Imagine you run a small bakery. You are already making 100 cakes a day, and a customer suddenly asks for one more. Should you make it?
That depends on a simple economic question: how much will that extra cake cost you, and how much additional revenue will it bring in?
This is exactly where marginal cost and marginal revenue come into play. If you’ve ever wondered what is the difference between marginal cost and marginal revenue, the easiest answer is this: marginal cost measures the additional cost of producing one more unit, while marginal revenue measures the additional revenue earned from selling one more unit.
These two concepts are central to business decision-making and microeconomics because they help firms determine how much to produce. When marginal revenue is greater than marginal cost, producing an additional unit can increase profit. When marginal cost becomes greater than marginal revenue, producing more can reduce profit.
Let’s break the concepts down with formulas, examples, tables, and practical situations.
What Is Marginal Cost?
Marginal cost (MC) is the additional cost a business incurs when it produces one more unit of a product or service.
In simple terms, it answers the question:
“How much more will it cost me to make one additional unit?”
The basic formula is:
Marginal Cost = Change in Total Cost ÷ Change in Quantity
In mathematical notation:
MC = ΔTC ÷ ΔQ
For example, suppose a company produces 100 products at a total cost of $5,000. Increasing production to 101 products raises total cost to $5,040.
The marginal cost of the additional product is:
MC = ($5,040 − $5,000) ÷ (101 − 100)
MC = $40
So, the 101st product adds $40 to total production cost.
Marginal cost can be calculated using changes in total cost and output, and in calculus it corresponds to the derivative of the cost function.
What Can Increase Marginal Cost?
The cost of producing an additional unit can change for many reasons.
For example:
- Higher wages
- More expensive raw materials
- Overtime pay
- Limited production capacity
- Higher energy costs
- Equipment limitations
- Additional shipping or packaging costs
- Diminishing marginal productivity
Marginal cost doesn’t necessarily stay constant as production increases. It may fall initially and then rise as production expands and capacity becomes more constrained.
What Is Marginal Revenue?
Marginal revenue (MR) is the additional revenue a business receives from selling one more unit of a product or service.
It answers a different question:
“How much additional money will I receive if I sell one more unit?”
The basic formula is:
Marginal Revenue = Change in Total Revenue ÷ Change in Quantity Sold
Or:
MR = ΔTR ÷ ΔQ
Suppose a business earns $10,000 by selling 100 products. If selling 101 products increases total revenue to $10,090, the marginal revenue from the additional product is:
MR = ($10,090 − $10,000) ÷ (101 − 100)
MR = $90
The additional sale therefore generates $90 in marginal revenue.
OpenStax defines marginal revenue as the additional revenue gained from selling one more unit.
What Is the Difference Between Marginal Cost and Marginal Revenue?
So, what is the difference between marginal cost and marginal revenue?
The main difference is what each measurement tracks.
| Factor | Marginal Cost | Marginal Revenue |
| Meaning | Additional cost of producing one more unit | Additional revenue from selling one more unit |
| Focus | Production costs | Sales revenue |
| Formula | ΔTC ÷ ΔQ | ΔTR ÷ ΔQ |
| Main question | How much will another unit cost? | How much will another unit earn? |
| Used to analyze | Production decisions | Revenue and output decisions |
| Relationship to profit | Higher MC can reduce profit | Higher MR can increase profit |
| Common abbreviation | MC | MR |
In other words:
Marginal cost looks at the additional expense.
Marginal revenue looks at the additional income.
Comparing the two tells a business whether increasing production is financially beneficial.
Marginal Cost vs Marginal Revenue Example
Let’s use a simple example.
Imagine a company selling handmade notebooks.
The company is considering whether to produce additional notebooks. Its calculations look like this:
| Additional Notebook | Marginal Revenue | Marginal Cost | Marginal Profit |
| 1 | $20 | $8 | $12 |
| 2 | $20 | $10 | $10 |
| 3 | $20 | $12 | $8 |
| 4 | $20 | $15 | $5 |
| 5 | $20 | $20 | $0 |
| 6 | $20 | $24 | -$4 |
The calculation for marginal profit is:
Marginal Profit = Marginal Revenue − Marginal Cost
For the first notebook:
$20 − $8 = $12
The company gains $12 from producing and selling that additional unit.
For the sixth notebook:
$20 − $24 = −$4
That additional notebook costs $4 more to produce than the revenue it generates.
This illustrates why comparing MR and MC is so useful.
What Happens When Marginal Revenue Is Greater Than Marginal Cost?
When:
MR > MC
the additional unit generates more revenue than it costs to produce.
That means producing another unit increases profit, assuming other relevant conditions remain unchanged.
For example:
- Marginal revenue = $50
- Marginal cost = $30
The additional unit contributes:
$50 − $30 = $20
to marginal profit.
A firm therefore has an economic reason to consider increasing output while additional units continue to generate positive marginal profit.
What Happens When Marginal Cost Is Greater Than Marginal Revenue?
Now consider the opposite situation:
MC > MR
Suppose:
- Marginal cost = $60
- Marginal revenue = $45
The additional unit produces:
$45 − $60 = −$15
in marginal profit.
In this situation, producing that additional unit reduces total profit.
A firm seeking to maximize profit would generally look for a lower output level rather than continuing to expand production.
What Happens When Marginal Cost Equals Marginal Revenue?
This is one of the most important ideas in the topic.
When:
MR = MC
the additional revenue from another unit equals the additional cost of producing it.
In the standard profit-maximization framework, the firm’s profit-maximizing output occurs where marginal revenue equals marginal cost, provided the relevant conditions for that optimization are satisfied.
Think of it as a balance point.
If you produce less than that level, there may be additional units that add more revenue than cost.
If you move beyond the relevant point, additional units may cost more than they generate.
This is why economists often summarize the decision rule as:
MR = MC
Why Is MR = MC Important for Profit Maximization?
To understand why this works, start with the basic profit equation:
Profit = Total Revenue − Total Cost
Now consider what happens when output increases by one unit.
The change in profit is approximately:
Marginal Profit = Marginal Revenue − Marginal Cost
So:
- If MR > MC, marginal profit is positive.
- If MR = MC, marginal profit is zero.
- If MR < MC, marginal profit is negative.
OpenStax similarly defines marginal profit as marginal revenue minus marginal cost and explains that total profit is maximized where marginal revenue equals marginal cost in the standard model.
The important point is that MR = MC is about the additional unit, not necessarily about total revenue being equal to total cost.
Marginal Revenue and Marginal Cost in Perfect Competition
The relationship between MR and MC also depends on the market structure.
In a perfectly competitive market, an individual firm is a price taker. Because the firm takes the market price as given, marginal revenue equals the market price.
Therefore:
P = MR
The firm then chooses its profit-maximizing output where:
P = MR = MC
assuming the firm is operating under the standard short-run conditions described by the model.
For example, if the market price is $10, the firm’s marginal revenue is also $10.
The firm can compare that $10 marginal revenue with marginal cost to determine whether increasing production makes economic sense.
Marginal Revenue and Marginal Cost Under Monopoly
A monopoly works differently because the monopolist faces the market demand curve.
To sell additional units, a monopolist may need to lower its price. As a result, marginal revenue can be below the price of the product.
The monopolist still uses the basic output rule:
MR = MC
But after determining the profit-maximizing quantity, the monopolist uses the demand curve to determine the corresponding price.
This distinction is important because marginal revenue is not always the same thing as price.
Under perfect competition:
MR = Price
For a monopolist:
MR generally differs from Price
That difference is one of the key distinctions between the two market structures.
Marginal Cost vs Average Cost
Marginal cost is often confused with average cost, but they measure different things.
Average cost tells you the average cost per unit.
The formula is:
Average Cost = Total Cost ÷ Quantity
Marginal cost, on the other hand, tells you the additional cost associated with producing another unit.
For example, suppose a company spends $10,000 producing 1,000 units.
Its average cost is:
$10,000 ÷ 1,000 = $10 per unit
But if producing the next unit increases total cost from $10,000 to $10,012, the marginal cost of that additional unit is $12.
So:
Average cost = cost per unit on average
Marginal cost = additional cost of another unit
Both are useful, but they answer different business questions.
Marginal Revenue vs Average Revenue
Marginal revenue is also different from average revenue.
Average revenue is the revenue per unit sold.
Since:
Total Revenue = Price × Quantity
average revenue is:
Average Revenue = Total Revenue ÷ Quantity
which gives the price per unit.
Marginal revenue instead measures the change in total revenue generated by selling another unit.
In a perfectly competitive market, average revenue and marginal revenue can both equal the market price. In other market structures, however, they may differ.
How to Calculate Marginal Cost
Calculating marginal cost is fairly simple when you know total cost at two different production levels.
Use this formula:
MC = Change in Total Cost ÷ Change in Quantity
Example
Suppose:
- Total cost at 500 units = $8,000
- Total cost at 501 units = $8,025
Then:
MC = ($8,025 − $8,000) ÷ (501 − 500)
MC = $25
The marginal cost of producing the additional unit is $25.
If the production increase involves several units, divide the change in total cost by the corresponding change in quantity.
How to Calculate Marginal Revenue
The process for calculating marginal revenue is similar.
Use:
MR = Change in Total Revenue ÷ Change in Quantity Sold
Example
Suppose:
- Total revenue from 500 units = $15,000
- Total revenue from 501 units = $15,040
Then:
MR = ($15,040 − $15,000) ÷ (501 − 500)
MR = $40
The marginal revenue is therefore $40.
The important distinction is that the calculation uses revenue, not profit.
A Step-by-Step Way to Use MR and MC
Businesses and economics students can use the following process to analyze an output decision.
Step 1: Determine Total Cost
Find the total cost associated with the current and potential production levels.
Step 2: Calculate Marginal Cost
Determine how much total cost changes when production increases.
Step 3: Determine Total Revenue
Calculate the revenue generated at different sales levels.
Step 4: Calculate Marginal Revenue
Find the additional revenue generated by selling additional units.
Step 5: Compare MR and MC
Now compare the two values.
- MR > MC: An additional unit adds positive marginal profit.
- MR = MC: The additional unit adds zero marginal profit.
- MR < MC: The additional unit has negative marginal profit.
This framework is widely used in introductory microeconomics to analyze profit-maximizing output.
A Real-World Example of Marginal Cost and Marginal Revenue
Imagine a coffee shop that normally sells 300 cups of coffee during a particular period.
The owner is considering selling 50 additional cups.
Producing those additional cups requires:
- More coffee beans
- More milk
- More cups and lids
- Additional labor
- More electricity and other operating inputs
Suppose the additional production and sales generate:
Marginal revenue = $4 per cup
and:
Marginal cost = $2.50 per cup
The additional contribution per cup is:
$4.00 − $2.50 = $1.50
That suggests the additional units are generating positive marginal profit.
But imagine demand weakens and the business has to discount the coffee. If marginal revenue falls to $2 while marginal cost rises to $2.50, the calculation changes:
$2.00 − $2.50 = −$0.50
Now each additional cup reduces marginal profit.
This is why businesses don’t simply ask, “Can we produce more?”
They also need to ask:
“What will the next unit cost, and what will it actually bring in?”
Why Marginal Cost Often Rises
Marginal cost can behave differently depending on the firm’s production process.
At lower production levels, a business may have unused capacity. Adding another unit can be relatively inexpensive.
As production approaches capacity, however, additional output may require:
- Overtime labor
- Additional equipment
- Faster production schedules
- More expensive inputs
- Extra storage
- Outsourcing
- Additional shifts
This can cause marginal cost to rise.
Economists often connect the eventual rise in marginal cost with diminishing marginal returns, where adding more of a variable input to fixed inputs produces progressively smaller increases in output.
Why Marginal Revenue Can Change
Marginal revenue doesn’t always remain constant.
In a perfectly competitive market, an individual firm takes the market price as given, so its marginal revenue equals that price.
But when a firm has some control over its selling price, increasing sales may require lowering the price. This can cause the additional revenue from each extra unit to change.
For a monopolist, for example, marginal revenue is generally below price because increasing quantity can require a lower price along the demand curve.
This is one reason understanding the firm’s market structure matters when analyzing marginal revenue.
Marginal Cost and Marginal Revenue Graph
Economics textbooks frequently display MC and MR on a graph.
Typically:
- The horizontal axis represents quantity of output.
- The vertical axis represents dollars per unit.
- The marginal cost curve often rises after an initial range.
- The marginal revenue curve depends on the firm’s market structure.
- The relevant intersection of MR and MC identifies the standard profit-maximizing output in the model.
For a perfectly competitive firm, MR is represented by a horizontal line at the market price. For a monopoly, MR generally slopes downward and lies below the demand curve.
The graph provides a visual way to understand the same decision that can be calculated using numbers.
Marginal Cost and Marginal Revenue: Key Differences at a Glance
Here’s the simplest way to remember the distinction:
| Question | Marginal Cost | Marginal Revenue |
|---|---|---|
| What does it measure? | Additional production cost | Additional sales revenue |
| Formula | ΔTC ÷ ΔQ | ΔTR ÷ ΔQ |
| Main focus | Cost of another unit | Revenue from another unit |
| Higher value means | Additional production is more expensive | Additional sale generates more revenue |
| Compared with | Marginal revenue | Marginal cost |
| Profit relationship | MC reduces marginal profit | MR increases marginal profit |
| Key decision | Whether another unit is costly to produce | Whether another unit generates enough revenue |
The relationship between them can be summarized as:
Marginal Profit = MR − MC
That single equation connects the two concepts.
Common Mistakes to Avoid
Confusing Marginal Cost With Average Cost
Marginal cost isn’t the average cost of all units. It focuses on the additional cost associated with another unit.
Assuming Marginal Revenue Always Equals Price
That is true for a perfectly competitive firm under the standard model, but not generally for firms with market power.
Thinking MR = MC Means No Profit
It doesn’t.
MR = MC identifies the standard profit-maximizing output condition. Total profit can still be positive, zero, or negative depending on the firm’s total revenue and total cost or its price relative to average cost.
Looking Only at Total Revenue
A business can increase total revenue while simultaneously seeing profit decline if the additional costs are growing faster than the additional revenue.
That’s why marginal analysis is so useful.
Frequently Asked Questions
What is the difference between marginal cost and marginal revenue?
Marginal cost is the additional cost of producing one more unit, while marginal revenue is the additional revenue earned from selling one more unit.
In formula form:
MC = ΔTC ÷ ΔQ
MR = ΔTR ÷ ΔQ
Why are marginal cost and marginal revenue important?
They help a firm evaluate whether producing and selling additional units will increase or decrease profit.
If MR exceeds MC, an additional unit generates positive marginal profit. If MC exceeds MR, the additional unit generates negative marginal profit.
What happens when marginal revenue equals marginal cost?
In the standard profit-maximization model, the firm chooses the output level where MR = MC. At that point, marginal profit is zero, and moving beyond the relevant point can reduce total profit if marginal cost exceeds marginal revenue.
Is marginal revenue the same as price?
Not always.
For a perfectly competitive firm, marginal revenue equals the market price. For a firm with market power, such as a monopolist, marginal revenue generally differs from price.
Can marginal cost be higher than marginal revenue?
Yes.
When marginal cost exceeds marginal revenue, producing the additional unit creates negative marginal profit.
Can marginal cost decrease?
Yes. Marginal cost can fall at lower production levels when a firm benefits from increasing productivity or better use of existing capacity. It may later rise as production expands and diminishing marginal returns become important.
What is the formula for marginal profit?
The formula is:
Marginal Profit = Marginal Revenue − Marginal Cost
Or:
MP = MR − MC
If MR is greater than MC, marginal profit is positive. If MC is greater than MR, marginal profit is negative.
Is marginal cost the same as variable cost?
No.
Variable cost is a category of total production cost that changes with output. Marginal cost measures the additional cost associated with a change in output.
Marginal cost can be influenced by changes in variable inputs, but the concepts are not interchangeable.
Conclusion: What Is the Difference Between Marginal Cost and Marginal Revenue?
So, what is the difference between marginal cost and marginal revenue?
The answer comes down to two simple questions.
Marginal cost asks: “How much will it cost to produce one more unit?”
Marginal revenue asks: “How much additional revenue will one more unit generate?”
The two become especially useful when they’re compared. If MR is greater than MC, the additional unit can increase profit. If MC is greater than MR, the additional unit can reduce profit. In the standard profit-maximization model, the relevant output level occurs where MR = MC.
Once you understand that relationship, many other economics concepts—including profit maximization, production decisions, market structures, and pricing—become much easier to understand.
If you’re studying microeconomics, the next useful step is to explore how marginal cost, average cost, total cost, marginal revenue, and total revenue work together on economic graphs and in real-world business decisions.
