How to Calculate Marginal Revenue: A Practical Tutorial with Example

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Jul 08, 2020 08:00 AM

If you have a company, whether it’s small or big, one of the most important things to do is calculating marginal revenue. Why is calculating marginal revenue important?

Calculating and analyzing marginal value is important because it helps you or the company to identify the revenue that you get from one additional unit of production. Marginal revenue is the additional revenue that you get from the sale of one additional unit of a product.

This revenue calculation is based on the law of diminishing returns. The value of marginal revenue will go down, while the output level is going up.

In simple words, marginal value is like the extra money you or your company collect or the income obtained from the last product or service that is successfully sold. You can use the money from the marginal revenue to cover general expenses and can help you to focus on profitability.

In this article, Tripboba will help you understand how to calculate marginal revenue in several steps.

1. How to Calculate Marginal Revenue Product

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In this part, Tripboba will show you how to calculate Marginal Revenue with a given example. You can follow the steps and understand them through the table.

First, create a table that shows the number of production costs and the number of units that you produce. The table consists of the number of quantities, price, total revenue, and marginal revenue. You can create the table either with Microsoft Word or Microsoft Excel on your computer.

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The table above shows the data which consists of the quantity or the number of units produced, and the price that consumers are willing to pay, this will give your demand curve.

For example, for one product, consumers are willing to pay for USD 76. Meanwhile, for two products, consumers are willing to pay for USD 72, and so on. 

To determine how much a monopoly will produce and what price they will charge for maximizing profit, you need to calculate the marginal revenue. And to calculate the marginal revenue, we should calculate the total revenue first. The formula for total revenue is price times quantity.

So, when zero units are produced, the total revenue is zero. When one unit is produced and sold at the price of USD 76, the total revenue is USD 76, and when two units are sold, then the total revenue is 144, and so on.

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Now, after you calculate the total revenue, you can start the steps on how to calculate marginal revenue.

Marginal revenue is the increase in total revenue divided by the increase in quantity, and the result is the extra money that you get when you sell the extra items. Here’s the formula to calculate marginal revenue. 

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So, when you increase the number of units from 0 to 1, your total revenue increases by USD 76, so your marginal revenue is USD 76. When you producing one item to two items, your total revenue increases from USD 76 to USD 144, and the quantity increases by one, then your marginal revenue is USD 68.

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So, those are the steps that you can follow on how to calculate marginal revenue.

2. How to Calculate Marginal Revenue Product of Labor

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Besides calculating marginal revenue, another important thing to calculate is the marginal revenue product of labor. So, what is the marginal revenue product of labor?

The marginal revenue product of labor is the change in output that results from the addition of a unit of labor. Here are things that you can follow to calculate marginal revenue product of labor. 

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You can use a formula to calculate it. The formula is shown below.

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After that, you can apply the formula according to the data that is shown on the table. And here are the result.

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So, now you know both how to calculate marginal revenue and marginal revenue product of labor. 

Calculating marginal revenue and marginal revenue product of labor is important especially if you’re running a business. It will help you to manage them better, and in return, you will gain more profit that will make your business even more developed.

So, that's all the tutorial on calculating marginal revenue for your business. We hope it is clear enough to allow you to continue running your business. Good luck!

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