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B.Prahalathan Senior Lecturer Department of Commerce Faculty of Management Studies & Commerce University of Jaffna
This article provides a simple introduction to the general topic of calculus. Calculus is concerned with the mathematical study of change - The techniques of calculus actually provide a quick way of performing calculations. In the last half of the 18th century Isaac Newton [1642-1727] and G.W. Leibniz [1646-1716] lay the foundations for what was to become known as “calculus.” This was a powerful tool to deal with infinitesimal problems of arc lengths, tangents to curves, area and volumes. The Bernoulli brothers, Jackob [1654-1705] and Johann [1667-1748] extended the tool to deal with the processes of change. During the mid 19th century (from about 1825 to 1875) a growing number of writers applied calculus to the problems of changes in the realm of economics. Johann Heinrich von Thünen [1783-1850], Hermann Heinrich Gossen , Jules Dupuit [1804-1866] and Augustin Cournot [1801-1877] applied mathematical tools to economic problems. In the 1870’s W.S. Jevons [1835-1882], Carl Menger  and Léon Walras [1834-1910] initiated what has come to be known as the “Marginalist Revolution” in economics. The Marginalist Revolution established the importance of calculus in economic analysis. During the 19th and 20th centuries the role of mathematics in economics has expanded. This article will show how diﬀerentiation can be used to ﬁnd out the maximum and minimum values of a function. Since, the derivative provides information about the gradient or slope of the graph of a function. In many applications, a scientist, engineer, or economist for example, will be interested in such points for obvious reasons such as maximising power, or proﬁt, or minimising losses or costs.
Functions & Economic Relationships
Models of economic relationships are abstractions that explain many of the forces that shape economic behaviour. Models can be in a narrative or mathematical format. In a mathematical format, the variables may be quantified or measured. A function is a relationship (or mapping) between two or more variables whereby the value of one variable (the dependent variable) is determined by the values taken by the other variables (the independent variables).
1 Linear Function A two variable linear function can be written as follows: Y = a +bX Where. 2 2 4 6 8 1 0 X . b = 2.The general notation for a function is a follows: Y = f ( X . QD = f (P) C = f (YD) U = f (X. Economic Examples The following are examples of commonly used functions in economic models. Example: Assume a = 10. Y) Q = f (L. Z f() : dependent variable : independent variables : means “is a function of” This is the most general form of a function. Y Y = 10 + 2 X We can now construct a table 2 5 and 2 0 1 5 1 0 5 Y=10+2X then graph this function. K) C = f (Q) : Demand function : Consumption function : Utility function : Production function : Total Cost function 2. Z) Where Y X. The values of a and b determine the exact form of the linear function. Thus we have the following specific linear function. a and b are two parameters which can be assigned fixed values. It simply states that the variable Y is a function of the variables X and Z.
Which shape the function has depends on the value of the parameter b2 − − If b2 < 0 the function is concave If b2 > 0 the function is convex 3 . and degree n = 3 (the cubic function).X 0 2 4 6 8 10 Y 10 14 18 22 26 30 Figure . Y = a + b1 X + b2 X 2 It has three parameters a..+ bn X n This is often referred to as polynomial of degree n. The most commonly used polynomial functions are those of degree n = 2 (the quadratic function).e.values for these determine the specific form and graph of the function.3 Quadratic Function A quadratic function is a polynomial of degree 2. b1 and b2 . 2.. i.1 To draw the graph of a linear function we only need to calculate and plot two points and then simply join them up with a straight line.. 2.2 Polynomial Functions A two variable general polynomial function is shown below: Y = a + b1 X + b2 X 2 + b3 X 3 + .. Economic Examples Some common examples of linear functions used in economic analysis are: Q D = a − bP + cY Q S = g + hP C = a + cYD M =αY −βr Demand function Supply function Keynesian consumption function Demand for money function Note the common use of upper case letters for variables and lower case English or Greek letters for parameters. The graph of a quadratic function is either a U-shape (convex) or an inverted U-shape (concave)..
TR = PQ So. Economic Example: Quadratic Function Total Revenue function Start with the linear demand function facing a price-taking firm (Perfect competitive firm) Q = a − bP Invert it to make price (P) a function of quantity sold (Q) bp = a −Q P= a Q − b b Recall that Total Revenue = Price times Quantity.0 Slope and Rate of Change The slope of a line measures the change in the dependent variable associated with a change in the independent variable.a maximum if concave. a Q TR = PQ = − Q b b Expanding the bracket gives us the quadratic total revenue function: a Q2 TR = Q − b b 3.e.1 Slope of a Straight Line When the function is linear.− A concave or convex function has only one turning point . a minimum if convex. i. 3. the slope can be calculated as Change in the dependent variable ∆ Y = Change in the independen t variable ∆ X 4 .
for every one-unit change in Q.0. The equation would be Q = 5 . Price 1 0 8 6 4 2 1 2 3 4 5 Figure – 3 Quantity It may be useful to notice that the function P = 10 – 2Q can be expressed where Q = f (P).Slope of upward line Slope of downward line Slope of the horizontal line Y Y X X Panel = A Y Y X X Panel = B Y X Y= 0 X Panel = C Figure 2 Given a function P = 10 – 2Q both a table and a graph can be constructed in following table and figure. Notice that the slope of the function Q= f (P) is the reciprocal of the slope of the equivalent function P = f (Q). Quantity (Q) Price (P) 0 10 1 8 2 6 3 4 4 2 5 0 The slope of the line in the graph is the change in price caused by a change in quantity.5P. the value of price (P) will change by 2 units in the opposite direction. 5 .
Y =f(X). the tangent tt’ represents the change in Y “caused” by a change in X. The value of is the slope of the dx 1 0 X notation for a derivative. ∂ x 4. The change in Y (ΔY) is +3. If the value of X changes from 4 to 10 then ΔX is +6. Generally. ∂ y is used.2 Slope of the Nonlinear Function Not all functions in economics are linear.0 Derivative of Function 6 .3. the notation for a partial derivative. In the following figure a nonlinear function Y= f(X) is graphed. each influencing the value of the dependent variable. the slope is an estimate of the “average” ∆ X dy slope between points a and b that lie on the function. If you use . If there are several independent variables. the dy is used. When the function is nonlinear the slope can be imagined as the slope of an arc between two points on the function or as the slope of a tangent at a point on a function.4 Notice that as the change in X (ΔX) approaches 0. ∆ X +6 ∆ Y ∆ X t’ Y 6 3 b Y=f (X) t 4 Figure . The slope of the curves can be derived by measuring the slope of the tangent. suggests the slope of a straight line or the slope of an arc between two points on a nonlinear function. tangent at a point on the function. The slope of the arc between points “a” and “b” is ∆ Y +3 = = 0. If the change in X (ΔX) approaches the limit of 0(ΔX→0). The slope of tt’ is calculated by taking the first dx ∆ Y derivative of the function.5.
.05(2) X (2-1) = 1 .1 Differentiation The process of finding the derived function symbolically is known as differentiation. we can get ‘first differential coefficient of y with respect to x’.05X2 The equation can be written as Y = 2X0 + 1X1 .. This slope of function is usually referred to as the derived function.3 A Simple Rule for a Derivative Simple rule to calculate the first derivative for a function Y = aXb is dy =a (b) X (b – 1) .1X. This is denoted by dy dy . [Y = 2+1(10) .05 X2. An alternative notation for the derived function is dy .2 Differential Coefficient Consider the function. By differentiate again with aspect to x. Y = dependent variable.This is the equation for the tangent line at any value of X. dx For example Applying this rule to the equation. 4. Y = f (x) x = independent variable. dx If X is 10 the value of Y is 7... This will make dy = 2(0) X (0-1) + 1(1) X (1-1) . dx 2 Function is f (x) 1st derivative of f (x) is denoted by f’ (x) 2nd derivative of f (x) is denoted by f” (x) 4. 7 .. That is. By differentiate y with respect to x. dx 4. This denoted by Note: d2y .05(100) = 12-5 = 7].05(10)2 = 12 .The slope of the graph of a function is called the derivative of the function. (dee y by dee x). we can get the ‘second derivative of y with respect to x’. is the first derivative of y with respect dx dx to x. Y = 2 + 1X ..
1X or = 1 .g. At a turning point dy dy = 0. 6. the second derivative (or second order condition) is used. We can locate stationary points by looking for points at which of the function.. Y(x). Figure . a minimum or an inflection point.. B and C. When X is 10 and Y is 7. Point C is not a turning point because. So. B and C the gradient of the graph is zero. although the graph is flat for a short time. at the points marked A. small change in X (ΔX→0). Where the slope is 0.1(10) = 0. Note that at points A and B the curve actually turns. the slope of the tangent to the function Y = 2 + 1X . This means that at each of the points A. = 0 at points A.05X2 will be dy dy dy = 1 .1X = 1 .That is. the function has a maximum. we draw tangents to the graph. They are horizontal. Consider the graph dx Any point at which the tangent to the graph is horizontal is called a stationary point. But not all stationary points are turning points (e. To determine which.e. = is the change in Y caused dx dx dx by a very.Consequently. The gradient of a graph is given by dy dy . Turning Points In figure 6.. These two stationary points are referred to as turning points. shown in the following figure. note that these are parallel to the X axis. All of dx dx these points are known as stationary points. not all dx dx 8 stationary points are turning points.5 If. i. Not all points where = 0 are turning points. point C). B and C. all turning points are stationary points. the curve continues to go down as we look from left to right. .. 5. very. Stationary points dy = 0.
to positive as x increases. and so represents the least.7. and so represents the greatest or maximum value of the function. So. The derivative of called the second derivative. value of the function. then that point must be a minimum turning point. if dx dy dy the derivative of is positive then the is increasing.2 Minima A function f (x) is said to be minimum at points where it changes from a decreasing to an increasing function. is written as . To the right of the minimum point is positive.0 7.3 The Conditions for Minimum dy goes from negative through zero to positive as x increases. 7. Point A in Figure 6 is called a local maximum (maximum) because it is the highest point. Figure – 6 7. is called a local minimum (minimum) because it is the lowest point. dy = 0 is increasing near the stationary point then that point must be minimum. So goes from negative. In the left of dx dy the minimum point is negative because the tangent has negative gradient. Point B in Figure 7. Since here the dx dx dy tangent has a positive gradient. At the dx dy dy minimum point. 9 . to zero.1 Distinguishing Maximum Points from Minimum Points Maxima A function f (x) said to be maximum at points where it changes from an increasing to decreasing function. = 0. So the stationary point is a dx dx dy d2y d2y minimum. or minimum. if dx dx 2 dx 2 If is positive at a stationary point. That is. dx In figure – 7.
7 Conditions for a Minimum Value dy =0 dx : Necessary Condition d2 y 〉0 2 dx : Sufficient Condition 7. is negative because the dx dx dy tangent has negative gradient. to dx Left of the maximum point zero.4 The Conditions for Maximum dy is positive because the tangent has positive gradient. 10 . to negative as x increases. At the dx dy dy = 0 .To the right of the maximum point maximum point.Figure . So when the function is positive goes from positive.
That is. The derivative of called the second derivative.Figure .5 Testing a Function for Maximum and Minimum dy . dx dy dy if the derivative of is negative then the is decreasing. Step (II) 11 . is written as .8 dy = 0 is decreasing near the stationary point then that point must be maximum. if dx dx 2 If d2y is negative at a stationary point. So. dx 2 Conditions for a Maximum Value dy =0 dx : Necessary Condition d2y 〈0 2 dx : Sufficient Condition 7. dx Step (I) Find the First Derivative of the function – f’(x) OR. so the stationary point is dx dx dy d2y maximum. then that point must be a maximum turning point.
dx 2 d 2 y ]. dx 2 dy dx d2y dx 2 Change of Stationary Point 0 0 + Maximum Point Minimum Point Example :Given a Y= x2 – 4x + 5. Step (I) Find the First Derivative of the function – dy = 2x – 4 dx dy . test the function whether it is minimum function or maximum function.Set the First Derivative Equal to Zero and find the real roots of the equation f ’(x) = 0 OR dy = 0 in order to find the stationary points of the independent variable (x). then the function is a minimum for that stationary point. [ d2y > 0 ]. If d2y . then the function is a maximum for that stationery point. dx Step (III) Find the Second Derivative of the function f” (x) OR Step (IV) Substitute each Stationary Point for the Independent Variable in the Second Derivative. dx 12 . If the result is negative [ 〈0 2 dx result is positive.
T.NewDelhi. Edward.(2004).India.Tata McGraw – Hill Publishing Company Ltd. dx 2 d2y =2 dx 2 Here. then Y=1 Step (III) Find the Second Derivative of the function dy = 2x – 4 dx d2y . The word “marginal” refers to the rate of change in a dependent variable “caused” by a change in an independent variable.The concept of a “marginal” is fundamental to choosing among alternatives. d2 y 〉0 dx Therefore the function is minimum function. Summary The “Marginalist Revolution” of the late 19th century was the result of the application of calculus to economic phenomena. If.Introduction to Mathematical Economics. x = 2. dx References 1.Step (II) Set the First Derivative Equal to Zero and find the real roots of the equation f ’(x) = 0 OR dy = 0 in order to find the stationary points of the independent variable (x). 13 .3rd Edition. Marginal can refer to the rate of change as the slope of a line at a point ∆ Y or the slope of a tangent to a nonlinear function ∆ X dy .D. dx dy =0 dx 2x – 4 = 0 x = 2.
Marginal Functions 1.2. Soni. (1994).R. 1st Edition. Addition – Wesley Publishing Company.I.Business Economics: Mathematical Application.S.New Delhi. Marginal Cost Marginal cost is the derivative of total cost with respect to input MC = d(T ) C d(Q ) Example:If the total cost function is TC = 2Q2 + 6Q + 13 MC = MC d(T ) C d(Q ) = 4Q + 6 = 4Q + 6. Marginal Revenue Marginal Revenue is the derivative of total revenue with respect to demand. India. Jacques. Piyush Printers Publishers Pvt Ltd.K.Mathematics for Economics and Business.T. 3rd Edition. Example:If the total revenue function is TR = 100 Q . 14 .R. Tharanjee Printers.M.Maharagama.SriLanka. MR = d R (T ) dQ .2Q2 MR = MR d R (T ) d(Q ) = 100 – 4Q = 100 – 4Q. 4. 2.Colombo. United Kingdom.Business Mathematics with Applications in Business and Economics.2nd Edition. Karunaratna. (1999).(2003). 3.
3.02Y2 – Y+ 100 MPS = d ) (S d ) (Y = 0. Marginal Product Marginal product of an input is the derivative of output with respect to that particular input.01Y2 + 0.2 5. For example.2 MPC = 0.2Y + 50 MPC = d ) (C d ) (Y = 0. Practical Example 15 . MPS = d ) (S d ) (Y Example:If the saving function is S = 0.04Y – 1.02Y + 0. Marginal Propensity to Consume Marginal propensity to consume is the derivative of consumption with respect to income. Example:If the production function is Q = 300 L2 – 4L MPL = d ) (Q d ) (L MPL = 600 L – 4 4. MPC = d ) (C d ) (Y Example:It the consumption function is C = 0. Marginal Propensity to Save Marginal propensity to save is the derivative of savings with respect to income. MPS = 0.02Y + 0.04 – 1. Marginal product of labor is MPL = d(T ) P d(L ) That is marginal product of labor is the derivative output with respect to labor.
Find the level of output which maximizes total revenue. Find the level of output which maximizes total revenue. Finding the Total Revenue Function P + Q = 30 Rearranging price function as P = 30 – Q Total revenue is defined by TR = PQ Hence TR = (30 – Q) Q TR = 30Q – Q2 Find the level of output which maximizes total revenue At a stationary point =0 d R (T ) dQ 30 – 2Q = 0 So.The demand equation of a commodity is given by P + Q = 30 The total cost function is given by TC = ½ Q2 + 6Q + 7 i. Q = 15 Units Find the second derivative of the function d 2 (TR) = −2 dQ 2 The value is negative. Find the level of output which maximizes profit. ii. What do you observe? 1. Conditions for a Maximum Value is dy = 0 : Necessary Condition dx d2y 〈0 2 dx : Sufficient Condition 16 . Calculate MR and MC at this value of Q.
Here the conditions are satisfied. Q = 8 Units Find the second derivative of the function d 2 (π ) = −3 dQ 2 The value is negative.3Q + 24 = 0 At a stationary point So. Conditions for a Maximum Value is dy = 0 : Necessary Condition dx d2y 〈0 2 dx : Sufficient Condition 17 . 2. therefore the total revenue is maximised at the output level of 15 units. Find the level of output which maximizes profit Finding the Profit Function The profit function is defined by π = TR – TC Here TR = 30Q – Q2 TC = ½ Q2 + 6Q + 7 π π = (30Q – Q2) – (½ Q2 + 6Q + 7) = 3 2 Q + 24Q – 7 2 d π) ( =0 dQ .
Calculation of MR and MC at the output level of 8 units which maximises the profit. 3. 18 . therefore the profit is maximised at the output level of 8 units. when the Q = 8 the values of MR and MC are equal.Here the conditions are satisfied. That is at the point of maximum profit MR = MC. If TR = 30Q – Q2 MR = d R (T ) dQ MR = 30 – 2Q When Q = 8 Units MR = 14 If TC = ½ Q2 + 6Q + 7 MC = d(T ) C d(Q ) MC = Q + 6 When Q = 8 Units MC = 14 The observation is.