How this instrument works
Marginal revenue is the change in total revenue that comes from selling one additional unit. This instrument computes it the way analysts actually have the data for it — from two observed points, a revenue-and-quantity pair before a change and another after — rather than from an assumed demand curve. Divide the revenue difference by the quantity difference and the result is the average revenue earned by every unit in that gap, which stands in for the revenue of the marginal unit near the middle of the interval.
The number matters because it rarely equals the price on the tag. A revenue manager setting a volume discount, a landlord filling the last few units in a building, or a retailer running a promotion all need to know whether the units they are chasing pay for themselves — a question the sticker price alone cannot answer once selling more requires cutting price to move it. Set the result here against a marginal cost figure and the sign tells you whether the added volume helped or hurt the bottom line.
Because the formula uses two snapshots rather than a continuous function, it reports an average slope over the interval, not the exact revenue of one specific extra unit at one specific quantity. The narrower the gap between Quantity 1 and Quantity 2, the closer this reading sits to the calculus definition economists write as dTR/dQ; a wide gap can smooth over a price change that happened partway through and hide exactly where revenue turned.
- Enter Total revenue at quantity 1, $ and the matching Quantity 1 — your starting sales point.
- Enter Total revenue at quantity 2, $ and Quantity 2 for the point after the change in output or sales.
- Read Marginal revenue per additional unit — the extra revenue earned, on average, by each unit sold between the two points.
- Compare that figure with revenue1 ÷ quantity1, the starting price per unit, to see whether marginal revenue sits below or above the going price.
Worked example — from 100 units to 110 units
Total revenue at quantity 1, $ is 15,000 and Quantity 1 is 100, so the starting sales average $150 per unit. Total revenue at quantity 2, $ rises to 16,400 once Quantity 2 reaches 110. The instrument takes the change in revenue, 16,400 minus 15,000, equal to 1,400, and the change in quantity, 110 minus 100, equal to 10, then divides one by the other: Marginal revenue per additional unit comes to 1,400 divided by 10, or $140.00.
That $140 sits below the $150 average price from the first reading, which is exactly the pattern a seller sees when moving added volume requires a lower price: the last ten units brought in less per unit than the average unit already sold. Total revenue alone (which rose, from 15,000 to 16,400) hides this; the marginal figure isolates what those specific additional units actually contributed, and flags that the seller likely gave up some price to land the extra ten.
Questions
Why is marginal revenue below the average price per unit in the example?
Because moving from 100 to 110 units required revenue to rise by only $140 per added unit, while the original 100 units averaged $150 each. That gap is the signature of a downward-sloping demand curve: to sell more, a seller typically accepts a lower price on the added units, and sometimes on earlier units too, which pulls the marginal figure under the average.
How does marginal revenue differ from average revenue?
Average revenue is total revenue divided by total quantity — effectively the price per unit across everything sold. Marginal revenue only looks at the last slice: the extra revenue divided by the extra quantity between two points. The two match only when price stays flat as volume changes; any price movement pulls them apart, which is the reason to compute marginal revenue separately at all.
Who actually uses a two-point marginal revenue calculation like this one?
Pricing and revenue managers checking whether a discount tier or extra production run still pays, retailers and hoteliers comparing a promotional price against baseline sales, and finance students working through microeconomics problem sets all use this exact two-point method, because real sales data usually arrives as before-and-after totals rather than a smooth demand equation.
Can marginal revenue come out negative?
Yes, whenever total revenue at the higher quantity is smaller than at the lower quantity, meaning selling more actually reduced total revenue. That happens on the elastic stretch of a demand curve, where the price cut needed to move extra units outweighs what those units bring in. A negative reading is a signal to question further expansion on revenue grounds alone, independent of cost.
How is this different from a marginal cost calculation?
This instrument only measures what an extra unit adds to revenue; it says nothing about what that unit costs to produce or sell. Marginal revenue and marginal cost are read together in economics — output that maximizes profit is where the two are equal — so this figure answers half the question, and a matching cost figure from your own records answers the other half.
Does the size of the quantity gap affect accuracy?
It does. This calculation averages revenue over the whole gap between Quantity 1 and Quantity 2, so a large jump can blur what happened partway through — a price cut that only applied to the last few units, for instance. A narrower quantity interval in your source data gives a reading closer to the revenue of one true additional unit.
References
- U.S. Small Business Administration — Manage Your Business guide
- MIT OpenCourseWare — Principles of Microeconomics (14.01SC)
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.