Marginal revenue (MR) is the additional revenue a firm earns from selling one more unit of output. In perfect competition MR equals price, but in imperfectly competitive markets a firm must lower its price to sell more, so MR falls below price and the MR curve sits below the demand curve.
Marginal revenue is the change in total revenue when a firm sells one more unit. Mathematically, MR = ΔTR / ΔQ. It answers a simple question every firm asks before producing another unit. Will this unit bring in more money than it costs to make?
Here's where Unit 4 gets interesting. The CED (EK PRD-3.B.2) says that in imperfectly competitive output markets, a firm must lower its price to sell additional units. And it has to lower the price on all units, not just the last one. So the extra revenue from one more sale is the new price minus the revenue lost on every unit that used to sell for more. That's why MR is less than price for a monopoly, oligopoly, or monopolistically competitive firm, and why the MR curve sits below the demand curve on every imperfect competition graph you'll draw. For a linear demand curve, MR falls twice as fast as demand. Contrast that with a perfectly competitive firm, which is a price taker facing a flat demand curve, so every unit sells at the market price and MR = P.
Marginal revenue lives in Topic 4.1 (Introduction to Imperfectly Competitive Markets) and supports learning objective 4.1.A, defining the characteristics of imperfectly competitive markets using graphs. MR is the hinge of the whole unit. Every firm maximizes profit by producing where MR = MC, but because MR < P for price makers, those firms end up charging a price above marginal cost (EK PRD-3.B.3). That P > MC gap is the textbook definition of allocative inefficiency, which is the entire reason Unit 4 exists as a contrast to Unit 3's perfectly competitive world. If you can't locate MR on a graph, you can't find a monopoly's output, price, profit, or deadweight loss. It all starts there.
Keep studying AP Microeconomics Unit 4
Total Revenue (Units 2, 3, 4)
MR is just total revenue's rate of change. When MR is positive, TR is rising; when MR hits zero, TR peaks; when MR goes negative, TR falls. This is also where elasticity sneaks back in, because MR is positive only on the elastic portion of the demand curve. A monopolist never knowingly produces where demand is inelastic, since selling more there actually shrinks revenue.
Demand Curve (Units 1, 3, 4)
For a price taker, demand and MR are the same horizontal line. For a price maker, MR splits off and sits below demand because lowering the price to sell one more unit also lowers the price on every other unit. One graph detail, and it determines whether you're drawing a perfect competition firm or a monopoly.
Price Maker (Unit 4)
Being a price maker is exactly what creates the MR < P wedge. A firm with market power chooses its price along a downward-sloping demand curve, and the cost of choosing a lower price to sell more is baked into MR. No market power, no wedge.
Deadweight Loss (Units 2, 4, 6)
Because a monopolist produces where MR = MC instead of where demand meets MC, output is too low and price is too high. The mutually beneficial trades between those two quantities never happen, and that lost surplus is the deadweight loss triangle you shade on the monopoly graph.
MR shows up constantly on both MCQs and FRQs. Graph questions hand you a monopoly diagram with D, MR, and MC curves (the 2017 FRQ did exactly this, adding marginal social cost and benefit curves) and ask you to find the profit-maximizing quantity at MR = MC, then read the price up off the demand curve, not the MR curve. That last step is the most common point students lose. The 2019 FRQ on FillUp, a local gas station monopoly earning positive profit, required drawing the full graph from scratch with MR below demand. MCQs also test the logic in words, asking how a monopolistically competitive firm decides whether to produce another unit (produce it if MR exceeds MC) or how a price control set near MR changes a monopoly's output. And watch for the contrast case. FRQs like 2021's Schmitt Inc. use perfectly competitive firms where MR equals the market price, so you need to know which world you're in before you draw anything.
Price is what the buyer pays for a unit; marginal revenue is what the firm actually gains from selling it. They're equal only in perfect competition. For a price maker, selling one more unit means cutting the price on all units, so MR < P. On the graph, this means quantity comes from the MR = MC intersection, but price comes from going up to the demand curve at that quantity. Reading price off the MR curve is the single most common monopoly-graph error.
Marginal revenue is the change in total revenue from selling one more unit, calculated as ΔTR / ΔQ.
In imperfectly competitive markets, a firm must lower its price on all units to sell more, so marginal revenue is less than price and the MR curve lies below the demand curve.
In perfect competition, the firm is a price taker, so marginal revenue equals the market price and the MR curve is the same horizontal line as demand.
Every profit-maximizing firm produces the quantity where MR = MC, but a price maker then charges the price on the demand curve above that quantity, not the MR value.
Because price makers charge P > MC at their MR = MC output, imperfectly competitive markets are allocatively inefficient and create deadweight loss.
For a linear demand curve, the MR curve has the same intercept but twice the slope, so it falls twice as fast.
Marginal revenue is the additional revenue a firm earns from selling one more unit of output (ΔTR / ΔQ). It's the firm-side half of the MR = MC profit-maximization rule that runs through Units 3 and 4.
Only in perfect competition. For monopolies, oligopolies, and monopolistically competitive firms, selling another unit requires lowering the price on all units, so marginal revenue is less than price. That's why the MR curve sits below the demand curve.
Because the monopolist can't lower the price for just the last buyer. To sell one more unit it must cut the price on every unit, so the extra revenue from that sale is the new price minus the revenue given up on all previous units. With linear demand, MR falls twice as steeply as the demand curve.
No, and this is the classic graph mistake. MR = MC tells you the profit-maximizing quantity. The price is found by going straight up from that quantity to the demand curve. On the 2019 FRQ about FillUp's gas station monopoly, that's exactly how price and quantity were identified.
Total revenue is everything the firm takes in (P × Q); marginal revenue is how much TR changes when one more unit is sold. They're linked: TR rises while MR is positive, peaks when MR equals zero, and falls when MR turns negative, which is why a monopolist only operates on the elastic part of its demand curve.