This is a term used in microeconomics, and it’s quite a well-known formula. However, in order to get a better understanding of what marginal revenue means, you will need to know that this is usually steady and won’t fluctuate. But mainly, the definition of marginal revenue is the additional revenue generated by increasing sales by one unit. In other words, if a company is lowering the price of a product to get better sales, the money resulted in that price lowering is named marginal revenue.
So, in the end, why would you need to know this ratio? Well, as per an old saying, the customer is the master. Thus, if you raise the price, the demand for that certain product will drop, so no production will be necessary. It may bring more profit, of course, but on the not-so-fun-part of things, the customers will start purchasing from the competitors that have lower prices. This could lead to a catastrophic loss.
To be sure that you got the whole idea, use the equations below.
Marginal Revenue Formula
First of all, to get the result for the marginal revenue, you will first need to know the total revenue. Doing this is simple by just multiplying the current number of products sold by the current price per product. Once you have the result, you will need to get the alternate revenue. After you’ve dropped the price of that product, you must multiply the new price with the products sold.
After this, you can finally find out the marginal revenue. To do so, subtract the original revenue from the
alternate revenue and subtract the current products sold from the alternate products sold. After this, just divide the two subtractions and you will get the marginal revenue.
To end these series of calculations, you get the marginal revenue or profit after you have changed the price of one product. Please be advised that these calculations are used to get the marginal revenue for just one product and not all at once. If you get all the products together and mix them, you will get only errors and inexact statistics.
To get the proper results, you should also perform a market study: when the price has dropped or increased, in what period, etc. As said earlier, inexact data will surely lead to errors.
Final Thoughts
To conclude the above statements and formulas, getting the right data will mean the world for your company. You will gain more profit and you will also get a reputation on the market. If you raise the price way to high, your competitors will win by getting the customers looking for lower prices. If you go too low, the marginal revenue will be inexistent, and you will go into a losing game and the only one who will win will be the competitors. But if you get the price just right, you can smash the competition and climb on top of the ladder only by getting the marginal revenue to work in your favor. Higher demands for your products mean that you can produce more, much cheaper but with great profit.