MARGINAL INCOME: HOW TO CALCULATE IT AND EXAMPLES - DUDAS - 2025

The marginal revenue is the increase in income resulting from the sale of an additional unit of output. While it may remain constant at a certain level of production, it follows the law of diminishing returns and will eventually slow down as the level of production increases.

There is a marginal cost attached to it, which must be taken into account. Perfectly competitive firms continue to produce results until marginal revenue equals marginal cost.

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This revenue is significant in economic theory because a firm that wants to maximize profits will produce up to the point where marginal revenue equals marginal cost.

Marginal revenue is easy to calculate; all you need to know is that it is the income earned by an additional unit sold. Managers use this type of income as part of their break-even analysis, which shows how many units a company must sell to cover its fixed and variable costs.

How to calculate marginal revenue?

A firm calculates marginal revenue by dividing the change in total revenue by the change in the quantity of total output. Therefore, the selling price of a single additional item sold will equal marginal revenue.

Marginal income = change in total income / change in quantity of total production.

The formula is divided into two parts: The first, the change in income, which means (total income - previous income). The second, the change in the quantity produced, which means (total quantity - old quantity).

For example, a company sells 100 items for a total of $ 1,000. If you sell the following item for $ 8, the marginal revenue for item 101 is $ 8. Marginal revenue ignores the previous average price of $ 10 as it only looks at incremental change.

Marginal revenue equaling marginal cost

A firm experiences best results when production and sales increase until marginal revenue equals marginal cost. Marginal cost is the increase in total cost that results from carrying out an additional unit of activity.

Any benefit from adding an additional unit of activity is a marginal benefit. This benefit occurs when marginal revenue exceeds marginal cost, resulting in a profit from the items sold.

When marginal revenue falls below marginal cost, firms generally adopt the cost-benefit principle and stop production, because no more profit is made from the additional production.

Marginal income vs. average income

There is an average income curve or demand curve, which is not the consumer demand curve, but the producer demand curve.

The curve represents the average quantity at an average price. Now you can analyze marginal revenue in the context of marginal cost.

In a competitive or perfectly competitive market, marginal cost will determine marginal revenue. In a monopoly market, demand and supply will determine marginal revenue.

Income program

To help with calculating marginal revenue, an income schedule describes the total income earned as well as the incremental income for each unit.

The first column of a revenue schedule lists the projected quantities demanded in increasing order, and the second column lists the corresponding market price.

The product of these two columns results in total projected revenue. The difference between the projected total revenue from an order line and the projected total revenue from the bottom line is the marginal revenue.

For example, 10 units sell for $ 9 each, resulting in total revenue of $ 90.

11 units are selling for $ 8.50, resulting in total revenue of $ 93.50. This indicates that the marginal revenue for unit 11 is $ 3.50.

Examples

Example 1

Suppose Mr. X is selling boxes of candy. He sells 25 boxes a day for $ 2 each, making a profit of $ 0.50 for each box sold.

Now, due to an increase in demand, he was able to sell an additional 5 boxes of candy for the same price. You incurred the same cost, which leaves you with the same amount of profit on these boxes, adding up to $ 2.50 ($ 0.50 x 5).

Mr. X calculated that he could sell even more boxes of candy, so he ordered 10 additional boxes.

Marginal cost increase

However, due to government restrictions and production limitations, the cost of each box after box 30 increased by 10%, making the additional 5 boxes of candy cost $ 1.65 each.

His total cost was as follows: (30 boxes x $ 1.50 = $ 45, plus 5 boxes x $ 1.65 = $ 8.25), Total cost = $ 45 + $ 8.25 = $ 53.25.

He went to the market and tried to sell those boxes of candy for the normal price of $ 2 each for the first 30 boxes. After that, she priced each box of candy at $ 2.15.

He was able to sell the first 30 boxes easily, but he couldn't sell the remaining 5 boxes at the price he determined. To sell the remaining boxes, he needed to reduce the price to the normal price, otherwise, people would buy them from some other seller.

He sold his remaining 5 boxes for $ 2 and had a diminishing marginal return on those 5 boxes. This is how marginal cost and diminishing marginal returns work with the marginal cost taken into account.

Example 2

For example, Mr. A sells 50 packages of homemade chips every day and incurs some costs to sell and produce them.

He determined that the price of each package was $ 5, adding all the cost and his profit, where his profit is $ 1.50 per package.

Now Mr A produced 55 packages one day by mistake and brought them to market. To no surprise, he was able to sell all 55 packages for $ 5 each. He made his usual $ 250 selling 50 packages.

On top of that, it sold 5 additional packages, which were produced by mistake. He was selling the packages for $ 5 and since he sold 5 additional packages, he had a marginal revenue of $ 25 ($ 5 x 5).

This is how marginal revenue is calculated. It depends on supply and demand, and also on the type of market, such as perfect competition or a monopoly.

References

1. Gerald Hanks (2017). How to Calculate Marginal Income. Bizfluent. Taken from: bizfluent.com.
2. Will Kenton (2018). Marginal Revenue (MR). Investopedia. Taken from: investopedia.com.
3. CFI (2019). Marginal Revenue. Taken from: corporatefinanceinstitute.com.
4. Economics Online (2019). Marginal revenue. Taken from: economicsonline.co.uk.
5. Wikipedia, the free encyclopedia (2019). Marginal revenue. Taken from: en.wikipedia.org.