The Dictionary of Finance and Investment Terms defines marginal revenue as the "change in total revenue caused by one additional unit of output." It is computed by taking the difference between total revenues before and after an increase in the rate of production. If product price is constant, marginal revenue is the same as price. As long as the price of a product is constant, price and marginal revenue are the same, but it is not uncommon for additional output to be sold at a lower or higher price. Additional production is not advised when marginal cost is greater than marginal revenue. Likewise, when marginal revenue exceeds marginal cost, you should buy additional units.
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Review the formula. MR(2nd goods) = TR(2 goods) - TR(1 good), where MR is marginal revenue and TR is total revenue. This formula calculates the marginal revenue of one good over two goods. In other words, what is the additional revenue a firm gets when producing two goods instead of one.
Work through an example. Before we can work through an example we need to define the variables of our example. Let's say you are selling a product for £3; the revenue for selling two goods is £6.
Substitute the variables into the equation. The equation is MR(2 goods) = TR(2 goods) - TR(1 good), where TR equals £6 for 2 goods, and £3 for 1 good. The equation is: MR (2nd goods) = £6 - £3, or £3. The marginal revenue for the second goodt therefore is £3.
Work through an example where the cost of selling two goods is 20 per cent less than selling one. In this example, TR for 1 good remains the same at £3. However, the cost of selling a second good is £2 so your TR increases by 60p. The TR for 2 goods is now £7 instead of £6.
Calculate new MR. The formula is MR(2nd goods) = TR(2 goods) - TR(1 good). MR(2 goods) = £7 - £3, or £3. The marginal revenue for the second good has changed to £3.
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