MARGINAL REVENUE Meaning and
Definition
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Marginal revenue is a concept used in economics to define the additional revenue obtained from selling one additional unit of a good or service. It is a crucial measure in understanding the financial impact of producing and selling additional units.
To calculate marginal revenue, the total revenue earned from selling a specific quantity of a good or service is compared with the total revenue earned from selling one additional unit. This difference represents the marginal revenue.
Marginal revenue is valuable in determining the optimal level of production and pricing strategies for a company. By comparing the marginal revenue with marginal costs, firms can assess the profitability of producing additional units. If the marginal revenue exceeds the marginal cost, producing more units can lead to increased profit. Conversely, if the marginal revenue falls below the marginal cost, it may be more beneficial for the firm to halt production or reduce output.
Understanding marginal revenue is also crucial for pricing decisions. Companies typically aim to set prices that exceed marginal costs to maximize their profits. By analyzing the relationship between the price, quantity sold, and marginal revenue, businesses can effectively determine an optimal price point that maximizes their revenue.
Overall, marginal revenue is a fundamental concept in economics that assists in decision-making processes related to production levels and pricing strategies, allowing businesses to make informed choices to achieve their financial objectives.
Etymology of MARGINAL REVENUE
The word "marginal" originates from the Latin word "marginalis", which means "on the edge" or "borderline". It is derived from "margo", meaning "border" or "margin".
The word "revenue" comes from the Old French word "revenue", which is derived from the Latin word "revenire", meaning "to come back" or "return". It signifies the amount of income or money that returns or comes back to an individual or a company.
When combined, "marginal revenue" refers to the additional revenue or income generated by producing one more unit of a product or service. It represents the change in total revenue when output or quantity increases by one unit.
