Marginal Revenue
Summary Definition: The additional revenue a business earns from selling one more unit of a product or service.
What is Marginal Revenue?
Marginal revenue is a business’s increased revenue from selling one additional unit of its goods or services. It reflects how total revenue changes as increases in output and supply affect demand and sales, thus helping businesses determine whether producing and selling extra units is financially beneficial.
For example, if producing more units maintains demand and revenue, a business may expand production. However, if increased supply leads to lower demand (and thus prices), expansion may not be worth it, especially if extra revenue falls short of production costs.
Key Takeaways
- Marginal revenue measures the extra income earned from selling one additional unit, helping businesses evaluate profitability per unit.
- Comparing marginal revenue with marginal cost (the expense of producing one more unit) is essential for determining the most profitable level of production.
- Measurements like a marginal revenue curve help finance teams make data-driven pricing and output decisions.
Marginal Cost vs. Marginal Revenue
Marginal cost is the added expense of producing one additional unit of product or service. When marginal revenue exceeds marginal cost, the business gains more from selling the unit than it spends making it, meaning expansion is a smart move. Conversely, if the marginal cost is higher, the added production could cut into profits or even cause losses.
Marginal Revenue vs. Marginal Revenue Product
Marginal revenue and marginal revenue product (MRP) refer to two distinct, but related, financial and economic concepts. Finance and operations teams rely on both to align production decisions with profitability goals and resource planning.
While marginal revenue is the additional income from selling one more unit, MRP measures the extra revenue generated by employing one more unit of input, like labor or equipment. As such, businesses typically use MRP formulas to decide whether hiring more staff or expanding operations will lead to more revenue.
In other words, marginal revenue gauges the profitability of a product while MRP gauges the profitability of the production process.
| Description | Uses | |
|---|---|---|
| Marginal Revenue | The added income from selling one more unit of a product or service | Assess if increasing sales will boost revenue |
| Marginal Cost | The added expense of producing one more unit of a product or service | Determine the most profitable level of production |
| Marginal Revenue Product | The added income from adding one more unit of input (e.g., labor) | Evaluate if hiring or investing in more production will boost revenue |
Why is Learning How to Find Marginal Revenue Important?
Learning how to calculate marginal revenue helps businesses make smarter pricing and production decisions by giving insight into whether increased output will increase or decrease profits.
By comparing marginal revenue and marginal cost, finance teams can identify the ideal production level to maximize profits without overspending. This, in turn, plays a key role in setting competitive prices, budget forecasting, and adapting to supply and demand shifts.
How is Marginal Revenue Calculated?
The marginal revenue formula is relatively straightforward:
Marginal Revenue Formula
Marginal Revenue = Revenue Increase ÷ Change in Units
Marginal Revenue Calculation Examples
If Business A sells 100 units at $10 each, it generates $1,000 in total revenue. If revenue increases to $1,007 after selling one more unit, the marginal revenue of the 101st unit is $7.
| $7 = ($1,007 - $1,000) ÷ (101 - 100) $7 = 7 ÷ 1 |
To fully evaluate profitability, the business would next compare this amount with the marginal cost of producing the 101st unit. If that cost were $4, increasing production would be a worthwhile decision. If, however, that cost were $9, the business should reconsider expanding its operations.
Now, imagine a service provider earning $5,000 from 50 clients. If adding a 51st client raises total revenue to $5,150, the marginal revenue of that client is $150:
| $150 = ($5,150 - $5,000) ÷ (51 - 50) $150 = 150 ÷ 1 |
To determine if hiring more staff to serve that client is a wise financial decision, the company would use a marginal revenue product formula to determine if hiring a new employee exceeds the $150.
What is a Marginal Revenue Curve?
A marginal revenue curve shows how marginal revenue changes as additional units are sold.
Typically downward sloping on a marginal revenue graph, the curve illustrates how earnings from each extra unit often decrease as inventory increases, especially in competitive or price-sensitive markets. This sometimes happens when businesses lower the selling price to boost the number of units sold, reducing the additional revenue generated per unit.
Finance professionals typically use the curve and the marginal revenue equation to find where marginal cost and revenue meet, helping identify the most profitable output level.
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