How this calculator works
Marginal revenue is the extra revenue a firm receives from selling one more unit. Because a firm that faces a downward-sloping demand curve must lower its price to sell more, marginal revenue is lower than price: the extra unit brings in its price, but the price cut applies to every unit sold. Marginal revenue can even be negative when demand is inelastic, because the price cut loses more revenue on existing units than the extra unit gains. Profit is maximised where marginal revenue equals marginal cost, and this calculator is the revenue half of that rule.
Formula
Marginal revenue = change in total revenue / change in quantity. From two levels: (final revenue - initial revenue) / (final quantity - initial quantity). Change in total revenue = marginal revenue × change in quantity.
Worked example
Selling 100 units brings $10,000 and selling 120 units brings $10,800. The change in revenue is $800 and the change in quantity is 20, so marginal revenue is $40 per unit. The twentieth extra unit still adds revenue, even though the price fell across the whole quantity.
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Frequently asked questions
Why is marginal revenue below price?
To sell an extra unit, a firm with market power must lower the price on all units. The extra unit earns the new price, but the firm loses the price reduction on every unit it was already selling. The net addition is the marginal revenue.
When is marginal revenue negative?
When demand is inelastic, a price cut raises quantity by so little that total revenue falls. The marginal unit then reduces revenue, which means the firm is past the output where revenue is maximised.
How does marginal revenue relate to total revenue?
Total revenue is the sum of marginal revenues. When marginal revenue is positive, total revenue is rising as output rises; when it is negative, total revenue is falling. Total revenue peaks where marginal revenue is zero.