What is marginal revenue?

Question

Here is are some basic definitions of marginal revenue...
-The change in total revenue that occurs when a company sells an additional unit of a product.
-the extra revenue received by a firm for selling one additional unit of a good
-Revenue generated from selling each additional unit.

So really, my question is, what is this "one additional unit"? I can't seem to grasp what it means and therefore I don't understand what marginal revenue is. Please someone help, before I go insane.

Answer 1

The topic of marginal revenue is related to the concept of elasticity. Perhaps an example would make it easier to understand.

Marginal revenue is the additional revenue added by an additional unit of output, or in terms of a formula:

Marginal Revenue = (Change in total revenue) divided by (Change in sales)

Let's assume people will not buy more than 100 units if its price is $10.00. To sell more, price must drop. Suppose that to sell 101 units, the price must drop to $9.95. What will the marginal revenue of the 101st unit be? Or, in other words, by how much will total revenue increase when the 101st unit is sold?

There is a temptation to answer this question by replying, "$9.95." A little arithmetic shows that this answer is incorrect. Total revenue when 100 are sold is $1000. When 101 are sold at $9.95, total revenue is (101 x $9.95) = $1004.95. The marginal revenue of the 101st unit is only $4.95.

To see why the marginal revenue is less than price, one must understand the importance of the downward-sloping demand curve. To sell another unit, sellers must lower price on all units. They received an extra $9.95 for the 101st unit, but they lost $.05 on the 100 that they were previously selling. So the net increase in revenue was the $9.95 minus the $5.00, or $4.95.

Please refer to the link for the full explanation and diagrams. Hopefully you'll understand this better after this.