What is Marginal Revenue?

S7-SA1-0113

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Marginal Revenue is the extra income a company earns when it sells one more unit of a product. It helps businesses understand how much their total earnings change with each additional sale.

Simple Example

Quick Example

Imagine your neighbourhood chai shop sells 100 cups of chai for Rs 1000. If they sell one more cup (101st cup) and their total earnings become Rs 1008, then the Marginal Revenue for that 101st cup is Rs 8. It's the additional money from that single extra cup.

Worked Example

Step-by-Step

Let's say a local bakery sells delicious samosas. Here's how to calculate Marginal Revenue:

Step 1: Find the Total Revenue before selling the extra unit. If they sell 50 samosas at Rs 10 each, Total Revenue = 50 * Rs 10 = Rs 500.
---Step 2: Find the Total Revenue after selling one more unit. If they sell 51 samosas, and to sell the extra one, they had to slightly lower the price of all samosas to Rs 9.80 each (sometimes happens to sell more), then Total Revenue = 51 * Rs 9.80 = Rs 499.80.
---Step 3: Calculate the change in Total Revenue. Change = New Total Revenue - Old Total Revenue.
---Step 4: Marginal Revenue = Rs 499.80 - Rs 500 = -Rs 0.20.
---Answer: The Marginal Revenue for the 51st samosa is -Rs 0.20. (This means selling the extra unit actually reduced overall revenue because of the price drop for all units).

Why It Matters

Understanding Marginal Revenue is crucial for businesses, big or small, to make smart decisions about production and pricing. From FinTech companies designing new payment systems to EV manufacturers deciding how many cars to produce, everyone uses this concept. It can even help data scientists in AI/ML predict optimal pricing strategies for online stores.

Common Mistakes

MISTAKE: Thinking Marginal Revenue is always the same as the price of the extra unit. | CORRECTION: Marginal Revenue is the change in total revenue, which might be less than the price if you have to lower the price of all units to sell more.

MISTAKE: Confusing Marginal Revenue with Total Revenue. | CORRECTION: Total Revenue is all the money earned from selling ALL units; Marginal Revenue is only the extra money from selling ONE MORE unit.

MISTAKE: Calculating Marginal Revenue for multiple extra units instead of just one. | CORRECTION: Marginal Revenue is specifically about the change in total revenue when ONE additional unit is sold.

Practice Questions

Try It Yourself

QUESTION: A mobile data company sells 10 GB packs for Rs 1000. If they sell 11 GB packs and total revenue becomes Rs 1080, what is the Marginal Revenue of the 11th pack? | ANSWER: Rs 80

QUESTION: A small stationery shop sells 20 notebooks for Rs 400. To sell the 21st notebook, they offer a slight discount, and total revenue from 21 notebooks becomes Rs 415. What is the Marginal Revenue for the 21st notebook? | ANSWER: Rs 15

QUESTION: An online t-shirt seller sells 50 t-shirts at Rs 300 each. Their total revenue is Rs 15,000. If they sell 51 t-shirts, they find they must drop the price for all t-shirts to Rs 295 to sell the extra one. Calculate the Marginal Revenue for the 51st t-shirt. | ANSWER: New Total Revenue = 51 * Rs 295 = Rs 15,045. Marginal Revenue = Rs 15,045 - Rs 15,000 = Rs 45.

MCQ

Quick Quiz

Which of the following best describes Marginal Revenue?

The total money earned from all sales.

The cost of producing one additional unit.

The additional revenue from selling one more unit.

The profit earned on each unit sold.

The Correct Answer Is:

Marginal Revenue specifically refers to the change in total revenue when one extra unit is sold. Option A is Total Revenue, Option B is Marginal Cost, and Option D is profit per unit.

Real World Connection

In the Real World

Online food delivery apps like Zomato or Swiggy constantly use Marginal Revenue. They analyze how offering a discount on an extra dosa or biryani affects their total earnings. Similarly, ISRO, when planning to launch satellites, considers the 'marginal revenue' from each additional service or payload they carry.

Key Vocabulary

Key Terms

REVENUE: The total income a business earns from its sales | TOTAL REVENUE: Price multiplied by the quantity sold | MARGINAL: The 'additional' or 'extra' amount | UNIT: A single item or quantity of a product or service

What's Next

What to Learn Next

Next, you should explore 'Marginal Cost'. Once you understand both Marginal Revenue and Marginal Cost, you'll be able to see how businesses decide the best quantity to produce to maximize their profits! Keep up the great work!