Marginal Revenue
What is Marginal Revenue?
Marginal revenue is the additional revenue a firm earns from selling one more unit of output.
For a perfectly competitive firm, marginal revenue equals the market price because the firm is a price taker. For a price maker such as a monopoly, marginal revenue lies below price and falls faster than demand, because cutting price to sell one more unit lowers revenue on all prior units. Every firm maximizes profit where marginal revenue equals marginal cost.
Marginal Revenue: a worked example
A monopolist's demand schedule says it sells 4 units at $10 and 5 units at $9. Total revenue at 4 units is 10 x 4 = $40; at 5 units it is 9 x 5 = $45. Marginal revenue for that fifth unit is (45 - 40) / (5 - 4) = $5, well under the $9 price. The reason splits into two pieces: the fifth unit brings in $9, but the four earlier units now sell for $1 less each, costing 4 x $1 = $4. So 9 - 4 = $5. A price taker at $9 loses nothing on earlier units, so its marginal revenue stays at $9.
The mistake students make with marginal revenue
The classic error is reading a monopolist's price off the marginal revenue curve. Students correctly find where MR = MC, then look straight left and call that height the price. For a straight-line demand curve the MR curve falls twice as steeply, so that number is far too low. The price sits above, on the demand curve, at the same quantity. The habit comes from perfect competition, where MR and price genuinely are the same number, so nothing goes wrong there.
Marginal Revenue questions
Why is marginal revenue less than price for a monopoly?
Marginal revenue is less than price for a monopoly because selling one more unit requires lowering the price on every unit, not just the extra one. The firm gains the new unit's price but loses a little on each unit it was already selling. Marginal revenue equals the new sale minus that loss, so it always comes out below the price charged.
Can marginal revenue be negative?
Marginal revenue turns negative when a price cut adds so few extra sales that total revenue actually falls. That happens on the inelastic lower half of a straight-line demand curve. A profit-maximizing firm never produces there, because marginal cost is positive and negative marginal revenue can never equal it, so the firm always stops somewhere on the elastic portion of demand.
How do you calculate marginal revenue from a table?
Marginal revenue is calculated from a table in two steps. First multiply price by quantity in each row to get total revenue. Then subtract each row's total revenue from the next row's and divide by the change in quantity. If quantity rises one unit at a time, the subtraction alone gives marginal revenue with no division needed.
Formula / Example
This is the live Monopoly sandbox. Drag the curves, or open the full version.
Related terms
The same idea in another course
Why marginal revenue sits below priceTotal revenue is P times Q with P depending on Q, so differentiating it needs the product rule, and the extra term is what pushes marginal revenue below price. On CalcLearn, a sister site.
Common comparisons
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