Marginal Revenue (MR) is the increase in the Total Revenue (TR) that is gained when the firm sells one additional (marginal) unit of that product. In other words, MR is the revenue obtained from the last unit sold.
Marginal Revenue can remain uniform at a particular level of output. However, the MR will eventually slow down as the production level rises due to the Law of Diminishing Returns. The Law of Diminishing Returns refers to a point at which the level of benefits gained is less than the amount of effort invested.
For example, we assume that when a firm sells 5, 6 and seven units of a good, the firm’s Total Revenue is $20, $25 and $28 respectively. Therefore, when the quantity sold is 5, the firm’s MR from selling the new unit or the 6th unit will be $25 – $20 = $5.
Similarly when the quantity is 6, the MR = $28 – $25 = $3.
Marginal Revenue Formula
The formula for Marginal Revenue is the change in Total Revenue divided by the change in Quantity.
Marginal Revenue For Monopolies
Monopolies have a decreasing Marginal Revenue curve.
A monopoly sets the market price and thus when a monopoly must sell an additional unit, it has to lower the price of the product in order to meet the increased demand. To calculate the monopoly’s MR, we must add up the revenue gained from selling the additional unit and subtract the revenue lost due to the decrease in price.
Thus, the MR for a monopoly will be less than the price of the product.