Marginal revenue is the income from sales of manufactured products calculated as the difference between net revenues and variable costs. Practically, the marginal revenue contains two components, namely, the fixed costs of the company and its profit.
Explanation:
The owner of the company aims at maximizing his profits. The firm produces up to the moment when the additional income that it would receive from the production of an extra unit equals to the additional costs of production of this unit (its marginal cost).
The additional income that a producer receives in this sense is called his marginal revenue. In conditions of perfect competition, marginal revenue coincides with the selling price, and for a monopolist, the income is less than the sale price. As the monopolist increases sales, he must lower the cost. The income that he receives from the sale of one additional unit is its price minus lost revenue because an increase in quantity traded reduces the amount of all manufactured units. The formula for calculating the marginal revenue is
TRm = TR – TVC, where TRm is the marginal income, and TR – total revenue.
The individual firms’ demand for resources in different types of markets has its characteristics. If the company operates in a perfectly competitive market and its need for funds is insignificant, then the share of the resource in the total consumption is small. A firm as a perfect competitor is a price receiver; it does not set a price for a resource. A company can buy all the units of a product at the same price. In conditions of perfect competition, the market price and marginal revenue coincide.