# Formula for Calculating Marginal Revenue

### Marginal revenue is a useful tool companies use to determine how to price their products and services, and here's how it's calculated.

Sep 4, 2015 at 9:33AM

Marginal revenue refers to the amount of additional revenue a company can expect to receive by selling one more product, or unit. For this reason, it is often referred to as "unit revenue."

Calculating marginal revenue can be more complicated than it seems, depending on the type of market for the particular product or service. For most products, to generate additional demand (and sell more products), the price needs to drop -- which can affect the additional amount of revenue per product a company can expect to produce.

Marginal revenue in a competitive market
If there are many firms that offer a substantially identical product at roughly the same price, we can say that the market is "competitive". Real-world examples of competitive markets include agricultural products and commodities.

In a competitive market, marginal revenue is equal to the price of the product. For example, if a farmer can sell tomatoes for \$10 per bucket, the marginal revenue from producing an additional bucket is \$10.

Marginal revenue in a non-competitive market
Most goods and services sold are not competitive markets in the economic sense, meaning that one company or a handful of companies can control the price of the goods they sell. For example, Apple is certainly in competition with many other mobile phone manufacturers, but it is the only company that makes the iPhone, so Apple can control its price.

Thanks to the laws of supply and demand, if Apple increases the price for the iPhone, it will become too expensive for some people and demand will go down. Conversely, if Apple lowers the price, demand for the iPhone would increase and the company would sell more phones.

So, the basic formula for calculating marginal revenue is

As a simplified example, let's say that Apple can sell 10 iPhones if it charges \$700. If Apple decides to lower the price to \$680, it can sell 11. In other words, by selling 10 iPhones, Apple would generate \$7,000 in revenue. And selling 11 phones would produce revenue of \$7,480 -- making the marginal revenue of the 11th phone \$480.

In most real-world situations, marginal revenue is less than the price of the product or service, and decreases as more products are sold. The challenge these businesses face is to determine how much they need to charge for a product in order to maximize profit, for which they use something called the marginal revenue curve. For example, if it costs Apple \$500 to make an iPhone, it doesn't make sense for the company to sell more phones if it makes the marginal revenue fall below that amount.

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# 4 in 5 Americans Are Ignoring Buffett's Warning

### Don't be one of them.

Jun 12, 2015 at 5:01PM

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.

The catch was: Attendees weren't allowed to record any of it. No audio. No video.

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than \$2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend.

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity.

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands."

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.