In economics, marginal revenue refers to the additional revenue that will be obtained by the production of one additional unit of a product. Marginal revenue is closely related to marginal cost, which represents the cost that will be incurred by producing one more of something. Mainstream economic theory teaches that a firm will produce a given product up until the point where marginal cost is equal to marginal revenue. This is the point at which profits are maximized, and beyond which, if one more unit were produced, it would result in a loss.
It is possible to express marginal revenue mathematically. In this case, it is equal to the change in a firm’s total revenue, divided by the change in its sales. The study of marginal revenue is part of the branch of economics known as microeconomics, which deals with the decisions of individuals and companies, as influenced by economic incentives. This is distinct from macroeconomics, which deals with general trends in economies as a whole.
Assuming a market in which there is healthy competition, a firm’s marginal revenue will generally decrease as output increases. This is also true for the market in general. In other words, a company that makes photocopiers will find that there is a certain point at which, given the market price of a copier, it is not worth it to produce a greater quantity. This does not mean that production stops, just that it does not increase. Similarly, photocopier makers as a group will find that increasing production too much will put too many copiers on the market, thereby lowering their price, to the detriment of the firms that make them.
Conditions change somewhat if one company has a monopoly on the photocopier market, or what economists call “market power,” meaning the ability of just one firm to set prices. Specifically, the firm’s marginal revenue will equal marginal cost at a lower quantity than it would for a competitive firm. This translates to a reduced quantity of the product being on the market, and therefore higher prices. To put it another way, for a monopolistic company, it is in their best financial interest to maintain a relatively small number of products on the market, at a price that’s higher than they would be able to get if engaging in competition. Given this fact, it is easy to see why many consumers resent the idea of a company having a monopoly in any market.