Definition Of Marginal Revenue

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Marginal revenue is the increase of profit as the result of one additional unit of output. The article “Marginal Revenue – MR” states that, “marginal revenue is calculated by dividing the change in total revenue by the change in output quantity” (“Marginal Revenue – MR,” n.d.). Marginal revenue’s relationship to total is defined by the Ingrimayne.com article, “Revenue and Demand,” as “selling another unit increases total revenue, the marginal revenue must be greater than zero” (“Revenue and Demand,” n.d.). Marginal revenue can increase the total revenue for a firm; however, the law of diminishing return does apply here as demand will eventually wane.
Marginal cost is the change in total cost that occurs when the quantity produced changes by one unit; simply, it the cost of producing one more unit of good. Marginal cost relationship with total cost is described by Amos Web site as “the change in total cost resulting from a change in the quantity of output produced by a firm in the short run. Marginal cost indicates how much total cost changes for a given change in the quantity of output” (“Marginal Cost,” n.d.). As a firm produces more of a product, they must also spend more for the output.
Accounting profit is determined by subtracting explicit costs from sales revenue. Economic profit is concluded by subtracting implicit and explicit costs from total revenue sales. Cliffnotes.com declares that profit maximization can be found by “equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output” (“Profit Maximization,” n.d.). It can also be defined as the process a firm uses to determine the price and output level that yields the most optimal return.
A Wikipedia article detailing profit maximization in regards to marginal cost and marginal revenue states that, “since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue” (“Profit Maximization” Wikipedia, 2011). When a firm reaches the state where marginal cost and marginal revenue are equal, they have achieved profit maximization. In the total revenue – total cost scenario, a firm achieved maximum profit when total revenue exceeds total cost to produce a unit of product. Economics by Campbell McConnell, Stanley Brue and Sean Flynn states that, “the firm achieves maximum profit, however, where the vertical distance between the total-revenue and total-cost curves is greatest” (McConnell, Brue & Flynn, 2012). In a graphical sense, the point at which the total revenue and total cost are their greatest distance from one another is when profit maximization is achieved.
If a firm’s marginal revenue is greater than marginal cost, the firm should produce the additional unit. Economics asserts that, “the firm
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