Economics
Marginal Revenue
Quick fact
Under perfect competition, marginal revenue equals the market price. But for a monopoly, marginal revenue is always less than the price—a key reason why monopolies produce less than competitive firms.
Why this is interesting
Imagine you run a lemonade stand. When you sell one more cup, does that cup always add the same amount to your total revenue? Often it doesn't—and that's where marginal revenue comes in.
Read the full explanation
Understanding Marginal Revenue
Marginal revenue (MR) is the change in total revenue from selling one additional unit. Think of your lemonade stand: if you sell 10 cups at $1 each, total revenue is $10. To sell an 11th cup, you might drop the price to $0.90 for all cups. Now total revenue is 11 × $0.90 = $9.90—actually less than before! The marginal revenue from that 11th cup is –$0.10, not $0.90. That surprising result shows that marginal revenue depends on whether you must cut the price on all units to sell more. In general, MR = change in total revenue / change in quantity. For firms with market power, MR is lower than price because the lower price applies to all units sold.
A deeper explanation
The mechanism behind marginal revenue ties directly to the demand curve and elasticity. When a firm lowers its price to sell more, it gains revenue from new sales but loses revenue on existing units (since they are now sold at a lower price). This 'price effect' reduces marginal revenue below price. The more elastic the demand, the smaller this price effect, and the closer MR is to price. Under perfect competition, individual firms are price takers—they can sell any quantity at the market price, so MR equals price (no price effect). In contrast, a monopolist faces the entire downward-sloping market demand, so MR is always below price. The famous profit-maximizing rule is to produce where MR = marginal cost. This rule explains why firms produce less as competition weakens. Marginal revenue also helps us understand price discrimination: firms that can separate markets may charge different prices to align MR across segments. Ultimately, marginal revenue gives a complete picture of how selling decisions affect a firm's bottom line beyond the simple 'more sales = more revenue' intuition.