It is the additional income that arises from the sale of an additional unit. For the relationship of the price of the product with the income and therefore the profit that the sale of said good generates for a company, it is necessary to take into account the marginal income, since while the marginal income is positive, the total income from sales will be growing.
In this sense, marginal revenue represents the change that is generated in total revenue, due to the sale of an additional unit. Thus, when a marginal revenue falls to zero or less, it means that an additional sale is not increasing or decreasing total revenue.
On the other hand, when the demand curve is known, the marginal revenue curve can be derived mathematically from it. Thus, at the point where the marginal income curve manages to intercept the horizontal axis, the appropriate level of production will be marked that will maximize total income.
In cases where a company is part of a market, where there is free competition, the marginal revenue is equal to the sale price.
On the other hand, if the company participates in a market that has perfect competition, that is, where all the companies that compete in the market with the same type of product sell at the same price, the marginal revenue curve is a horizontal line, equal to the unit price for all sales volumes.
In this way, as long as the marginal cost (additional cost resulting from producing and selling an additional unit) is less than the marginal income, which is given by the price, the additional production and sales will be profitable for the company.
However, when marginal cost exceeds price, the company loses money on each of the additional units. That is why, the volume that maximizes the profits is given by the quantity for which the marginal cost is equal to the price.
Marginal revenue can be kept constant, but the most common or normal is to follow the law of diminishing returns, where the higher the number of units produced, the lower the marginal revenue.
For a company it is profitable to produce more units, even if marginal revenue is decreasing, as long as it is above or equal to marginal cost.
The calculation of marginal revenue is done by dividing total revenue by the number of additional units sold.
