Marginal revenue is a concept in economics that measures the change in a firm’s revenue resulting from the sale of one additional unit of a product or service. It is an important metric for businesses to consider when making decisions about pricing and production levels. In this article, we’ll provide a comprehensive guide to calculating marginal revenue, including key concepts, formulas, and examples.
Key Concepts
Before we dive into the formula for calculating marginal revenue, it’s important to understand a few key concepts.
- Total Revenue
Total revenue is the total amount of money a firm earns from the sale of its products or services. It is calculated by multiplying the price of the product by the quantity sold.
- Average Revenue
Average revenue is the average amount of revenue generated per unit of output. It is calculated by dividing total revenue by the quantity sold.
- Marginal Revenue
Marginal revenue is the change in total revenue resulting from the sale of one additional unit of a product or service. It is calculated by subtracting the total revenue generated by the sale of n-1 units from the total revenue generated by the sale of n units, where n is the total number of units sold.
Formula for Calculating Marginal Revenue
The formula for calculating marginal revenue is as follows:
MR = ΔTR/ΔQ
Where: MR = Marginal revenue ΔTR = Change in total revenue ΔQ = Change in quantity sold
It’s important to note that the change in quantity sold should only be one unit. This is because marginal revenue measures the change in revenue resulting from the sale of one additional unit of a product or service.
Examples
Let’s look at a few examples to illustrate how to calculate marginal revenue.
Example 1
A company sells 100 units of a product at a price of $10 per unit. The company decides to lower the price to $9 per unit and sells an additional 10 units. What is the marginal revenue for the additional 10 units sold?
Total revenue before the price change = 100 x $10 = $1000 Total revenue after the price change = 110 x $9 = $990 ΔTR = $990 – $1000 = -$10 ΔQ = 10 MR = -$10/10 = -$1
In this example, the marginal revenue for the additional 10 units sold is -$1. This means that the company earned $1 less in revenue for each additional unit sold.
Example 2
A company sells 100 units of a product at a price of $10 per unit. The company decides to increase the price to $12 per unit and sells an additional 5 units. What is the marginal revenue for the additional 5 units sold?
Total revenue before the price change = 100 x $10 = $1000 Total revenue after the price change = 105 x $12 = $1260 ΔTR = $1260 – $1000 = $260 ΔQ = 5 MR = $260/5 = $52
In this example, the marginal revenue for the additional 5 units sold is $52. This means that the company earned $52 more in revenue for each additional unit sold.
Conclusion
Marginal revenue is an important concept in economics that helps businesses make informed decisions about pricing and production. It measures the change in a firm’s revenue resulting from the sale of one additional unit of a product or service.
To calculate marginal revenue, the formula MR = ΔTR/ΔQ is used, where ΔTR represents the change in total revenue and ΔQ represents the change in quantity sold for one additional unit. It’s important to remember that marginal revenue should only be calculated for one additional unit to accurately reflect the change in revenue.
By understanding marginal revenue, businesses can make informed decisions about pricing and production levels. For example, if the marginal revenue for an additional unit sold is positive, it may be profitable to increase production and sales. On the other hand, if the marginal revenue is negative, it may be more profitable to decrease production or adjust the pricing strategy.
Your Wolf Academy offers a range of educational resources to help traders succeed, including free signals, technical analysis, and weekly webinars. Sign up today and get a recommendation for a regulated brokerage company that suits your needs.
