Monday, September 14, 2009

bJargons - I Marginal Revenue

It is the revenue per additional unit of an item sold. For eg lets say the price of an item A is 10$. And a company C sells 100 units on an average. So the revenue is 1000$. To sell an additional unit the company might have to reduce the price of the item. Why..? Since the item is priced at 10$, consumers are buying the product and the consumption is 100 units. To make the consumers to buy one more unit, the company needs to reduce the price for eg by .05 dollar. So the the price is 9.95$ now. Now the

Marginal revenue = Change in revenue/Change in units
which is
(101 * 9.95) - (100 * 10) / 101-100 = 4.95.

So the Marginal revenue is 4.95 against 9.95 that you might have expected.

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