Marginal revenue – definition
Marginal revenue is the additional income generated from the sale of one more unit of a good or service. It can be calculated by comparing the total revenue generated from a given number of sales (e.g. 11 units), and the total revenue generated from selling one extra unit (i.e. 12 units).
Example:
Output | Total revenue (£) | Marginal revenue (£) |
10 | 500 | |
11 | 700 | 200 |
12 | 800 | 100 |
In this case, the marginal revenue from selling the 12th unit is £100 – the difference in the total
revenue between selling 11 units and 12. Marginal revenue can become negative if total revenue declines, as shown below:
Output | Total revenue (£) | Marginal revenue (£) |
10 | 500 | |
11 | 700 | 200 |
12 | 800 | 100 |
13 | 800 | 0 |
14 | 700 | – 100 |
Marginal revenue is significant in economic theory because a profit maximising firm will produce up to the point where marginal revenue (MR) equals marginal cost (MC).
Read more on profit maximisation
A second rule, where MR=0, is used to establish the output where total revenue is maximised. Changes in marginal revenue give us the gradient of the total revenue curve.
![Marginal revenue (2) Marginal revenue (2)](https://i0.wp.com/www.economicsonline.co.uk/content/images/2021/11/9.webp)
The relationship between the MR and average revenue (AR) curve is also significant – whenever the AR curve falls, the MR curve falls at twice the rate.