In general, in economics, marginal revenue refers to the additional amount of revenue that would be generated in increasing product sales by a single unit. When a business creates this type of revenue, it may have to increase prices in order to make up for the new investment created by the new sales.
In microeconomics this type of revenue is created when a new product is added into a market. If the new product can compete with an existing product that is already in the market, this new product is said to enter the market at a competitive price. This type of revenue is commonly referred to as ‘impending demand.’
The most common example of this would be when a company decides to create a new product for its customers, but at a lower price than its existing products. This new product will enter the market at a lower price because the company is already in a saturated market. For the company, this means they can create more profit by selling their new product for less than the price they paid to create the product in the first place. In the process, they also create more marginal revenue.
The effect of this market entry occurs immediately. The new product begins to sell at a lower price than other similar products in the market. The company continues to increase their profit by selling at this reduced cost.
However, as time goes on, the price of this product begins to fall. Eventually, the price of this new product begins to equal the cost of creating the original product. As more units are manufactured, the cost of manufacturing the new product decreases. Eventually, the price of the product becomes equal to the cost of manufacturing all of the new units.
This new product is known as ‘market saturation.’ As more units are produced in the same area, the average price of the product that is being sold falls to the point where the company has to make additional investments in order to continue to sell the products they currently produce. These additional investments often result in the need to raise prices even further to continue to generate enough revenue.
In theory, a company could create more income than necessary if they increased their price so high that the amount of additional income they were earning began to outweigh the new investment that they were making. The only problem with this approach is that it may not work in all cases. In order to see if this is the case, a company would need to observe how many competitors in the industry had similar products that they were already selling at a lower price. At these prices, they would see what occurred.
In many cases, these competitors had not gone out and increased their prices. They simply continued to sell the same products that they had been selling at the lower price. In other words, their profits had dropped because of the competition. In these cases, it would be much easier for a new company to enter the market at a higher price and then begin to make an income that was greater than the previous company’s earnings.
By observing the prices of competitors, a company can learn which products they can remove from their product line and increase the price of the product they produce. Once they find that they are now producing the same products at a higher price, they know they have achieved their goal and can then concentrate their efforts on the products they are still producing at a lower price.
It may be necessary to increase the price on some of the products that they are currently producing. just to maintain their competitiveness in the market, although this is ultimately the company’s decision.
Of course, increasing your profit margins at this point requires your company to make additional investments in order to continue to produce products at the lower cost that they are producing. In many cases, if the company is not able to generate enough additional revenue to support these additional costs, they will eventually have to raise the price of their products again to generate enough revenue to replace the lost income. The idea is to eventually reach a level where the new product and the additional investment that you are making are equal to or exceeds the cost of producing the old product.