Total Revenue=Current Price Per Productx Current Number Products Sold{\displaystyle {\text{Total Revenue}}={\begin{aligned}{\text{Current Price Per Product}}\x\ {\text{Current Number Products Sold}}\end{aligned}}}
Alt Revenue=(Alt Price)(Alt Products Sold){\displaystyle {\text{Alt Revenue}}=({\text{Alt Price}})({\text{Alt Products Sold}})}
Marginal Cost=Alt Revenue−Original RevenueAlt Products Sold−Current Products Sold{\displaystyle {\text{Marginal Cost}}={\frac {{\text{Alt Revenue}}-{\text{Original Revenue}}}{{\text{Alt Products Sold}}-{\text{Current Products Sold}}}}}. In other words, marginal revenue is the change in revenue per additional product sold.
Total Revenue=($25)(500)=$12,500{\displaystyle {\text{Total Revenue}}=($25)(500)=$12,500} The company determines it will sell 530 T-shirts if it drops the price to $24. Alt Revenue=($24)(530)=$12,720{\displaystyle {\text{Alt Revenue}}=($24)(530)=$12,720} \text{Marginal Revenue} = 12720−12500530−500=22030=$7. 33{\displaystyle {\frac {12720-12500}{530-500}}={\frac {220}{30}}=$7. 33}
Remember, marginal revenue is only useful when analyzing a single product. Some reports may only list data for groups of products.
Marginal Cost=AltProductionCost−CurrentProductionCostAltProductsSold−CurrentProductsSold{\displaystyle {\text{Marginal Cost}}={\frac {{\text{AltProductionCost}}-{\text{CurrentProductionCost}}}{{\text{AltProductsSold}}-{\text{CurrentProductsSold}}}}}. For example, it costs Kim’s Soda $50 to produce 200 cans of soda. Kim’s could spend $60 instead to produce 225 cans. Marginal Cost=60−50225−200=$0. 40{\displaystyle {\text{Marginal Cost}}={\frac {60-50}{225-200}}=$0. 40}. Kim’s soda should only enact this plan if marginal revenue is equal to or greater than $0. 40.
For instance, let’s say that Kim’s, the soda company from the examples above, is now in competition with hundreds of other soda firms. The price per can is set at $0. 50 — any lower and Kim’s will lose money, and any higher and customers will choose other products. Marginal revenue is always $0. 50, since Kim’s cannot sell cans for any other price.
For instance, let’s say that Kim’s, the soda company from the examples above, is now in competition with hundreds of other soda firms. The price per can is set at $0. 50 — any lower and Kim’s will lose money, and any higher and customers will choose other products. Marginal revenue is always $0. 50, since Kim’s cannot sell cans for any other price.
For example, Kim’s drops the price of its soda from $1 to $0. 85. It may still receive additional revenue, but in a monopolistic market, customers will still buy their competitors’ soda for a higher price.
Kim’s has become a major soda player and now shares the market with Linda’s and Andy’s, two other soda firms. The three firms agree to sell their sodas at the same price, so marginal revenue for each additional soda will remain unchanged regardless of the price level they chose. If Jeff starts a small firm to undercut their inflated price, the three large firms may drop their prices so low that Jeff is forced out of business. The firms accept the reduced marginal revenue temporarily because they can raise the prices again once Jeff’s is gone.
