What is Marginal Revenue?
Marginal revenue is the extra money a company makes by selling a single additional unit of a product or service. It reveals the dollar change in revenue resulting from the sale of an additional unit. Let's consider this example: assuming a company sells 100 units for $10 each, earning it $1,000; then sells one more unit at $9. The marginal revenue for the added unit is $9. It enables firms to comprehend pricing strategies and find ideal levels of production that maximize profits.
How to Calculate Marginal Revenue?
The marginal revenue is calculated as the change in total revenue divided by the change in quantity sold. For example, from 100 to 120 units sold, the total revenue increased from $1,000 to $1,200, and the marginal revenue would be ($1,200 - $1,000) / (120 - 100) = $10 per unit. This allows an organization to identify how many dollars each additional unit brings in and evaluate the feasibility of expanding output.
Marginal Revenue Formula
The formula for marginal revenue is:
- Marginal Revenue (MR)= Change in Total Revenue (ΔTR) / Change in Quantity Sold (ΔQ).
- This is the formula used to determine how much extra revenue is generated from additional sales. For example, suppose a firm generates $500 more in revenues when it sells 50 more units.
- Its marginal revenue is $500 / 50 = $10. Marginal revenue helps businesses in determining prices and diminishing returns.
Marginal Cost
Marginal cost is the additional cost incurred to produce one more unit of a good or service. It is calculated by dividing the change in total cost by the change in quantity produced. For example, if producing 100 units cost $1,000 and producing 101 units costs $1,010, the marginal cost is $10. Businesses use marginal cost to decide optimal production levels, balancing it against marginal revenue for profitability.
Total Revenue
Total revenue refers to the total income received from the sale of goods or services. It can be determined by multiplying the price of one unit by the total units sold. For example, if a business sells 500 units at $20 each, then its total revenue would be $500 × $20 = $10,000. Total revenue is very important because it enables a business to gauge how well it operates and plan accordingly for its finances.
Average Revenue
Average revenue refers to the revenue per unit level of output sold, and it is calculated as total revenue divided by quantity sold. For instance, if a company realizes a revenue of $5,000 from selling 250 units, then its average revenue is $5,000 / 250 = $20 per unit. It is an important concept in business as it highlights the efficiency of revenues. In many cases, particularly in competitive markets, average revenue equals price per unit.
Revenue Maximization
Revenue maximization involves a business setting prices or levels of production in a way that maximizes revenue. It entails balancing price reductions against the increases in sales volume. For instance, although reducing the price of a product from $25 to $20 increases the sales from 100 to 150 units, thereby increasing revenue from $2,500 to $3,000, a firm usually will try to maximize revenue with a view to gaining market share or increasing sufficient levels of fixed costs.
Total Cost
Total cost includes all the expenses incurred to produce and deliver goods or services. It is the total of fixed costs (such as rent) added to variable costs (such as raw materials). For instance, a business may incur fixed costs of $1,000 while the variable costs amount to $4,000, making its total cost $5,000. Marginal Profit Calculator Total cost is an important concept in pricing analysis, profit calculation, and financial planning.