Marginal revenue

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Marginal Revenue is an important concept in basic microeconomics. Marginal revenue (MR) is the extra revenue that an additional unit of product will bring a firm. It can also be described as the change in total revenue/change in number of units sold.

More formally, marginal revenue is equal to the change in total revenue over the change in quantity when the change in quantity is equal to one unit (or the change in output in the bracket where the change in revenue has occurred)

This can also be represented as a derivative. (Total revenue) = (Price) times (Quantity) or TR=P \cdot Q. Thus, by the product rule:

MR=\frac{dTR}{dQ}=\frac{dP}{dQ} \cdot Q + \frac{dQ}{dQ} \cdot P=P + Q \cdot \frac{dP}{dQ}.

For a firm facing perfectly competitive markets, price does not change with quantity sold (\frac{dP}{dQ}=0), so marginal revenue is equal to price. For a monopoly, the price received will decline with the quantity sold (\frac{dP}{dQ}<0), so marginal revenue is less than price. This means that the profit-maximizing quantity, for which marginal revenue is equal to marginal cost will be lower for a monopoly than for a competitive firm, while the profit-maximizing price will be higher. When marginal revenue is positive, price elasticity of demand [PED] is elastic, and when it is negative, PED is inelastic. When marginal revenue is equal to zero, price elasticity of demand is equal to -1.

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