Marginal Revenue (MR) Curve

Definition

The marginal revenue (MR) curve represents the additional revenue a firm earns by selling one more unit of its product. It is a crucial concept in understanding a firm's pricing and output decisions, particularly in the context of the short-run cost structure.

5 Must Know Facts For Your Next Test

1. The marginal revenue curve is downward-sloping, reflecting the law of diminishing marginal revenue, which states that as a firm sells more units, the additional revenue from each successive unit sold will decrease.
2. The position and slope of the MR curve depend on the firm's demand curve and the market structure in which it operates, with more competitive markets typically having flatter MR curves.
3. In a perfectly competitive market, the MR curve is horizontal and equal to the market price, as the firm is a price-taker and cannot influence the price of its product.
4. In a monopolistic market, the MR curve lies below the demand curve and has a steeper slope, reflecting the firm's ability to raise prices and earn higher profits by restricting output.
5. The relationship between the MR curve and the firm's marginal cost (MC) curve determines the profit-maximizing level of output, as the firm will produce where MR = MC.

Review Questions

• Explain how the marginal revenue (MR) curve is related to the firm's demand curve and the market structure in which it operates.
  • The position and slope of the MR curve are directly influenced by the firm's demand curve and the market structure in which it operates. In a perfectly competitive market, the MR curve is horizontal and equal to the market price, as the firm is a price-taker and cannot influence the price of its product. However, in a monopolistic market, the MR curve lies below the demand curve and has a steeper slope, reflecting the firm's ability to raise prices and earn higher profits by restricting output.
• Describe the relationship between the MR curve and the firm's marginal cost (MC) curve, and explain how this relationship determines the profit-maximizing level of output.
  • The relationship between the MR curve and the firm's marginal cost (MC) curve determines the profit-maximizing level of output. The firm will produce where MR = MC, as this is the point at which the additional revenue from selling one more unit is equal to the additional cost of producing that unit. By producing at the point where MR = MC, the firm maximizes its profits, as it is selling each additional unit at a price that exceeds the cost of producing that unit.
• Analyze how the law of diminishing marginal revenue affects the shape of the MR curve and the firm's pricing and output decisions.
  • The law of diminishing marginal revenue states that as a firm sells more units, the additional revenue from each successive unit sold will decrease. This is reflected in the downward-sloping shape of the MR curve. As the firm increases its output, the MR curve will become increasingly flatter, indicating that the firm must lower the price to sell an additional unit. This relationship between the MR curve and the firm's output decision is crucial, as the firm will produce at the point where MR = MC to maximize profits, and the shape of the MR curve will influence the firm's pricing strategy and the quantity it chooses to produce.

Related terms

Total Revenue (TR): The total amount of money a firm receives from selling its product, calculated by multiplying the price per unit by the quantity sold.

Average Revenue (AR): The revenue per unit of output, calculated by dividing the total revenue by the quantity sold.

Demand Curve: A graphical representation of the relationship between the price of a good and the quantity demanded, showing the maximum amount consumers are willing to pay for each additional unit.