Marginal Revenue and Price

The final new concept is marginal revenue.

Marginal revenue (MR) is the change·in revenue that is generated by an additional unit of sales. MR can be either positive or negative. – Table 9-3 shows marginal revenue in’ column (4). MR is calculated by subtracting the total revenues of adjacent outputs. When we subtract the TR we get by selling q units from the TR we get by selling q + 1units, the difference is extra revenue or MR Thus. from q = 0 to s= 1. we get MR = $180 – $0. From’ q = 1 to q = 2. MR is $320 – $180 == $140. . MR. is positive until we arrive at q = 5 and negative from then on. What does the strange notion of negative marginal revenue mean? That the firm is paying people to take its goods? Not at all. Negative MR means that in order to sell additional units, the firm -must decrease its priu on earlier units’ so much that -its total revenues decline.

For example. when the firm sells 5 units. it gets TR (5 units) ‘7 5 X $100 = $500 Now say the firm wishes to sell an additional-unit of output. Because it is an imperfect competitor. it can increase sales only by lowering price. So to sell 6 units. it lowers the price from S100 to S80. It gets SSO of revenue from the sixth unit, but it gets only 5 X $80 on the first 5 units. yielding: TR hr (6 units) = 5 X SSO + 1 X $80 = $400 + 80 = $480 Marginal revenue between 5 and 6 units is 480- $500 = – $20. The necessary price reduction on the first 5 units was so large that, even after adding in the sale of the sixth “mit. total revenue fell. This is what happens when Am is negative. To test your understanding. fill in the blanks in columns (2) to (4) of Table 9-3.

Note that even though MR is negative. AR or price, is still positive. Do not confuse marginal revenue with average revenue or price. Table 9-3 shows that they are different. In addition, Figure . ,3(.1) plots the demand (AR~ curve and the marginal revenue (MR) curve. Scrutinize Figure 9-3«(1) to see that the plotted blue steps of MR definitely lie below the black dd curve of Aft In fact, MR turns n gative when AR is halfway down toward zero.

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