Whether you manage a vast factory or produce hand-made goods, this marginal revenue calculator will surely come in handy. With its assistance, you will learn how to calculate marginal revenue for your product - be it shoes, electronics, or equipment for a drilling platform 🛢️
In this article, we will demystify the marginal revenue formula using a simple example, and shed some light onto the shape of the marginal revenue curve, for both competitive and monopoly markets. Let's dive right in!
Make sure to check out our profit margin calculator, too!
Marginal revenue definition
By definition, marginal revenue is the increase in revenue that comes from selling one additional unit. Every time you increase the number of units sold by one, the difference in revenue before and after that will be equal to your marginal revenue.
To better illustrate this, let's consider a hypothetical situation in which you're the producer of the world's best Magic 8 Balls. You know, the type that you shake to get an answer to all your profound, existential questions. You used to produce 1000 Magic 8 Balls a month, and selling them brought you a revenue of $50,000 a month - $50 per ball on average.
This month, you took the advice of your own Magic 8 Ball and produced 200 units more. It turned out that the total revenue was $62,000. The marginal revenue is the change in revenue (which is $12,000), divided by the change in the quantity produced (200 units). So, your marginal revenue this month was $60.
To maximize profits, you should always try to have your marginal revenue equal to your marginal cost!
Marginal revenue formula
Now that you know how to find the marginal revenue, let's transform our knowledge into a mathematical equation. The marginal revenue formula looks like this:
MR = ΔTR / ΔQ
MRis the marginal revenue;
ΔTRis the change in total revenue; and
ΔQis the change in quantity.
If you want to analyze the initial and final revenue (or quantity), feel free to use the advanced mode of our calculator!
You should note that we interpret positive change as an increase, while a negative change is a decrease. If your change in revenue is negative, you might want to rethink your sales strategy!
How to calculate marginal revenue? An example
Let's analyze the case of the Magic 8 Balls in more detail. How to find the marginal revenue, step by step?
We know the initial situation - the number of Magic 8 Balls produced and the revenue. To input these numbers into the marginal revenue calculator, open the advanced mode. In this case, the initial quantity equals 1000, and the initial revenue is $50,000.
Let's input the final revenue in an analogical way. It is equal to $62,000.
We also know the change in quantity - we produced 200 units more than in the previous month, so we'll input 200 into this field.
The marginal revenue calculator automatically finds the change in revenue, equal to $12,000.
It also applies the marginal revenue formula to find the value of MR:
MR = ΔTR / ΔQ
MR = $12,000 / 200
MR = $60
You can also use our calculator in a different direction. For example, if you already know the marginal revenue and change in quantity, you can easily calculate the increase in total revenue, too! 📈
What is the marginal revenue curve?
In most cases, the marginal revenue changes with the number of units produced. For example, the difference in total revenue might be quite significant when you increase the number of manufactured units from 10 to 20 (as you're virtually doubling your revenue), but will be much smaller if you're already producing 10,000 units.
Why? It all has to do with the demand on the market. If your product already satisfies the market demand, the additional 10,000 Magic 8 Balls will just gather dust on the shelves! If you'd wanted to sell them, you'd need to lower the price, which in turn lowers the marginal revenue. Head to our price elasticity of demand calculator for more detail on this topic!
If we showed the relationship between marginal revenue and the number of items sold on a graph, we'll get a marginal revenue curve. It can take different forms. If you're on a perfectly competitive market, you can't freely choose your price - the market and competitors dictate it. In such a case, the marginal revenue curve is a constant function.
What happens in the case of a monopoly? You are free to pick your price as you see fit. Then, the marginal revenue curve is usually a decreasing function.