Marginal Revenue
Marginal revenue refers to the additional revenue that a firm earns from selling one more unit of a product or service. It is calculated as the change in total revenue divided by the change in quantity sold. Marginal revenue is crucial in a firm's pricing and production decisions, as it helps determine the optimal level of production to maximize profit. In a perfectly competitive market, marginal revenue equals the price of the product. However, in a monopoly or imperfectly competitive market, marginal revenue is typically less than the price of the product because the firm must lower the price to sell additional units.
Definition: Marginal revenue is the additional income a company earns from selling one more unit of a product or service. It is the ratio of the change in total revenue to the change in sales volume. Marginal revenue plays a crucial role in pricing and production decisions, as it helps companies determine the optimal production level to maximize profits. In a perfectly competitive market, marginal revenue equals the product's price, but in a monopoly or imperfect competition market, marginal revenue is usually lower than the product's price because the company needs to lower the price to sell more products.
Origin: The concept of marginal revenue originated from the marginalist economic theory of the 19th century. Marginalists like Alfred Marshall and Léon Walras introduced the concept by studying marginal utility and marginal cost. This theory helped economists and businesses better understand and analyze market behavior and business decisions.
Categories and Characteristics: Marginal revenue can be categorized based on market structure into marginal revenue in a perfectly competitive market and marginal revenue in an imperfect competition market. In a perfectly competitive market, marginal revenue equals the product's price because companies are price takers. In an imperfect competition market, marginal revenue is lower than the product's price because companies need to lower the price to sell more products. Characteristics of marginal revenue include: 1. It is a dynamic indicator that changes with sales volume; 2. It plays a key role in a company's production and pricing decisions; 3. It, along with marginal cost, determines the optimal production level for a company.
Specific Cases: Case 1: Suppose a coffee shop sells each cup of coffee for $5. When the sales volume increases from 100 cups to 101 cups, total revenue increases from $500 to $505, making the marginal revenue $5. Case 2: A monopoly company sells a unique electronic product for $1000. When the company decides to increase sales volume from 10 units to 11 units, it lowers the price to $950 to attract more consumers. Total revenue increases from $10,000 to $10,450, making the marginal revenue $450.
Common Questions: 1. Why is marginal revenue lower than the product price in an imperfect competition market? Because companies need to lower the price to sell more products. 2. What is the relationship between marginal revenue and marginal cost? The relationship between marginal revenue and marginal cost determines the optimal production level for a company. When marginal revenue equals marginal cost, the company's profit is maximized.
