# what is the difference between average revenue and marginal revenue?

Difference Between Marginal and Average Revenueby Gregory HamelPublished on 26 Sep 2017Revenue is the money that a business generates by selling its products and services. A compan

## Difference Between Marginal and Average Revenue

by Gregory Hamel

Published on 26 Sep 2017

Revenue is the money that a business generates by selling its products and services. A company's profit is equal to its total revenue minus its total costs, so generating revenue is an essential part of running a successful company. "Average revenue" and "marginal revenue" are common terms used in finance and economics. They describe different facets of a firm's revenue.

## Average Revenue

Average revenue describes the average amount of revenue a firm makes on each unit of a good it sells. For example, if a firm makes 100 T-shirts and sells each one for \$10, its average revenue is \$10 because each unit of output resulted in \$10 of revenue. Average revenue can be calculated by dividing total revenue by the quantity of units sold. Average revenue is also equal to the price level.

## Marginal Revenue

Marginal revenue describes the change in total revenue that occurs when a firm produces one extra unit of output. For instance, if a firm produces \$100 T-shirts and sells them at a price of \$10 each, its total revenue is \$1,000. If the firm increases its production to 101 T-shirts, it may have to reduce the price of shirts to entice an extra buyer to purchase the additional unit of output. If the firm drops its price to \$9.99 per shirt, its total revenue after selling 101 shirts is \$1.008.99. The marginal revenue is \$8.99 in this case, because total revenue increased by \$8.99 due to producing an extra shirt, while the average revenue changed from \$10 to \$9.99.

## Marginal Cost and Maximizing Profit

Marginal cost is the cost of producing one additional unit of output. In a competitive market, a firm can maximize profit by producing a quantity of goods that makes marginal revenue equal to marginal cost. For example, if a T-shirt company can produce shirts for \$5 each, it should continue producing shirts until its marginal revenue equals \$5.

## Considerations

As a firm produces more units of a good and reduces its prices to entice buyers to purchase additional units, average revenue decreases because average revenue is equal to the price level. If a firm keeps its prices fixed and is able to sell an additional unit of output without reducing its price, marginal revenue equals average revenue.

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1. Cliffs Notes: Profit Maximization
2. The Free Dictionary: Marginal Revenue
3. The Free Dictionary: Average Revenue

Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.