What is Marginal Revenue? – Definition | Meaning | Example

Marginal Revenue Definition

Marginal revenue is the financial ratio which is used to calculate the change in the Marginal Revenueoverall income by sale the one additional unit or product. You consider this is the additional income earned from last sold unit.

For analyzing the consumer demand, set product price, and for the planning of production schedule marginal revenue is used. To understand these 3 concepts is not easy for any manufacturer. The customers which are misjudging have demanded the shortage of product which is the cause of loss in sales, or the customer demand for the overages production due to which excess in the manufacturing cost is the loss for the business.

If the price of the product increases then the demand of that product and the need for manufacturing decrease. Due to increase, the price of products, the company gets more profit on that products. But it may be harmful to the company because the customer may be going to the competitor of the company which made the cause of loss in the sales of the company. Management considers all these scenarios when analyzing the marginal revenue.

Formula

Marginal revenue formula can be calculated by dividing the change in total revenue by the change in quantity sold.

Marginal revenue= Change in total revenue/ change in total quantity

For the calculation of the change in revenue, we need to subtract the revenue figure before the last unit sold from total revenue after total revenue sold.

Usually, this ratio is used to change in producing one unit sold so the denominator is 1. For understanding MR formula in a better way, we take the example.

Example

Micky manufactures the office supplies and his upcoming product is the pencils for which he uses the marginal revenue curve to figure out that how much pencils produce and how much will be the price of pencils. There are several competitors in the industry of Micky.

Micky figure that he has 100 pencils and he sold each pencil at the rate of $150.then he get the revenue of $15,000. Now Micky estimates that he needs to down the pencil price from 150 dollars to 149 dollars if he produces more then 2,000 units. If Micky produce 1 extra unit then marginal revenue calculated as

$49 =  (15,049 -15,000)/1

Marginal revenue for this product of Jerry is 49 dollars.

Analysis

From the above example, the marginal ratio seems to ba a simple ratio. Price of the product and the production level depend upon the manufacture’s industry and product.

For an instant, if the manufacturer sells its product in the competitive market at the rate of the market price then the MR on that product will be equal to the market price. As there is the competition in the market so if the manufacturer raises the price of products then customer move to the competitor of the manufacturer because manufacturer products are same as competitors have.

If the manufacturer produces some products less due to which products are short in the market. Due to the shortage of product willingness of the consumer increase then the manufacturer can raise the price of those products in order to get more profit. then MR will be increased.

For more Financial Ratio Check: 

Loan to value (LTV) Ratio

Long term debt to total asset ratio

Margin of safety

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