Marginal revenue is the additional revenue gained from producing one more unit of a product, and is related to marginal cost. Firms aim to produce up to the point where marginal cost equals marginal revenue. In a competitive market, marginal revenue decreases as output increases, but in a monopoly, the firm’s marginal revenue equals marginal cost at a smaller amount, resulting in higher prices.
In economics, marginal revenue refers to the additional revenue that will be obtained from producing one additional unit of a product. Marginal revenue is closely related to marginal cost, which represents the cost that will be incurred producing another of something. Traditional economic theory teaches that a firm will produce a given product up to the point where marginal cost equals marginal revenue. This is the point where profits are maximized and beyond which, if another 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 revenues is part of the branch of economics known as microeconomics, which deals with the decisions of individuals and companies, influenced by economic incentives. This is distinct from macroeconomics, which addresses general trends in economies as a whole.
Assuming a market where there is healthy competition, a firm’s marginal revenues will generally decrease as output increases. This also applies to the market in general. In other words, a company that makes copiers will find that there is a certain point where, given the market price of a copier, it isn’t worth producing more. That doesn’t mean that production stops, just that it doesn’t increase. Similarly, copier manufacturers as a group will find that too much ramp-up in production will put too many copiers on the market, thus driving their price down, to the detriment of the companies that make them.
Conditions change somewhat if one company has a monopoly on the copier market or what economists call “market power,” meaning the ability of one firm to set prices. In particular, the firm’s marginal revenue will equal marginal cost at a smaller amount than that of a competitive firm. This results in a reduced quantity of the product on the market and therefore in higher prices. To put it another way, for a monopolistic firm, it is in their best financial interest to keep a relatively small number of products on the market, at a higher price than they would be able to obtain if they were involved in competition. In light of this, it’s easy to see why many consumers resent the idea that one company has a monopoly in any market.
Protect your devices with Threat Protection by NordVPN
