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Faizan
Imagine that you sell widgets at a rate of $20 each. You've found that you can sell 100 widgets in a given period at that price. Now you want to sell more, but you'll need to drop the price to do so. The additional revenue that the 101st unit generates is called marginal revenue. To determine the total marginal revenue, you need to know the following formula: Marginal revenue = Change in total revenue / Change in sales.
Calculate the total revenue when the current quantity of units is sold at the current price. In our example, 100 widgets at $20 each equals $2000.
Calculate the total revenue that will be generated when your predicted new quantity of units is sold at the new price. For example, if you can sell 101 units at a lower price of $19.95, the total revenue would be $2,014.95.
Subtract these two totals to get the marginal revenue. In the example, $2,014.95 minus $2,000 gives results in a marginal revenue of $14.95.
Tips & Warnings
Marginal revenue is an important concept in relation to supply and demand. To increase demand you need to lower price, which means that each unit you produce at the lower price yields a lower profit. You could drop your price so low that even if you sell a large quantity, your marginal revenue would be negative, and you are actually losing money.
Calculate the total revenue when the current quantity of units is sold at the current price. In our example, 100 widgets at $20 each equals $2000.Calculate the total revenue that will be generated when your predicted new quantity of units is sold at the new price. For example, if you can sell 101 units at a lower price of $19.95, the total revenue would be $2,014.95.
Subtract these two totals to get the marginal revenue. In the example, $2,014.95 minus $2,000 gives results in a marginal revenue of $14.95.
Tips & Warnings
Marginal revenue is an important concept in relation to supply and demand. To increase demand you need to lower price, which means that each unit you produce at the lower price yields a lower profit. You could drop your price so low that even if you sell a large quantity, your marginal revenue would be negative, and you are actually losing money.
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