Glossary term
Marginal Revenue (MR)
Marginal revenue is the additional revenue a business earns from selling one more unit of output.
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What Is Marginal Revenue (MR)?
Marginal revenue, or MR, is the additional revenue a business earns from selling one more unit of output. It measures the change in total revenue that results from a small increase in quantity sold.
The concept matters because profit decisions are made at the margin. A company does not only ask whether total revenue is high. It asks whether selling the next unit adds more revenue than cost, capacity strain, discounts, or complexity.
Key Takeaways
- Marginal revenue is the extra revenue from selling one additional unit.
- It is calculated as the change in total revenue divided by the change in quantity.
- In perfectly competitive markets, marginal revenue often equals the market price.
- For firms with pricing power, marginal revenue can fall as output rises because additional units may require lower prices.
- Profit is typically maximized where marginal revenue equals marginal cost, assuming standard economic conditions.
Formula
If total revenue rises from $10,000 to $10,800 after selling 20 more units, marginal revenue over that range is $40 per unit. The calculation is $800 divided by 20 units.
For a single extra unit, marginal revenue is the revenue added by that unit. In real businesses, managers often estimate it over small ranges because pricing, discounts, capacity, and customer behavior do not always move one unit at a time.
Marginal Revenue and Pricing Power
A firm in a highly competitive market may sell all it can at the market price. In that case, the marginal revenue from the next unit is close to the price received. A commodity producer or small seller with no pricing power often faces this situation.
A firm with pricing power faces a different problem. To sell more units, it may need to lower price, offer discounts, or target lower-margin customers. If the lower price applies to many units, marginal revenue can be less than the selling price of the additional unit.
MR, Marginal Cost, and Profit
Marginal revenue is most useful when compared with marginal cost. If marginal revenue exceeds marginal cost, producing and selling the next unit can add profit. If marginal cost exceeds marginal revenue, the next unit can reduce profit even if it increases total revenue.
This is why revenue growth alone can mislead. A company can grow sales by discounting heavily, taking low-quality orders, or stretching operations in a way that reduces margin. The marginal view asks whether incremental growth is economically worthwhile.
Business Examples
Situation | Marginal revenue question |
|---|---|
Retail discount | Does the extra volume offset the lower price? |
Software seat expansion | Does another customer add revenue with little extra cost? |
Manufacturing overtime | Does the added order cover overtime, scrap, and rush costs? |
Airline ticket pricing | Does selling a low-fare seat add value before departure? |
How Managers Use It
Managers use marginal revenue in pricing, capacity planning, sales incentives, product mix, and promotion decisions. It can help decide whether to accept a special order, reduce price, add production, or stop chasing unprofitable volume.
The concept also links to market structure. In monopoly or differentiated-product settings, marginal revenue often slopes downward as quantity rises. In competitive settings, the firm may be a price taker, so marginal revenue is much closer to price.
Reading It Carefully
Marginal revenue is not always visible in accounting statements. Financial statements show total revenue over a period, not the revenue from the next decision. Businesses need contribution-margin analysis, customer economics, price testing, or demand estimates to understand the marginal effect.
It also changes over time. A promotion may have high marginal revenue at first and lower marginal revenue as the best customers are reached. A capacity-constrained business may see marginal revenue rise during peak periods and fall during slow periods.
The Bottom Line
Marginal revenue is the extra revenue generated by selling one more unit. It is useful because profitable decisions depend on comparing incremental revenue with incremental cost, not just chasing higher total sales.