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Marginal revenue refers to the change in total revenue of the firm caused by one unit change in output. Means, Marginal revenue is the addition to total revenue caused by the production and sale of an additional unit of the commodity.

where, ? symbol stands for "change in".

Suppose total revenue is Rs. 100 when 10 units are sold at the per unit price of Rs. 10. Now suppose price is reduced to Rs. 9.50 to sell 11 units of the commodity. Hence total revenue is now Rs. 9.50 * 11 = Rs. 104.50. In this case, while average revenue (or price) is Rs. 9.50, marginal revenue is Rs. 4.50 only (Rs. 104.50 - Rs. 100). Why is marginal revenue less than average revenue by Rs. 5.0 ? (Rs. 9.50 - Rs. 4.50). In order to sell 11th unit of the commodity, price of all 10 intra-marginal units also has been reduced by 50 paise, causing a total loss of Rs. 5.0 on those units (10 * 50 paise). Since the 11th unit is responsible for the loss of Rs. 5.0 on the intra marginal units, this loss must be deducted from the price of the 11th unit to find out its net contribution to total revenue. This is why marginal revenue is Rs. 4.50 only. We come to the point, that when demand curve is downward sloping (so that price has to be reduced to sell more), marginal revenue is always less than average revenue (or price).

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