In economics, marginal revenue is the additional revenue that a firm can generate by selling one additional unit of a good or service. It is the increase in total revenue that results from increasing the quantity of goods or services sold by one unit. Marginal revenue is an important concept in microeconomics because it helps firms determine the optimal level of production and pricing for their goods or services. It is calculated by dividing the change in total revenue by the change in the quantity of goods or services sold. For example, if a firm sells 10 units of a good for $10 each and then sells 11 units for $9 each, the marginal revenue from the 11th unit is $9.
Plotting the graph for finding out marginal revenue
To plot the graph for finding out marginal revenue in economics, you would need to first collect data on the total revenue and quantity of goods or services sold for a given period of time. Then, you would calculate the marginal revenue for each unit sold by dividing the change in total revenue by the change in the quantity of goods or services sold. Once you have this information, you can plot the marginal revenue on the vertical axis and the quantity of goods or services sold on the horizontal axis to create a graph. The slope of this graph will represent the marginal revenue, and the points on the graph will represent the total revenue at each quantity of goods or services sold. This will allow you to visualize the relationship between marginal revenue and quantity, and help you determine the optimal level of production and pricing for your goods or services.
Calculation of marginal revenue
To calculate marginal revenue, you would need to first collect data on the total revenue and quantity of goods or services sold for a given period of time. Then, you would calculate the marginal revenue for each unit sold by dividing the change in total revenue by the change in the quantity of goods or services sold. For example, if a firm sells 10 units of a good for $10 each and then sells 11 units for $9 each, the marginal revenue from the 11th unit can be calculated as follows:
Marginal Revenue = Change in Total Revenue / Change in Quantity = ($9 – $10) / (11 units – 10 units) = -$1 / 1 unit = -$1
In this example, the marginal revenue from the 11th unit is $1. You can continue to calculate the marginal revenue for each additional unit sold in this way to determine the overall trend in marginal revenue as the quantity of goods or services sold increases. This will help you determine the optimal level of production and pricing for your goods or services.
Below are some more examples of marginal revenue:
- A Candy Shop sells 10 units of a candy for $10 each and then sells 11 units for $9 each. The marginal revenue from the 11th unit is calculated as follows:Marginal Revenue = Change in Total Revenue / Change in Quantity = ($9 – $10) / (11 units – 10 units) = -$1 / 1 unit = -$1
- A stationary store sells 20 units of a good for $5 each and then sells 21 units for $4 each. The marginal revenue from the 21st unit is calculated as follows:Marginal Revenue = Change in Total Revenue / Change in Quantity = ($4 – $5) / (21 units – 20 units) = -$1 / 1 unit = -$1
- A Camera Store sells 30 units of a good for $2 each and then sells 31 units for $1 each. The marginal revenue from the 31st unit is calculated as follows:Marginal Revenue = Change in Total Revenue / Change in Quantity = ($1 – $2) / (31 units – 30 units) = -$1 / 1 unit = -$1
In these examples, the marginal revenue decreases as the quantity of goods sold increases. This is because the firm must lower the price of its goods in order to sell more units, which reduces the total revenue. This is a common trend in economics, and is known as the law of diminishing marginal returns.
What’s the law of diminishing marginal returns?
The law of diminishing marginal returns states that as the quantity of a good or service increases, the marginal return from each additional unit will eventually decrease. In other words, the more units of a good or service that are produced, the less additional benefit or output will be gained from each additional unit. This is because there are limits to the amount of resources and inputs that can be effectively used to produce a good or service, and at some point, the marginal cost of producing additional units will begin to outweigh the marginal benefit.
