Marginal revenue is the change in revenue as a business changes how much it produces. For most businesses, marginal revenue stays constant because the cost of creating the product stays constant. For monopolies, however, marginal revenue always changes because the monopoly's level of output affects the cost of making the item. You can calculate the effect of output on marginal revenues using a formula.
1. Calculate the change in total revenue. Subtract the total revenue after increasing or decreasing your production from the total revenue before you made the change.
2. Subtract the total quantity of product before you made the change from the total quantity of product after you made the change to determine your change in quantity.
3. Divide the change in revenue by the change in quantity to calculate the marginal revenue.
- Pay attention to if the numbers are negative or positive as you do these calculations. If marginal revenue is negative, it means revenue is decreasing due to your change, and you may need to adjust your output.
- Compare marginal revenue and marginal costs. You can maximize profits when these values are equal.
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