Marginal revenue is referred to as the revenue that is earned from the sale of an additional product or unit. It is the revenue that the company generates when there is a sale of an additional unit.
It is a microeconomic term that has many applications in accounting. Marginal revenue formula is the formula to calculate marginal revenue.
It is used by the management to analyse the customer demand, plan the production schedules, and set product prices. If the customer demand is not appropriately judged, then it results in the loss of sales and excess production, which, in turn, results in increased manufacturing costs.
Also read: What is revenue?
Marginal revenue remains constant till a certain level of output is achieved. It then slows down with increasing output by following the law of diminishing returns.
By setting the price for a product, manufacturers can alter its demand. For example, if the price of a product is raised, then it reduces its demand and also reduces the need for its manufacturing.
It might also lead to higher revenue per product. However, the downside is that it can cause the buyers to shift to competitors which can result in the business losing out on more sales.
The marginal revenue formula is as follows:
Marginal revenue = Change in total revenue/Change in quantity
Or, MR = ∆TR/∆q
∆TR = Change in total revenue
∆q = Change in quantity
This concludes the topic of the marginal revenue formula, which is an important part of economics. To read more about such intriguing concepts on economics for class 12, stay tuned to our website.