Marginal Revenue

What is marginal revenue?

Marginal revenue measures the gain in income generated from the sale of one extra unit of a product or service. It’s calculated by dividing the change in total revenue by the change in output quantity.

Where have you heard about marginal revenue?

Marginal revenue is gauged by companies to help them maximise their profits. If a decline in marginal revenue is forecast, firms can either add new products or update their current ones to keep their product line fresh.

What you need to know about marginal revenue.

If a company produces 20 units, and sells each for £10, the total revenue is £200. If the 21st item produced is sold for £5 then the marginal revenue is £5.

Marginal revenue is closely linked to marginal cost, which measures the change in total cost from producing one extra unit of a product.

When marginal revenue is less than the marginal cost of a product, a company is producing too much and should cut down its quantity until marginal revenue equals the margin cost of production, so profits are maximised.

Find out more about marginal revenue.

Read our definition of marginal cost to discover how it’s related to marginal revenue.