Category: 

What is a Marginal Revenue?

Marginal revenue results from producing extra units of a given product.
Article Details
  • Written By: Adam Hill
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 August 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
The seahorse is among the only animals on Earth which has males bear the young.  more...

September 30 ,  1949 :  The Berlin Air Lift ended.  more...

In economics, marginal revenue refers to the additional revenue that will be obtained by the production of one additional unit of a product. Marginal revenue is closely related to marginal cost, which represents the cost that will be incurred by producing one more of something. Mainstream economic theory teaches that a firm will produce a given product up until the point where marginal cost is equal to marginal revenue. This is the point at which profits are maximized, and beyond which, if one more unit were produced, it would result in a loss.

It is possible to express marginal revenue mathematically. In this case, it is equal to the change in a firm's total revenue, divided by the change in its sales. The study of marginal revenue is part of the branch of economics known as microeconomics, which deals with the decisions of individuals and companies, as influenced by economic incentives. This is distinct from macroeconomics, which deals with general trends in economies as a whole.

Ad

Assuming a market in which there is healthy competition, a firm's marginal revenue will generally decrease as output increases. This is also true for the market in general. In other words, a company that makes photocopiers will find that there is a certain point at which, given the market price of a copier, it is not worth it to produce a greater quantity. This does not mean that production stops, just that it does not increase. Similarly, photocopier makers as a group will find that increasing production too much will put too many copiers on the market, thereby lowering their price, to the detriment of the firms that make them.

Conditions change somewhat if one company has a monopoly on the photocopier market, or what economists call "market power," meaning the ability of just one firm to set prices. Specifically, the firm's marginal revenue will equal marginal cost at a lower quantity than it would for a competitive firm. This translates to a reduced quantity of the product being on the market, and therefore higher prices. To put it another way, for a monopolistic company, it is in their best financial interest to maintain a relatively small number of products on the market, at a price that's higher than they would be able to get if engaging in competition. Given this fact, it is easy to see why many consumers resent the idea of a company having a monopoly in any market.

Ad

More from Wisegeek

You might also Like

Discuss this Article

Charred
Post 3

@nony - I don’t think you can apply the marginal cost revenue distinction to the software industry in my opinion, at least not in a clear cut manner as you could with photocopiers or hard goods.

The reason is that it costs almost nothing to produce a digital good. Seriously, how hard is it to burn an additional CD for the Windows operating system? It costs practically nothing.

So while I think you may have a point about the dangers of monopolies, I don’t think marginal costs would have as much an impact on the software industry, at least from what I can tell.

nony
Post 2

@hamje32 - What about where there is a market that does not have “healthy competition” as the article talks about?

In that case, the monopoly doesn’t feel any pricing pressures from other companies. Since you mentioned computers, the company that comes to mind is Microsoft.

For all practical purposes, I say they are still a monopoly. Yes, they had some litigation and stuff was settled in the court of law, but the court of public opinion still says otherwise.

They still own the software market and most software is primarily produced to cater to the Microsoft Windows operating system, not competing products like Linux or Macintosh. That’s why Windows still costs too much (in my opinion).

hamje32
Post 1

I guess what we’re talking about here is the law of diminishing returns as it applies to expected marginal revenue. I think that makes sense in a lot of industries.

The article’s example of the photocopiers is not the one that came to my mind. I was thinking rather of more bread and butter items like electronics or DVD players or computers.

I know that there is not a high markup on computers. I believe there’s a point where it doesn’t make sense to tremendously ramp up production for computers or DVD players. At certain price points, these products are practically sold at cost.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email