1. Definition of Marginal Revenue
Marginal Revenue (MR) is the additional revenue a firm earns by selling one more unit of a product. It helps businesses understand how total revenue changes with output levels.
2. Formula for Marginal Revenue
Where:
- MR = Marginal Revenue
- ΔTR = Change in Total Revenue
- ΔQ = Change in Quantity Sold
3. Relationship Between MR, AR, and TR
- Perfect Competition:
- MR = AR = Price (horizontal straight line).
- Firms are price takers, so selling an extra unit does not change the price.
- Monopoly & Imperfect Competition:
- MR < AR, meaning MR declines faster than AR.
- Firms must lower the price to sell more, so each additional unit contributes less revenue than before.
- MR can become negative when TR starts declining.
4. Example Table of MR Calculation
| Quantity (Q) | Price (P) | Total Revenue (TR = P × Q) | Marginal Revenue (MR = ΔTR / ΔQ) |
|---|---|---|---|
| 1 | ₹10 | ₹10 | – |
| 2 | ₹9 | ₹18 | ₹8 |
| 3 | ₹8 | ₹24 | ₹6 |
| 4 | ₹7 | ₹28 | ₹4 |
| 5 | ₹6 | ₹30 | ₹2 |
| 6 | ₹5 | ₹30 | ₹0 |
| 7 | ₹4 | ₹28 | -₹2 |
👉 Observation:
- In monopoly, MR decreases as Q increases.
- MR becomes negative when total revenue starts declining (beyond 6 units).
5. Graphical Representation of MR
The MR curve differs for different market structures:
- Perfect Competition:
- MR is a straight horizontal line (MR = P).
- Monopoly/Oligopoly:
- MR is downward sloping and lies below AR.
- It eventually reaches zero and becomes negative when TR falls.
Marginal Revenue (MR) Curves in Different Market Structures
Explanation of the Marginal Revenue (MR) Curve Graph
- Perfect Competition (Blue Dashed Line)
- MR is constant and equals the price (P).
- The firm can sell any quantity at the same price, so MR remains the same.
- Monopoly / Imperfect Competition (Red Line)
- MR declines as output increases because the firm must lower the price to sell more.
- The MR curve lies below the AR (demand) curve in imperfect markets.
- MR eventually becomes negative, indicating that producing additional units reduces total revenue.
- Zero MR Point (Black Dashed Line at MR = 0)
- When MR = 0, Total Revenue (TR) is maximized.
- Beyond this point, any increase in output leads to negative MR, reducing overall revenue.
Key Takeaways
✅ In perfect competition, MR is flat and equal to price.
✅ In monopoly and imperfect competition, MR declines and eventually becomes negative.
✅ Profit-maximizing output occurs where MR = MC (Marginal Revenue = Marginal Cost).