Marginal Revenue Calculation and Remain Constant

Understanding marginal revenue calculation is essential for pricing decisions and production strategy. Marginal revenue measures the extra revenue a firm earns from selling one additional unit. A key economic question is when prices remain constant and how that affects revenue.

This guide explains how to calculate marginal revenue, how the marginal revenue curve behaves, and why marginal revenue equals marginal cost at the profit-maximizing level of production.

What Is Marginal Revenue?

Marginal revenue is the additional revenue generated from selling one more unit of a product.

In simple terms, marginal revenue measures the change in total revenue when the number of units sold increases.

The Marginal Revenue Formula

The standard marginal revenue calculation is:

Marginal Revenue = Change in Total Revenue ÷ Change in Quantity

Or:

MR = ΔTR ÷ ΔQ

Where ΔTR is the change in total revenue and ΔQ is the change in the number of units sold.

Example of Marginal Revenue Calculation

Suppose a company sells:

• 100 units at $10 → Total revenue = $1,000
• 101 units at $10 → Total revenue = $1,010

Change in total revenue = $10
Change in quantity = 1

Marginal revenue = $10 ÷ 1 = $10

In this case, marginal revenue equals the price because the price remains constant.

When Prices Remain Constant

In a perfect competition market, firms are price takers. The price point does not change when a firm increases production.

This means:

• Marginal revenue equals price
• The marginal revenue curve is horizontal
• Additional revenue per unit is the same

When prices remain constant, revenue from each additional unit sold stays unchanged.

When Prices Do Not Remain Constant

In most markets, firms must lower prices to increase production and generate additional sales.

Example:

• 100 units at $10 → Total revenue = $1,000
• 101 units at $9.90 → Total revenue = $999.90

Change in total revenue = -$0.10
Change in quantity = 1

Marginal revenue = -$0.10

Here, marginal revenue falls because lowering the price reduces revenue on all units sold. This is why the marginal revenue curve slopes downward in imperfect markets.

Marginal Revenue and Profit Maximization

Businesses aim to maximize profits. The rule is:

Produce where marginal revenue equals marginal cost.

• If marginal revenue > marginal cost → Increase production
• If marginal revenue < marginal cost → Reduce production
• If marginal revenue equals marginal cost → Profit is maximized

When marginal revenue falls below marginal cost, additional units reduce profit.

Relationship Between Total Revenue and Marginal Revenue

Total revenue is calculated as:

Price × Number of Units Sold

Marginal revenue measures the extra revenue from each additional unit.

• If marginal revenue is positive, total revenue increases.
• If marginal revenue is zero, total revenue is at its maximum.
• If marginal revenue is negative, total revenue decreases.

Why Marginal Revenue Matters

Understanding marginal revenue helps firms:

• Choose the optimal price point
• Determine the ideal level of production
• Improve profit margins
• Analyze revenue vs marginal cost

Without calculating marginal revenue, firms risk producing too much or pricing incorrectly.

Common Misunderstandings

• Marginal revenue is not total revenue divided by quantity (that is average revenue).
• Marginal revenue does not always equal price.
• Higher additional sales do not guarantee higher profits.

Final Thoughts

Marginal revenue calculation is a core concept in economics and business strategy. It measures the extra revenue from each additional unit sold and guides decisions about pricing and output.

In markets where prices remain constant, marginal revenue equals price. In other markets, marginal revenue declines as firms increase production.

To maximize profits, produce where marginal revenue equals marginal cost.