![]() There is an Average Revenue Curve or Demand Curve, which is not the consumers’ demand curve but rather the producers’ demand curve. So, the more you sell after a normal limit, the more the price will diminish and, accordingly, so will revenue. Otherwise, we will not be able to sell all the units, which is also known as the law of diminishing margin. The Marginal Revenue curve is sloping downwards because, with one additional unit sold, we would generate revenue close to our normal revenue but as we start selling more and more, we would be required to reduce the price of the item we are selling. The Marginal Cost curve is a “U”-shaped curve because the marginal cost for 1-5 additional units will be less, whereas with selling more incremental units, the marginal cost will begin to rise. Let us examine the concept of Marginal Revenue in greater detail. The calculation of Marginal Revenue is dependent on supply and demand and on the type of market as well, such as Perfect Competition or Monopoly. He was selling the packets for $5 and since he sold five additional packets, he generated a Marginal Revenue of $25 ($5 x 5). In addition to that, he sold five packets, which were produced by mistake. He made his usual $250 by selling 50 packets. With no surprise, he was able to sell all 55 packets for $5 each. A produced 55 packets one day by mistake and took all of them to the market. He determined the price of each packet to be $5, adding all the cost and his profit, where his profit is $1.50 per packet. A sells 50 packets of homemade chips every day and he incurs some cost to sell and produce them. Practical Example of Marginal Revenueįor example, Mr. In the image above, you can see three curves: Marginal Revenue, Average Revenue or Demand, and Marginal Cost. ![]() However, it may perform a cost-benefit analysis and cease production if marginal revenue drops below marginal cost. Hence, a company seeking to maximize profits must raise its production up to the level where marginal revenue is equal to the marginal cost. It is the revenue that a company can generate for each additional unit sold there is a marginal cost attached to it, which must be accounted for.Ī business can examine its marginal revenue to determine the level of its earnings based on the extra units of output sold. Marginal Revenue is the revenue that is gained from the sale of an additional unit. ![]()
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