In microeconomics, marginal revenue (MR) is the extra revenue that an additional unit of product will bring. It is the additional income from selling one more unit of a good; sometimes equal to price. It can also be described as the change in total revenue divided by the change in the number of units sold.
For a firm facing perfectly competitive markets, price does not change with quantity sold (), so marginal revenue is equal to price. For a monopoly, the price received will decline with quantity sold (), so marginal revenue is less than price. This means that the profit-maximizing quantity, for which marginal revenue is equal to marginal cost (MC) will be lower for a monopoly than for a competitive firm, while the profit-maximizing price will be higher. When demand is elastic, marginal revenue is positive, and when demand is inelastic, marginal revenue is negative. When the price elasticity of demand is equal to 1, marginal revenue is equal to zero.
:MR = dTR/dQ :MR = P+Q(dP/dQ) :MR = P[1 + (dP/dQ) (Q/P)] :MR = P(1 + 1/PED)
where PED is the price elasticity of demand. If demand is inelastic (PED < 1) then MR will be negative, because to sell a marginal (infinitesimal) unit the firm would have to lower the selling price so much that it would lose more revenue on the pre-existing units than it would gain on the incremental unit. If demand is elastic (PED > 1) MR will be positive, because the additional unit would not drive down the price by so much. If the firm is a perfect competitor, so that it is so small in the market that its quantity produced and sold has no effect on the price, then the price elasticity of demand is negative infinity, and marginal revenue simply equals the (market-determined) price.
:MR = MC :MR = P(1 + 1/PED) :MC = P(1 + 1/PED) :MC = P + P/PED :(P - MC)/ P = - 1/PED
Markup is the difference between price and marginal cost. The formula states that markup as a percentage of price equals the negative of the inverse of elasticity of demand.Alternatively, the relationship can be expressed as:
:P = MC/(1 + 1/PED)
Thus if PED is - 2 and MC is $5.00 then price is $10.00.
(P - MC)/ P = - 1/PED is called the Lerner index after economist Abba Lerner. The Lerner index is a measure of market power - the ability of a firm to charge a price that exceeds marginal cost. The index varies from zero to 1. The greater the difference between price and marginal cost the closer the index value is to 1. The Lerner index increases as demand becomes less elastic.
Category:Microeconomics Category:Marginal concepts Category:Economics terminology
ar:إيراد حدي ca:Ingrés marginal de:Grenzerlös es:Ingreso marginal fr:Revenu marginal ko:한계 수입 it:Ricavo marginale he:פדיון שולי hu:Határbevétel nl:Marginale opbrengst ja:限界収益 pl:Przychód krańcowy pt:Renda marginal ru:Предельный доход sr:Маргинални приход sv:MarginalintäktThis text is licensed under the Creative Commons CC-BY-SA License. This text was originally published on Wikipedia and was developed by the Wikipedia community.
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