing and selling the right quantity of a product or service at the right price.