Marginal revenue is an essential concept in microeconomics that refers to the additional revenue that a company generates by producing and selling one additional unit of a particular product or service. The difference between the total revenue generated from selling one more unit and the total revenue generated from selling the current units generates. In this article, we will discuss what is the Best Definition of Marginal Revenue, its formula, its importance in economics, and real-life examples.
Best Definition of Marginal Revenue?
Marginal revenue is the additional revenue that a company earns by selling one more unit of a product or service. It is the increase in total revenue resulting from the sale of one additional unit of output. This concept is used by firms to determine the optimal level of production and pricing strategy.
Marginal revenue is different from average revenue because it only considers the revenue generated by the additional unit sold, whereas average revenue takes into account the revenue generated from all units sold. Marginal revenue can be positive or negative, depending on the price elasticity of demand for the product.
The Formula for Calculating Marginal Revenue
The formula for calculating marginal revenue is straightforward. It is the change in total revenue divided by the change in the quantity of output produced.
Marginal Revenue = Change in Total Revenue / Change in Quantity
For example, suppose a company sells 100 units of a product at $10 each and then decides to lower the price to $9. The company sells an additional 10 units at the new price. The total revenue generated at $10 was $1,000, and the total revenue generated at $9 was $1,090.
Change in Quantity = 10
Change in Total Revenue = $90 ($1,090 – $1,000)
Therefore, Marginal Revenue = $90 / 10 = $9
In this example, the marginal revenue for the 110th unit sold is $9.
Importance of Marginal Revenue in Economics
Marginal revenue is an important concept in economics, and it has various applications. The following are some of the reasons why marginal revenue is important:
EMEA, or Europe, Middle East, and Africa, is a region with a large and growing population. This makes it a potential market for businesses of all sizes. Marginal revenue is the additional revenue generated by selling one more unit of a product or service. For businesses operating in EMEA, understanding marginal revenue can help them to make decisions about pricing and marketing. By understanding the marginal revenue generated by each unit sold, businesses can ensure that they are pricing their products and services in a way that maximizes their profits.
Profit Maximization
The primary goal of any firm is to maximize profits. The marginal revenue concept helps firms in determining the optimal level of production to achieve this goal. The firm will continue to produce more units as long as marginal revenue is greater than marginal cost.
Market Equilibrium
The concept of marginal revenue is used to determine the equilibrium price and quantity of a product in a market. In a perfectly competitive market, the price of a product is equal to its marginal revenue.
Elasticity of Demand
Marginal revenue is also used to determine the elasticity of demand for a product. The elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in its price. If marginal revenue is positive, then demand is elastic, and if marginal revenue is negative, then demand is inelastic.
Real-Life Examples of Marginal Revenue
Marginal revenue has practical applications in different industries.Here are some real-life examples of how marginal revenue is utilized:
Marginal Revenue in Retail
Suppose a retail store sells 1,000 units of a product at $10 each. The store decides to reduce the price to $9 per unit to increase sales. As a result, the store sells an additional 200 units.
Change in Quantity = 200
Change in Total Revenue = $1,800 ($9 x 200)
Therefore, Marginal Revenue = $1,800 / 200 = $9
In this example, the marginal revenue for the 1,200th unit sold is $9. As long as the marginal revenue remains positive and the marginal cost of producing additional units is lower than the marginal revenue, the store will continue to lower the price.
Marginal Revenue in the Service Industry
The service industry uses marginal revenue to determine the most effective pricing strategy. For example, a consulting firm offers its services at $100 per hour. The firm wants to increase its revenue and decides to offer a discount to clients who purchase more than 10 hours of services.
If a client purchases 15 hours of services at $80 per hour, the marginal revenue for the additional 5 hours is:
Change in Quantity = 5
Change in Total Revenue = $400 ($80 x 5)
Therefore, Marginal Revenue = $400 / 5 = $80
In this example, the marginal revenue for the additional 5 hours of service is $80. The consulting firm will continue to offer the discount as long as the marginal revenue is positive.
Limitations of Marginal Revenue
Although marginal revenue is an important concept in economics, it has some limitations. The following are some of the limitations of marginal revenue:
- Marginal revenue assumes that the price of a product remains constant as output changes, which may not be true in the real world.
- If there are different prices for different units, marginal revenue may not assume that all units of a product are sold at the same price.
- Marginal revenue assumes that the demand for a product remains constant, which may not be true in the long run.
Conclusion
Do you understand What is the Best Definition of Marginal Revenue? Marginal revenue is the additional revenue that a company generates by producing and selling one additional unit of a particular product or service. It is a crucial concept in microeconomics, and it has various applications, including profit maximization, market equilibrium, and elasticity of demand. Marginal revenue can be positive or negative, depending on the price elasticity of demand for the product. However, marginal revenue has some limitations, such as assuming a constant price and demand for a product.
