Saturday Brain Storming Thought (191) 07/10/2023

MARGINAL REVENUE

Marginal Revenue is the increase in revenue that results from the sale of one additional unit of output

As a firm is trying to maximize it’s profits, it needs to consider what happens when it changes its production by one unit

Revenue

Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise

Marginal Revenue formula

MR = (Change in total Revenue) / (Change in quantity sold)

Marginal Benefit

It is a central concept in microeconomics that describes the additional total revenue generated by increasing product sales by one unit

Relation between Marginal Revenue and Demand

The Monopolist must lower the price on all units in order to sell additional units,

As Marginal Revenue is less than the price,

The marginal revenue curve will lie below the demand curve

Key Takeaways of Marginal Revenue

1) the marginal revenue is a financial ratio measuring the change in total revenue from the additional products or units sold

2) it affects product price and production level depending on the industry

3) It is a microeconomics term

4) it also has various financial and managerial accounting applications

5) if manufacturar prices increases, sale starts decreasing

6) the production influences the selling price if a specific industry’s output is low and choises are unavailable

Marginal Revenue and Perfect Competition

In perfect competition, the marginal revenue equals the product price at all output levels

Marginal Profit

Marginal Profit is the difference between marginal cost and marginal product (also known as marginal revenue)

Law of diminishing marginal returns

In microeconomics, for every unit of output added to a firm, the return received decreases

Law of increasing marginal returns

In a knowledge dependent economy, as knowledge and technological inputs increase, the output increases and the producers return tend to increase

Use of Marginal Revenue in business

1) compare the output to revenue

2) if marginal revenue falls below marginal cost per unit, business usually stops producing units and analyzes the cost of production versus benefits

3) it helps a business to eliminate a product that does not sell well

4) manage production costs

5) using marginal revenue to analyse consumer demand can prevent excess product or shortages

6) help business to set competitive prices that encourages customers to purchase from them

7) marginal revenue for a price taker, hence neither be equal to zero nor negative

8) marginal revenue is an important concept in vendor analysis

Marginal Revenue of Labour

It represents the extra revenue earned by hiring an extra worker

It indicates the actual wage that a company is willing and can afford to pay for each new worker they hire

The wage that the company pays is the market wage rate determined by the forces of supply and demand

Zero Marginal Revenue

The selling another does not change the total revenue

Marginal Revenue and Profit

Marginal Revenue and profit are not the same

Profit describes the net gain or loss associated with the business operation, taking into account revenue and operational costs

Marginal Revenue only shows the increase in total revenue that occurs when one additional unit is sold

Marginal Revenue in perfect competitive market

In such market, the marginal revenue is equal to the market price, as the seller cannot charge extra for additional unit

Marginal Revenue and Monopoly Market

In such market, marginal revenue will have a falling trend

Additional revenue from every extra sale will go down after a point of time

Marginal Revenue and Price Elasticity of Demand

1) In case demand is inelastic

Firm will have to reduce the prices to a considerable extent to sell more of that product

So beyond a point, marginal revenue will become negative

2) In case demand is elastic

Firm can sell an additional unit of the product with a small reduction in price

So the marginal revenue will be positive

COMPILED BY:-

Er. Avinash Kulkarni
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Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer