The revenue function: TR = PQ.

𝑑(𝑇𝑅)
The marginal functions: MR = , ∆ (TR) ≈ MR x ∆Q
𝑑𝑄
 L: the labour
Q: the output

The marginal propensity to consume MPC, and the marginal propensity

to save MPS

C: the consumption
S: the savings
Y: the national income
Problem: to determine the effect on revenue of a change in the price of a
good.
From the formula for total revenue, TR = PQ, not immediately obvious
what the net effect on TR will be as P decreases and Q increases. The
crucial factor here is not the absolute changes in P and Q but rather the
proportional or percentage changes.
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑
The price elasticity of demand, E =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑃 ∆𝑄
E = × ∶ the elasticity averaged along an arc
𝑄 ∆𝑃

𝑃 𝑑𝑄
E = × : the price elasticity at a point (point elasticity)
𝑄 𝑑𝑃
The relationship between elasticity and marginal
revenue:

MR = P(1 + 1/E)
If -1< E < 0, then 1/E < -1, so MR is negative for any
value of P. It follow that the revenue function if
decreasing in regions where demand is inelastic,
because MR determines the slope of the revenue
curve, and so on.