Marginal Revenue Guide: How to Understand Marginal Revenue

In microeconomics, the concept of marginal revenue is the amount of revenue that a business generates from selling an extra unit of a product. The additional revenue will change depending on the change in the production price (and hence, the selling price) of the additional unit. This concept is relevant when a business changes one factor of the production process. The business compares the revenue difference between the original [amount of output](https://www.masterclass.com/articles/supply-curve-explained) of the marginal revenue product with the projected new output to assess whether a production change is cost-effective. In a competitive market, a business will be able to incrementally increase the sale price of their product to compensate for the extra production costs without affecting the [demand curve](https://www.masterclass.com/articles/demand-curve-explained) or the number of units sold. Marginal revenue is calculated by dividing the change in total revenue by the change in total output quantity: *Marginal Revenue = Change in Total Revenue / Change in Quantity*. For example, a firm sells ten units at a total revenue of $50.00, and the eleventh unit sells for an average revenue of $54.00. The marginal revenue from the sale of the additional unit is $4.00. Marginal revenue is used to calculate the financial benefits of producing a higher quantity of products than a firm has produced in the past. Companies will typically produce additional units of a product until the marginal revenue equals the marginal cost, at which point adding more units will lower the profitability associated with producing the additional units. Competitive firms can typically match the marginal cost of producing additional products with the marginal revenue gained from selling them. This is because competitive market prices dictate the sales price of their goods. In a perfectly competitive market, these companies can use marginal revenue to recoup the increase in their marginal costs resulting in a marginal benefit. In such an economic climate, consumers will continue to purchase the goods in spite of a price change. However, in an economy with monopoly competition, the economic power will be able to lower its prices and impact the overall average price of a good, impacting consumer demand and starving out the competition. Companies use marginal revenue to analyze their options to maximizing earnings while preserving savings, which is called a cost-benefit analysis. Marginal revenue is also important for monopoly companies to ensure profit maximization. Monopolies have an incentive to lower prices to increase demand for their products. For small businesses or non-monopoly companies, higher prices typically generate a revenue increase if the marginal revenue continues to equal or exceed the total cost of production. Every additional unit of output that affects the sale price must be accounted for in order to ensure that marginal revenue either equals or exceeds the total costs. Get the [MasterClass Annual Membership](https://www.masterclass.com/) for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more. Companies will assess the marginal revenue associated with making a production level change for a certain product, which will affect the cost of making a good. Read on to learn more about marginal revenue and how companies use it to make financial decisions.