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.