The concept of marginal revenue is key to analyzing the supply decision of an individual firm. We have used marginal analysis at several points to date. In consumer theory, we saw how consumers balance the utility per dollar at the margin in allocating their budget. Marginal revenue is the additional revenue accruing to the firm from the sale of one more unit of output.
Marginal revenue is the additional revenue
accruing to the firm resulting from the sale of one more unit of output.
In perfect competition, a firm’s marginal revenue (MR) is the price of the good. Since the price is constant for the individual supplier, each additional unit sold at the price P brings in the same additional revenue. Therefore, P = MR. This equality holds in no other market structure, as we shall see in the following chapters.
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