Sell one more unit and revenue rises, but not always by the full price. If a firm must cut its price to sell that extra unit, the revenue gain is less than the sticker price. Marginal revenue is the change in total revenue from selling one additional unit, and it is almost always lower than the price in markets where firms have pricing power.

For a perfectly competitive firm, marginal revenue equals price. The firm is too small to affect the market price, so every extra unit sells for the same amount. For a monopolist, marginal revenue is lower than price because selling more means lowering the price on all units, not just the last one. That gap explains why monopolies produce less and charge more than competitive markets would.

The profit-maximizing rule is simple: produce until marginal revenue equals marginal cost. Beyond that point, each extra unit costs more than it brings in. Below it, the firm is leaving money on the table. This rule applies to lemonade stands and multinational corporations alike, though real businesses rarely have perfect information about their marginal curves.

Key relationships

• Marginal revenue equals price under perfect competition
• Marginal revenue is below price under monopoly
• Profit is maximized where marginal revenue equals marginal cost
• Marginal revenue falls as quantity sold rises