Marginal revenue (or marginal benefit) is a central concept in microeconomics that describes the additional total revenue generated by increasing product sales by 1 unit.[1][2][3][4][5] Marginal revenue is the increase in revenue from the sale of one additional unit of product, i.e., the revenue from the sale of the last unit of product. It can be positive or negative. Marginal revenue is an important concept in vendor analysis.[6][7] To derive the value of marginal revenue, it is required to examine the difference between the aggregate benefits a firm received from the quantity of a good and service produced last period and the current period with one extra unit increase in the rate of production.[8] Marginal revenue is a fundamental tool for economic decision making within a firm's setting, together with marginal cost to be considered.[9]
In a perfectly competitive market, the incremental revenue generated by selling an additional unit of a good is equal to the price the firm is able to charge the buyer of the good.[3][10] This is because a firm in a competitive market will always get the same price for every unit it sells regardless of the number of units the firm sells since the firm's sales can never impact the industry's price.[1][3] Therefore, in a perfectly competitive market, firms set the price level equal to their marginal revenue .[8]
In imperfect competition, a monopoly firm is a large producer in the market and changes in its output levels impact market prices, determining the whole industry's sales. Therefore, a monopoly firm lowers its price on all units sold in order to increase output (quantity) by 1 unit.[1][3][8] Since a reduction in price leads to a decline in revenue on each good sold by the firm, the marginal revenue generated is always lower than the price level charged .[1][3][8] The marginal revenue (the increase in total revenue) is the price the firm gets on the additional unit sold, less the revenue lost by reducing the price on all other units that were sold prior to the decrease in price. Marginal revenue is the concept of a firm sacrificing the opportunity to sell the current output at a certain price, in order to sell a higher quantity at a reduced price.[8]
Profit maximization occurs at the point where marginal revenue (MR) equals marginal cost (MC). If then a profit-maximizing firm will increase output to generate more profit, while if then the firm will decrease output to gain additional profit. Thus the firm will choose the profit-maximizing level of output for which .[11]
- ^ a b c d Bradley R. chiller, "Essentials of Economics", New York: McGraw-Hill, Inc., 1991.
- ^ Edwin Mansfield, "Micro-Economics Theory and Applications, 3rd Edition", New York and London:W.W. Norton and Company, 1979.
- ^ a b c d e Roger LeRoy Miller, "Intermediate Microeconomics Theory Issues Applications, Third Edition", New York: McGraw-Hill, Inc, 1982.
- ^ Tirole, Jean, "The Theory of Industrial Organization", Cambridge, Massachusetts: The MIT Press, 1988.
- ^ John Black, "Oxford Dictionary of Economics", New York: Oxford University Press, 2003.
- ^ Primont, D. F., & Primont, D. (1995). Further Evidence of Positively Sloping Marginal Revenue. Southern Economic Journal, 62(2), 481–485. https://doi.org/10.2307/1060699
- ^ Wilson, T. (1979). The Price of Oil: A Case of Negative Marginal Revenue. The Journal of Industrial Economics, 27(4), 301–315. https://doi.org/10.2307/2097955
- ^ a b c d e Schiller, Bradley R.; Gebhardt, Karen (2017). Essentials of economics (10th ed.). New York: McGraw-Hill/Irwin. ISBN 978-1-259-23570-2. OCLC 955345952.
- ^ Mankiw, N. Gregory (2009). Principles of microeconomics (5th ed.). Mason, OH: South-Western Cengage Learning. ISBN 978-0-324-58998-6. OCLC 226358094.
- ^ O'Sullivan & Sheffrin (2003), p. 112.
- ^ Fisher, Timothy C. G.; Prentice, David; Waschik, Robert G. (2010). Managerial economics : a strategic approach. Routledge. p. 33. ISBN 9780415495172. OCLC 432989728.