ⓘ Marginal revenue. In microeconomics, marginal revenue is the additional revenue that will be generated by increasing product sales by one unit. In a perfectly c ..

                                     

ⓘ Marginal revenue

In microeconomics, marginal revenue is the additional revenue that will be generated by increasing product sales by one unit.

In a perfectly competitive market, the additional 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. 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 firms sales can never impact the industrys price.

However, a monopoly determines the entire industrys sales. As a result, it will have to lower the price of all units sold to increase sales by 1 unit. Therefore, the marginal revenue generated is always lower than the price the firm is able to charge for the unit sold, since each reduction in price causes unit revenue to decline on every good the firm sells. 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.

A firm’s profits will be maximized when marginal revenue MR equals marginal cost MC. If M R > M C {\displaystyle MR> MC} then a profit-maximizing firm will increase output for more profit, while if M R < M C {\displaystyle MR