How to Find Marginal Revenue

Marginal revenue analysis helps determine profit maximization for a business.

Marginal analysis helps business managers determine the optimal point of output that generates the maximum amount of revenue without losing money. Finding the marginal revenue helps businesses find this optimal point to maintain or work toward this point to keep the business profitable. Mathematically, marginal revenue reflects the increase or decrease in revenue that may result from producing one more unit of a particular product. Generally, more production does not necessarily generate more revenue. At a certain point, a business may actually lose money from producing too much. Finding the marginal revenue may help prevent inefficiency and financial losses.

Things You'll Need

• Product selling prices
• Quanities sold
• Revenue results
• Marginal revenue formula
• Calculator

Instructions

Marginal Revenue Analysis

1. Organize your quantity and selling price data in two separate columns in ascending order by quantity. Comparing these two columns side by side lets you assign a specific price for every quantity value.

   Refer to the following simple example:

   Quantity
   1
   2
   3
   4

   Price
   $ 2.00
   $ 2.00
   $ 2.00
   $2.00

2. Multiply every quantity value by the selling price. You can organize the revenue calculations on a third column for easy reference. Revenue indicates how much money your products bring into the business. However do not confuse revenue with profits which are calculated in a different way.

   Qty Price Revenue
   1 X $ 2.00 = $ 2.00
   2 X $ 2.00 = $ 4.00
   3 X $ 2.00 = $ 6.00
   4 X $ 2.00 = $ 8.00

3. Fill in the marginal revenue formula using your quantity, price and revenue figures. The formula for marginal revenue divides the change in total revenue by the change in output. This division problem is called a ratio between revenue and output. Consider the formula in a different way:

   Marginal Revenue = Change in total revenue / Change in output

   Refer back to the columns of information in Step 2 and consider the values for quantities 2 and 3. If this imaginary business produces two units and sells these units for $2, the revenue will be $4. Producing a quantity of 3 units at a price of $2, the business generates $6 in revenue. So, the top part of the ratio is the difference between the revenue generated by quantity 2 and 3:

   Marginal Revenue = $6 - $4 / Change in output

   Similarly, the change in output is the difference between quantities 2 and 3. Plugging in this difference in the bottom part of the ratio, the formula looks like this:

   Marginal Revenue = $6 -$4 / 3 - 1

   The marginal revenue of this sample problem comes out to $2/1 or just $2. This means that for every single unit of output that is sold, the business will make $2.

Tips & Warnings

• Double-check your quantity and price figures for accuracy

• Remeber the order of operations when completing the mathematics

References

• "Microeconomics"; Paul Krugman; 2004
• Drezel University: Marginal Revenue Tutorial

Resources

• University of South Carolina: Economics Tutorial