A farmer sells corn at $5 per bushel regardless of how many bushels she brings to market — she's a price-taker. Her marginal revenue is $5 per bushel: every additional bushel adds exactly $5 to her revenue. A pharmaceutical company with a patented drug faces a downward-sloping demand curve — to sell 10,001 pills instead of 10,000, it must lower the price slightly on all 10,001 pills. Its marginal revenue from the 10,001st pill is the new price minus the revenue lost by cutting the price on the previous 10,000 pills. That gap — between price and marginal revenue — is the signature of market power.
The formula
Marginal Revenue (MR) = ΔTotal Revenue ÷ ΔQuantity
For a competitive firm selling at constant market price P: MR = P (revenue rises by exactly P for each additional unit)
For a firm with a downward-sloping demand curve: MR < P (to sell more, price must be cut on all units; the revenue gain on the new unit is partially offset by the revenue loss on previous units)
If a firm currently selling 100 units at $50 can sell 101 units only by dropping price to $49.80:
- Revenue before: 100 × $50 = $5,000
- Revenue after: 101 × $49.80 = $5,029.80
- MR of 101st unit = $5,029.80 – $5,000 = $29.80 — far below the $49.80 price
Reading the result
The relationship between MR and price:
| Market structure | MR vs. Price |
|---|---|
| Perfect competition | MR = P (horizontal demand) |
| Monopolistic competition | MR < P (some pricing power) |
| Monopoly | MR < P, gap largest (full pricing power) |
The MR curve for a firm with a downward-sloping demand curve lies below the demand curve and falls twice as fast (for a linear demand curve). MR becomes zero at the output level where total revenue is maximized, and becomes negative beyond that point — selling more actually reduces total revenue.
Worked example
A streaming platform has a linear inverse demand: P = 20 – 0.001Q (where Q is subscribers in thousands). Total revenue = P × Q = 20Q – 0.001Q². Marginal revenue = dTR/dQ = 20 – 0.002Q.
At Q = 5,000 (5 million subscribers): P = $15, MR = $10. The platform earns $15 per subscriber but the marginal revenue of the next subscriber is only $10 — because adding subscribers requires cutting price for all existing ones.
The Bureau of Economic Analysis corporate revenue data tracks industry-level revenue dynamics that reflect these MR relationships — industries where pricing power is high (pharmaceuticals, software, media) show persistent gaps between price and production cost that are consistent with MR well below P.
Where it's used
MR is half the profit-maximization equation. No firm output decision can be evaluated without comparing MR to MC. For competitive firms, P = MR makes the analysis straightforward. For firms with market power, finding the profit-maximizing output requires explicitly calculating MR from the demand curve — and recognizing that it always falls below price.
