How to Calculate Marginal Revenue in Economics

by Ryan Menezes

Marginal revenue is the change in a company's income following an additional sale. In other words, it is the revenue a company gets from the last unit sold. This is calculated by dividing the change in total revenue by the change in quantity. In a fully competitive market, a company's marginal revenue exactly equals the product's market price. The company is a "price taker," which means that it sells products at the market price, and its sales do not affect this price at all.

1. Obtain or estimate a relationship between the item's price and the quantity of units that you sell. On a graph, this relationship forms a demand curve. For example, if you sell hats, the price per unit equals \$10 minus the number of units you sell. This is a linear relationship, and in practice, the demand curve may be more complex.

2. Note the current number of units that you sell, and the price at which you sell them. For example, assume that you currently sell four hats for \$6 each.

3. Note the new price after you sell one additional unit. According to the formula from Step 1, you will sell five hats for \$5 each.

4. Calculate the total revenue for the original four units: 4 --- \$6 = \$24.

5. Calculate the total revenue for the 5 units: 5 --- \$5 = \$25.

6. Subtract the original revenue from the later total revenue: \$25 - \$24 = \$1. This is the marginal revenue for the additional hat sale.