Marginal revenue is the amount of money that a company earns off of a single new sale. In a fully competitive system, no one producer's sales affect price levels, so a company's marginal revenue is the same as the price they change for the item. In an actual market structure, companies exist in monopolistic competition, in which each one's products only partially substitute for another company's products. In this case, product prices relate to the quantity of goods that consumers buy. Each new sale reduces marginal revenue.
1. Calculate an association between the product's prices and its sales. For example, assume the price (p) and quantity (q) of the cars a company sells relate according to the formula p = 20,000 - 150q.
2. Calculate the product's price and quantity before and after an additional sale. For example, at a price of $15,500, the company will sell 30 cars. If it sells 31 cars, the price drops to $15,350, according to the previous step's formula.
3. Determine the revenue before and after the additional sale. In each case, revenue is the product of price and quantity: $15,500 --- 30 = $465,000; $15,350 --- 31 = $475,850
4. Calculate the difference between these two values: $475,850 - $465,000 = $10,850. This is the company's marginal revenue from the extra sale.
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