Marginal revenue is one of the most important concepts in microeconomics, business economics, and managerial economics. It helps firms understand how much additional revenue they earn by selling one more unit of a product or service. Businesses use marginal revenue to make decisions about production, pricing, sales, and profit maximisation.
In a competitive business environment, firms must decide whether increasing their sales will improve their financial performance. Selling additional products may increase total revenue, but the amount of additional revenue depends on the market price and the firm’s pricing strategy. Marginal revenue provides a useful way to measure this change.
For example, if a company earns ₹10,000 by selling 100 units and its total revenue increases to ₹10,800 after selling 110 units, the additional revenue is ₹800. The marginal revenue over these ten additional units is ₹80 per unit.
Understanding marginal revenue in economics is essential for studying consumer demand, market structures, price elasticity, and the theory of the firm.
## Meaning and Definition of Marginal Revenue
Marginal revenue refers to the additional revenue a firm receives from selling an additional unit of output. More generally, it measures the change in total revenue resulting from a change in the quantity sold.
In simple words, **marginal revenue is the extra income a business earns when it sells additional units of a product or service**.
For example, suppose a bakery earns ₹20,000 by selling 100 cakes. After selling one additional cake, its total revenue increases to ₹20,250. The marginal revenue from that additional cake is ₹250.
Marginal revenue helps businesses evaluate whether increasing sales is financially beneficial. It is particularly important when a firm must reduce its selling price to attract more customers.
## Formula for Marginal Revenue
The standard formula for marginal revenue is:
**Marginal Revenue (MR) = Change in Total Revenue ÷ Change in Quantity Sold**
Mathematically:
\[
MR=\frac{\Delta TR}{\Delta Q}
\]
Where:
– **MR** represents marginal revenue.
– **ΔTR** represents the change in total revenue.
– **ΔQ** represents the change in quantity sold.
When quantity increases by exactly one unit, marginal revenue equals the difference between total revenue after the sale and total revenue before the sale.
For example, suppose total revenue increases from ₹5,000 to ₹5,600 when quantity sold increases from 50 units to 60 units.
Change in Total Revenue = ₹5,600 − ₹5,000 = ₹600.
Change in Quantity = 60 − 50 = 10 units.
Marginal Revenue = ₹600 ÷ 10 = ₹60 per additional unit on average over this interval.
This calculation demonstrates how marginal revenue can be measured using changes in total revenue and sales quantity.
## Practical Examples of Marginal Revenue
Consider a mobile phone retailer that sells smartphones. When the retailer sells 10 phones, total revenue is ₹1,50,000. After selling 11 phones, total revenue increases to ₹1,65,000.
Marginal Revenue = ₹1,65,000 − ₹1,50,000.
Therefore, the marginal revenue from the eleventh phone is ₹15,000, assuming these figures represent the firm’s total revenue before and after that sale.
Now consider a manufacturer that sells 100 products and earns ₹50,000. If selling 101 products increases total revenue to ₹50,400, marginal revenue from the additional unit is ₹400.
These examples show that marginal revenue depends on the additional revenue generated by a change in sales, rather than on the firm’s total sales income.
## Marginal Revenue Schedule
A marginal revenue schedule is a table showing the relationship between the quantity sold, total revenue, and marginal revenue.
Consider the following hypothetical schedule for a firm operating under a single-price selling arrangement.
| Quantity Sold | Price per Unit | Total Revenue | Marginal Revenue |
|—:|—:|—:|—:|
| 0 | — | ₹0 | — |
| 1 | ₹100 | ₹100 | ₹100 |
| 2 | ₹100 | ₹200 | ₹100 |
| 3 | ₹100 | ₹300 | ₹100 |
| 4 | ₹100 | ₹400 | ₹100 |
| 5 | ₹100 | ₹500 | ₹100 |
The table assumes that the firm can sell every unit at the same price of ₹100. As a result, total revenue increases by ₹100 for every additional unit, and marginal revenue remains constant at ₹100.
This pattern is typical of a perfectly competitive firm when it can sell additional output at the prevailing market price.
## Relationship Between Marginal Revenue and Total Revenue
Marginal revenue and total revenue are closely related. Total revenue represents the firm’s overall sales income, whereas marginal revenue measures how total revenue changes when sales increase.
The relationship can be explained through three situations.
**First, when marginal revenue is positive**, selling additional units increases total revenue.
**Second, when marginal revenue is zero**, an additional unit generates no change in total revenue at the margin. In a smooth, single-peaked total revenue relationship, this may occur at the revenue-maximising output level.
**Third, when marginal revenue is negative**, selling additional units reduces total revenue.
For example, if a firm’s total revenue increases from ₹10,000 to ₹11,000 after expanding sales, marginal revenue over that change is positive. If total revenue remains ₹11,000 despite a further increase in sales, marginal revenue over that change is zero. If total revenue subsequently falls to ₹10,800, marginal revenue over the latest change is negative.
This relationship is important because it helps firms identify whether changes in output are increasing or decreasing sales income.
## Relationship Between Marginal Revenue and Average Revenue
Average revenue and marginal revenue are two different measures of a firm’s revenue performance.
Average revenue refers to revenue earned per unit sold, while marginal revenue measures the additional revenue generated by additional sales.
The formula for average revenue is:
Average Revenue = Total Revenue ÷ Quantity Sold**
Under perfect competition, an individual firm is a price taker and sells its output at the market price. In the standard model, price, average revenue, and marginal revenue are equal.
However, under a downward-sloping demand curve, a firm that must lower its price to sell more units generally experiences marginal revenue below average revenue. This occurs because the lower price may apply not only to the additional unit but also to units that could previously have been sold at a higher price.
Understanding this relationship is essential for analysing monopoly, monopolistic competition, and other market situations in which firms have some influence over prices.
Marginal Revenue Under Perfect Competition
Perfect competition is a market structure characterised by many buyers and sellers, homogeneous products, and freedom of entry and exit under the standard textbook assumptions.
An individual firm operating under perfect competition cannot independently determine the market price. It accepts the prevailing market price and is known as a price taker.
Consequently, marginal revenue remains equal to price as the firm increases output, provided the market price remains unchanged.
For example, if the market price of wheat is ₹2,500 per quintal, a farmer selling an additional quintal receives ₹2,500 in additional revenue under the standard competitive model.
Therefore:
**Price = Average Revenue = Marginal Revenue**
This relationship plays an important role in explaining the output decisions of perfectly competitive firms.
## Marginal Revenue Under Monopoly
A monopoly exists when a single firm supplies a product or service without close substitutes and barriers restrict competition.
Unlike a perfectly competitive firm, a monopolist faces the market demand curve and can influence the price through its output decisions. However, to sell additional units, the monopolist generally needs to reduce its price.
Under the standard single-price monopoly model, marginal revenue is lower than the price when demand slopes downward and the firm must reduce the price on previously sold units to increase sales.
For example, suppose a monopolist sells 10 units at ₹500 each. Total revenue is ₹5,000. To sell 11 units, it reduces the price to ₹480 for every unit. Total revenue becomes ₹5,280.
Marginal Revenue = ₹5,280 − ₹5,000 = ₹280.
Although the eleventh unit sells at ₹480, marginal revenue is only ₹280 because the lower price also reduces the revenue received on the original ten units.
This example demonstrates why marginal revenue can be lower than price under monopoly.
## Marginal Revenue and Profit Maximisation
One of the most important applications of marginal revenue is determining the profit-maximising level of output.
In standard economic theory, a firm maximises profit at an output where marginal revenue equals marginal cost, provided the relevant conditions for a maximum are satisfied.
Marginal cost refers to the additional cost of producing one more unit of output.
**Profit-maximising condition: MR = MC**
If marginal revenue is greater than marginal cost, producing an additional unit may increase profit because the extra revenue exceeds the extra cost.
If marginal revenue is less than marginal cost, producing an additional unit may reduce profit because the extra cost exceeds the extra revenue.
For example, suppose a firm earns ₹200 in marginal revenue from an additional unit and incurs a marginal cost of ₹150. Producing that unit increases profit by ₹50, assuming other factors remain unchanged.
However, if marginal revenue is ₹120 and marginal cost is ₹160, producing the additional unit reduces profit by ₹40.
The condition MR = MC is a central principle of managerial economics and microeconomic analysis. It should be applied alongside other relevant conditions, including the shape of marginal revenue and marginal cost curves and any production or shutdown constraints.
## Importance of Marginal Revenue in Business Decision-Making
Marginal revenue is important because it helps businesses evaluate the financial consequences of increasing sales and production.
First, it supports output decisions by showing how much additional revenue a firm can earn from expanding sales.
Second, it helps businesses develop pricing strategies. Firms can examine how changes in price influence the revenue generated by additional sales.
Third, marginal revenue supports profit maximisation by allowing managers to compare additional revenue with marginal cost.
Fourth, it helps economists understand the behaviour of firms under different market structures, including perfect competition and monopoly.
Finally, marginal revenue contributes to demand analysis and revenue forecasting. Businesses can use information about prices, customer responses, and sales patterns to evaluate alternative production plans.
Nevertheless, marginal revenue should not be considered in isolation. A sound business decision also requires information about costs, capacity, market demand, competition, and long-term business objectives.
## Difference Between Marginal Revenue and Marginal Cost
Marginal revenue and marginal cost are closely related concepts, but they measure different economic outcomes.
Marginal revenue measures the additional income generated by selling additional output. Marginal cost measures the additional expenditure required to produce additional output.
For example, if selling an additional product generates ₹500 in marginal revenue and producing it costs ₹350, the additional contribution to profit is ₹150.
If the marginal cost rises to ₹550 while marginal revenue remains ₹500, producing that additional unit reduces profit by ₹50.
This comparison helps businesses identify whether expanding production is economically beneficial and supports decisions about the appropriate level of output.
## Limitations of Marginal Revenue Analysis
Although marginal revenue is a valuable economic tool, it has certain limitations. In real markets, prices and consumer demand may change unexpectedly. Firms may also lack accurate information about how customers will respond to price changes.
In addition, marginal revenue calculations can become more complicated when businesses sell multiple products, offer discounts, negotiate individual contracts, or operate under capacity constraints.
Marginal revenue alone cannot determine the profitability of a business because it does not account for all fixed costs, operating expenses, or long-term investment requirements.
For this reason, firms should combine marginal revenue analysis with marginal cost analysis, demand forecasting, financial planning, and broader market research.
Conclusion
Marginal revenue in economics refers to the additional revenue a firm earns when its sales quantity increases. It is calculated by dividing the change in total revenue by the change in quantity sold.
The concept helps explain how total revenue changes with output, why marginal revenue differs across market structures, and how firms make pricing and production decisions. Under perfect competition, marginal revenue equals the market price, while under a standard monopoly model, marginal revenue is generally below price when demand slopes downward.
Most importantly, marginal revenue is essential for understanding profit maximisation. By comparing marginal revenue with marginal cost, firms can evaluate whether increasing or reducing output is likely to improve profitability.
In conclusion, **marginal revenue is a fundamental concept in microeconomics that helps businesses and economists understand additional sales income, pricing behaviour, production decisions, and the conditions for profit maximisation.**
