marginal revenue

Marginal revenue is the extra money a firm brings in from selling one more unit. If you're a lemonade stand and selling the 11th cup adds $0.50 to your takings, your marginal revenue is $0.50. It sounds like just the price — and for a tiny competitive firm it is — but for any seller with market power there's a sneaky twist that makes marginal revenue one of the most quietly important ideas in the study of monopoly.

Here is the twist. A price taker can sell as much as it wants at the going price, so each extra unit simply adds that price: marginal revenue equals price, full stop. But a price maker faces a downward-sloping demand curve — to sell more, it has to lower the price, and (selling the same product to all) it must lower the price on every unit, not just the new one. So selling one more both adds the new unit's price and shaves a little off the revenue from all the units it could have sold dearer. Net, marginal revenue is less than the price. A quick numeric feel: if you can sell 10 cups at $1.00 (revenue $10) but must drop to $0.95 to sell 11 (revenue $10.45), the 11th cup added only $0.45 — below its $0.95 price, because you gave up 5 cents on each of the first ten.

This gap — marginal revenue sitting below price for anyone with market power — is the engine behind the whole monopoly story. A firm maximises profit where marginal revenue equals marginal cost (MR = MC). For a competitive firm, since MR equals price, that lands at price = marginal cost, the efficient outcome. For a monopolist, since MR is below price, MR = MC lands at a quantity where price is above marginal cost — fewer units sold, a higher price charged. Marginal revenue is thus the precise reason a monopoly holds output back: pushing one more unit out the door costs it revenue on everything else.