What Is the Best Definition of Marginal Revenue?
Marginal revenue is the additional total revenue a firm gains from selling one more unit of a good or service. It equals the change in total revenue divided by the change in quantity sold (MR = delta TR / delta Q).
The answer
The best definition of marginal revenue is: the additional total revenue a firm earns from selling one more unit of output. Formally, marginal revenue (MR) equals the change in total revenue divided by the change in quantity sold:
MR = change in total revenue / change in quantity = delta TR / delta Q
If a bakery's total revenue rises from 100 to 108 dollars when it sells one more cake, the marginal revenue of that cake is 8 dollars. Marginal revenue answers a precise question: what does the next unit add to the money coming in?
Why this is the correct definition
Economics analyzes decisions "at the margin" one more or one fewer unit and marginal revenue is the revenue side of that analysis. It is defined as a change (a difference between two totals), not a level. This is what separates it from other revenue measures:
- Total revenue (TR) is price times quantity the whole amount earned. Marginal revenue is only the increment the last unit adds, not the total.
- Average revenue (AR) is total revenue divided by quantity (TR / Q), which for a single-price firm equals the price. Marginal revenue is not an average; in most markets it falls faster than average revenue because selling more may require lowering the price on all units.
For a firm in perfect competition, price stays constant no matter how much it sells, so MR equals the price and equals average revenue. For a firm with market power (a monopoly or monopolistic competitor), selling an extra unit usually means cutting the price on every unit sold, so MR is below the price and can even become negative if the price cut outweighs the extra sales.
Why the other options are wrong
On a multiple-choice exam, tempting distractors define marginal revenue as "total money a firm earns" (that is total revenue), "revenue per unit" (that is average revenue or price), or "the cost of producing one more unit" (that is marginal cost, a completely different concept). Each confuses marginal revenue with a neighboring term. The only accurate choice is the one describing the added revenue from one more unit sold the change in total revenue per additional unit.
The bigger picture: MR = MC
Marginal revenue matters because it drives the profit-maximizing rule. A firm should keep producing as long as each additional unit brings in at least as much revenue as it costs to make. Profit is maximized where marginal revenue equals marginal cost (MR = MC). Produce beyond that point and the extra units cost more than they earn, shrinking profit; stop short of it and the firm leaves profitable sales on the table. Because MR can be negative once price cuts overwhelm added volume, this rule also explains why firms with market power deliberately restrict output rather than selling as much as possible. Understanding marginal revenue as the change in total revenue per extra unit is the foundation for all of this analysis.
| Marginal revenue (MR) | delta TR / delta Q | Extra revenue from selling ONE more unit |
| Total revenue (TR) | Price x Quantity | All revenue earned from every unit sold |
| Average revenue (AR) | TR / Q (= price) | Revenue earned per unit on average |
| Marginal cost (MC) | delta TC / delta Q | Extra cost of producing one more unit |
Frequently asked
What is the formula for marginal revenue?
Marginal revenue equals the change in total revenue divided by the change in quantity sold: MR = delta TR / delta Q. In practice, it is the difference in total revenue when output rises by one unit, showing how much that extra unit adds to income.
How is marginal revenue different from total revenue?
Total revenue is the entire amount earned (price times quantity), while marginal revenue is only the increment the next single unit adds to that total. Total revenue is a level; marginal revenue is a change measured one unit at a time.
Why does profit maximize when marginal revenue equals marginal cost?
As long as an extra unit earns more revenue (MR) than it costs to make (MC), producing it raises profit. Once MR falls below MC, extra units lose money. Profit peaks exactly where MR = MC, the point where those two forces balance.
Can marginal revenue be negative?
Yes. For a firm with market power, selling more may require lowering the price on all units. If that price cut outweighs the revenue from the extra unit, total revenue falls and marginal revenue becomes negative. In perfect competition, MR stays constant at the price.
What is the difference between marginal revenue and average revenue?
Average revenue is total revenue divided by quantity (TR/Q), which equals the price per unit. Marginal revenue is the added revenue from one more unit. For a single-price firm AR equals price, while MR is below price whenever selling more requires cutting the price.