According to basic economic principles, if a company reduces the price of its products, then this company can sell more products. However, this will bring less profit for each additional unit sold. Marginal revenue is the revenue growth resulting from the sale of an additional unit of output. Marginal revenue can be calculated using a simple formula: Marginal revenue = (change in total revenue) / (change in the number of units sold).
Marginal revenue (marginal revenue) - the maximum income received from the sale of an additional unit of production. It is necessary to compare marginal costs and marginal revenue. It is beneficial to produce a product when marginal cost is lower than marginal revenue.
Marginal income, also marginal income, marginal revenue - additional income received from the sale of an additional unit of goods. Marginal revenue is also characterized as income received from sales after recovering variable costs. Marginal revenue is a source of generating profit and covering fixed costs. Marginal revenue is an intermediate measure of profit change and is formally calculated as a derivative of the profit function.
With less competition marginal revenue is reduced because each additional unit of production is sold at a lower price.
The increase in total income occurs as a result of the fact that the quantity of goods sold increases by a small amount and is measured per unit of sales growth. If the seller cannot influence the price, then marginal revenue is equal to the price.
Marginal revenue is calculated by determining the difference between the total income received before and after an increase in production by one unit. As long as the cost of products remains constant, price and marginal revenue remain unchanged. For example, if baseball bats are sold at a fixed price of $ 10 apiece, an increase in sales by one baseball bat means an increase in total revenue by $ 10.
But often the situation is such that additionally produced products can be sold only with a reduction in price, in which case marginal cost is used, i.e. value added for the volume of production is more per unit of output. A further increase in production is not recommended if marginal costs exceed marginal revenues, as this will result in losses. Conversely, when marginal revenue exceeds marginal expenditure, the production of additional units of output is desirable.
In conditions of perfect competition, the demand curve is a straight horizontal line: marginal revenue equals price. In conditions of imperfect competition, the demand curve has a downward slope. To sell more products, the company has to lower the price. In this case, the marginal income is lower than the price: as it decreases, each additional unit of production gives an ever smaller increase in income compared to previous units.
Profit is maximum when the volume of production at which marginal revenue equal marginal cost.