Calculator
Formula
Marginal Revenue = Change in Total Revenue (ΔTR) ÷ Change in Quantity (ΔQ)
Where:
- Δ Total Revenue (TR) is the change in total revenue from selling one more unit.
- Δ Quantity (Q) is the change in the number of units sold.
How to Calculate Marginal Revenue – Step by Step
Step 1 – Find the change in total revenue
The change in total revenue is the difference in the total revenue between the 1st and 2nd time period.
Step 2 – Find the change in quantity
The change in quantity is the difference in the amount sold between the 1st and 2nd time period.
Step 3 – Calculate the marginal revenue
Use the formula and calculator above to calculate the marginal revenue.
Example
A coffee shop sells 20,000 cups of coffee in the first month, for total revenue of $100,000. They sell 22,000 cups of coffee in the 2nd month, for total revenue of $115,000.
Here’s how you would calculate the marginal revenue:
Step 1: Find the change in total revenue:
Change in total revenue = Revenue in the 2nd month – Revenue in the 1st month = $115,000 – $100,000 = $15,000
Step 2: Find the change in the number of Units Sold (Q)
Change in number of units sold = Number of units sold in the 2nd month – Number of units sold in the 1st month = 22,000 – 20,000 = 2,000
Step 3: Calculate Marginal Revenue (MR)
MR = $15,000 ÷ 2,000 = $5
In this example, the marginal revenue is $7.5. This means that selling additional cups of coffee above 20,000 cups will bring in $7.50 in revenue per cup.
Definition – What is Marginal Revenue?
Marginal revenue (MR) refers to the additional revenue a business earns from selling one more unit of a good or service. It shows how much the total revenue increases (or decreases) with each additional sale. Marginal revenue is help in finding the most profitable level of production and is closely tied to pricing strategies.
Marginal Cost vs. Marginal Revenue
Marginal Cost looks at the cost of producing one extra unit. It is similar to MR in that
While marginal revenue shows the additional income generated by selling one more unit, marginal cost represents the additional expense incurred by producing one more unit. Businesses seek to balance these two concepts to maximize profit. As long as marginal revenue exceeds marginal cost, the company should continue producing additional units to increase profitability.
Total Revenue vs. Marginal Revenue
Marginal revenue is the extra revenue from selling one more unit, while total revenue represents the total amount of money a business earns from selling all units. Marginal revenue helps explain how total revenue changes with each additional sale, providing insight into whether increasing sales will boost or reduce profitability.
For instance, if marginal revenue declines as more units are sold, it indicates that the business may have to lower prices, which can lead to diminishing returns on total revenue.
Average Revenue vs. Marginal Revenue
Marginal revenue measures the extra income from selling one more unit, whereas average revenue is the total revenue divided by the quantity sold. Average revenue typically equals the price of the product in competitive markets, but marginal revenue can fall below average revenue when businesses need to reduce prices to increase sales. Analyzing both helps firms understand their revenue structure and pricing effectiveness.
Tables
Marginal revenue, based on an increase of 1,000 units
| Change in Total Revenue | Marginal Revenue |
| $10 | $0.01 |
| $100 | $0.10 |
| $1,000 | $1 |
| $5,000 | $5 |
| $10,000 | $10 |
| $50,000 | $50 |
| $100,000 | $100 |
| $250,000 | $250 |
| $500,000 | $500 |
| $1,000,000 | $1,000 |
Marginal revenue, assuming a change in total cost of $100,000
| Change in Units Sold | Marginal Revenue |
| 1 | $100,000 |
| 10 | $10,000 |
| 100 | $1,000 |
| 1,000 | $100 |
| 5,000 | $20 |
| 10,000 | $10 |
| 50,000 | $2 |
| 100,000 | $1 |
| 250,000 | $0.40 |
| 1,000,000 | $0.10 |
FAQs
Q: Can marginal revenue be negative?
A: Yes, but rarely. Marginal revenue can be negative if total revenue decreases when more units are sold.
Q: What happens if marginal revenue is equal to zero?
A: If marginal revenue is zero, it means that total revenue has reached its maximum point. Producing additional units will start to decrease total revenue, indicating that the firm should not increase output further.
Q: How can a firm use marginal revenue to maximize profit?
A: A firm maximizes profit by producing the quantity where marginal revenue equals marginal cost (MR = MC). Beyond this point, the cost of producing additional units is more than the revenue they bring in.
Sources and more resources
- Wikipedia contributors. (2024b, June 4). Marginal revenue. Wikipedia. https://en.wikipedia.org/wiki/Marginal_revenue
- Khan Academy. (n.d.-f). https://www.khanacademy.org/economics-finance-domain/microeconomics/firm-economic-profit/average-costs-margin-rev/v/marginal-revenue-and-marginal-cost
- Kacapyr, E., & Redelsheimer, J., & Musgrave, F. Barron’s AP Microeconomics / Macroeconomics (6th ed.). (2018). United States of America: Barron’s. ISBN: 978-1-4380-1065-6. Page 108.
- Pindyck, R., & Rubinfeld, D., Microeconomics (8th ed.), (2013). United States of America: Pearson. ISBN 13: 978-0-13-285712-3. Page 284.
- Nicholson, W., & Snyder, C. Microeconomic Theory – Basic Principles and Extensions (10th ed.). (2008). United States of America: Thomas South-Western. ISBN 13: 978-0-324-42162-0. Page 361.
- Greenlaw, S., & Shapiro, D., Principles of Microeconomics 2e. (2018). Houston: Rice University OpenStax. ISBN 13: 978-1-947172-35-7. Page 191.