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What is Marginal Revenue?

Definition: Marginal revenue is an economic metric defined as the increase in a company’s gross revenue from selling one additional unit of its product. It can be more easily defined as the variation of the revenue figure after one more unit is sold.

What Does Marginal Revenue Mean?

What is the definition of marginal revenue? This economic concept analyzes the profitability of selling more products. The purpose of this calculation is to perform some comparisons in order to evaluate a decision of increasing the number of units being sold. The MR should be compared with the current price per unit or against the marginal cost of producing one more unit.

If the MR is equal to the price it means that in order to sale more units the company doesn’t have to change its price. This is not normally the case in practice because selling one additional unit is not a real life situation but this concept can also be applied to ranges of hundred units or even thousands. The MR should be compared with marginal cost and as long as the MR stays higher it will be profitable for the company to produce and sell an additional unit.

Here’s a brief example

Example

Movement Bicycles LLC is a company that produces bicycles for professional athletes. The company manager, Mr. Chen wants to analyze the possibility of increasing the company’s production by 10%. Currently, Movement Bicycles produces 100 bicycles per month, so the goal will be to produce 110 units per month. Mr. Chen wants to calculate the profitability of doing this. Can he use MR to evaluate the profitability of this new scenario?

The answer is yes. By calculating the marginal revenue of this new production level Mr. Chen can then go ahead and compare it with the marginal cost of producing those 10 additional units and if the marginal revenue is higher than the marginal cost then the new set up will be profitable for the company.

Summary Definition

Define Marginal Revenue: MR means the amount of sales generated from selling one additional product.

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