For price-taking firms, how is marginal revenue calculated?

Marginal revenue for price-taking firms is calculated as the change in total revenue divided by the change in quantity sold. This relationship reflects how much additional revenue a firm generates from selling one more unit of its product. Since price-taking firms operate in a perfectly competitive market, they must accept the market price, and thus the price remains constant as they sell additional units. Consequently, marginal revenue remains equal to the market price for each additional unit sold.

Calculating marginal revenue using the formula derived from total revenue allows firms to understand how changes in quantity affect overall revenue. This is crucial for firms when making decisions about how much to produce, as they seek to maximize profit where marginal costs equal marginal revenue. In essence, understanding this relationship is fundamental to the firm’s pricing and output strategies in a competitive landscape.