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What is the relationship between marginal revenue and total revenue?

Modified on: 2018/07/16
A:

Total revenue is the amount of total sales of goods and services. It is calculated by multiplying the amount of goods and services sold by the price of the goods and services. Marginal revenue is directly related to total revenue because it measures the change in the total revenue with respect to the change in another variable.

Marginal revenue measures the change in revenue that results from a change in the amount of goods or services sold. It indicates how much revenue increases for selling an additional unit of a good or service. To calculate marginal revenue, divide the change in total revenue by the change in the quantity sold. Therefore, the marginal revenue is the slope of the total revenue curve. Use the total revenue to calculate marginal revenue.

For example, suppose a company that produces toys sells one unit for $10 for each of its first 100 units. If it sells 100 toys, its total revenue would be $1,000 (100 * 10). The company sells the next 100 toys for $8 a unit. Its total revenue would be $1,800 (1,000 + 100*8).

Suppose the company wanted to find its marginal revenue gained from selling its 101st unit. The total revenue is directly related to this calculation. First, the company must find the change in total revenue. The change in total revenue is $8 ($1,008 - $1,000). Next, it must find the change in the toys sold, which is 1 (101-100). Thus, the marginal revenue gained by producing the 101st toy is $8.


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