What is marginal revenue?

When we speak of marginal income we refer to the increase in total income originated by the sale of one more unit of product. This means, how much income has increased when one more unit of product is sold: how much increase in income is the extra unit sold.

If the company we are considering operates in a market where there is free competition, the marginal revenue should equal the price of the product.

Ideally, for every unit of product sold there is a correlational increase in marginal revenue. But the reality is not this, since the law of diminishing returns it intervenes so that said increase in marginal income is less and less. However, this will not always be sustainable: only until the moment when marginal revenue is equal to marginal costs.

How to calculate marginal revenue?

In order to calculate the marginal income, the variation in total income from the sale of products must be divided by the number of additional units that have been produced. In addition, it must be borne in mind that if the company we are considering operates in a market where there is free competition, the marginal revenue should be equal to the price of the product.

The units of additional products that the company has produced and sold can be observed using marginal revenue. On the other hand, if the income of each additional unit produced is greater than the marginal cost, the company must produce that quantity in order not to incur losses or a reduction in its profits.

Marginal analysis is used by companies to find the best way to maximize their profits. Through the marginal income we can calculate or carry out said marginal analysis to know what is the benefit that we will obtain. Such an approach will help us maximize profits with a short-term focus.

Leave a Comment