Marginal revenue is the additional revenue earned by producing an extra unit of a product, and is related to marginal cost. Firms produce up to the point where marginal cost equals marginal revenue for maximum profit. Marginal revenue can be mathematically expressed and is studied in microeconomics. In a competitive market, marginal revenue declines as production increases. Monopoly firms have less marginal revenue and keep fewer products on the market at a higher price.
In economics, marginal revenue refers to the additional revenue that will be earned by producing an additional unit of a product. Marginal revenue is closely related to marginal cost, which represents the cost that will be incurred from producing one more thing. Conventional 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 at which profits are maximized and beyond which, if one more unit were produced, a loss would result.
It is possible to mathematically express marginal revenue. In this case, it equals the change in a company’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, influenced by economic incentives. This is different from macroeconomics, which deals with general trends in economies as a whole.
Assuming a market where there is healthy competition, a firm’s marginal revenue generally declines as production increases. This is also true for the market in general. In other words, a company that manufactures photocopiers will find that there is a certain point at which, given the market price of a copier, it is not worth producing more. This does not mean that production stops, just that it does not increase. Likewise, photocopier manufacturers, as a group, will find that increasing production too much will bring too many copiers to market, thereby lowering their price, to the detriment of the companies that manufacture them.
Conditions change somewhat if one company has a monopoly on the photocopier market, or what economists call “market power,” meaning the ability of only one company to set prices. Specifically, the firm’s marginal revenue will equal marginal cost by a smaller amount than it would for a competitive firm. This translates into a reduced quantity of the product on the market and therefore higher prices. In other words, for a monopoly firm, it is in its financial interest to keep a relatively small number of products on the market at a higher price than they could obtain if they competed. Given this fact, it’s easy to see why many consumers resent the idea of one company having a monopoly in any market.
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