Marginal revenue

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. 1000 units), and the total revenue generated from selling one extra unit (i.e. 1001 units).

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.