DIFFERENTIATION

EC202
Background Material

Frank Cowell

Frank Cowell: Differentiation 1

Frank Cowell: Differentiation 2
Overview...
Differentiation

Basics

Basic definitions Chain rule

Elasticities

l’Hôpital’s rule

Frank Cowell: Differentiation 3

Definition (1)
  Take the univariate case first
 Let f be a function from to
• as usual denotes the set of real numbers
• the real line
 Let x and Dx be real numbers
 The derivative of f at x is

• where the limit exists

 This simple definition is often useful in practice

Frank Cowell: Differentiation 4

Examples
 Take an example where the limit is easy to evaluate
 Let f(x) = x2
 So f(x + D x) = x2 + 2xDx + [Dx]2
 Therefore [f(x + D x)  f(x)] / Dx = 2x +Dx
 Take the limit of this as Dx  0
• clearly we have df(x)/dx = 2x

 Some other examples

Frank Cowell: Differentiation 5

Definition (2)
  Now the multivariate case
 Let f be a function from to :
• y = f(x1, x2,…, xn) = f(x)
• a variation in the ith component: f(x1, x2, …, xi 1 , xi + Dxi , xi+1 , …, xn)

 The derivative of f with respect to xi is

 If all the components of x are allowed to vary

• then we find the total variation in y thus:

• if f is differentiable in each of its n arguments the total differential is

Frank Cowell: Differentiation 6

Overview...
Differentiation

Basics

Differentiation Chain rule

involving a “function
of a function”
Elasticities

l’Hôpital’s rule

Frank Cowell: Differentiation 7

Chain rule (1)
  Also known as “function-of-a-function” rule
• when one differentiable function has as its argument something that is
itself a differentiable function of something else
• how to carry out differentiation in this composition arrangement?
 Let f and  be functions from to for some x :
• y = f(x), z = (y)
• Dy = f(x+Dx)  f(x), Dz = (y+Dy)  (y)
 Clearly z can be written as a function g of x such that
• z = g(x) = (f(x))
• the function g is a composition of f and 
 We also have
• Dz = g(x+Dx)  g(x)
• = (f(x+Dx))  (f(x))
 How do we proceed to the differentials?

Frank Cowell: Differentiation 8

Chain rule (2)
 For Dx ≠ 0 and Dy ≠ 0 we could write
• Dz/Dx = (Dz/Dy)  (Dy/Dx)
• follows from simple rearrangement of expressions on previous page
 Now assume that f and  are differentiable
• as Dx  0, we have Dy  0 and…
• [f(x+Dx)  f(x)]/Dx becomes f '(x), [g(x+Dx)  g(x)]/Dx becomes g'(x)
• as Dy  0, [(y+Dy)  (y)]/Dy becomes  '(y)
 Drawing these results together
• in the limit we have the differential of g(x) = (f(x)):
• g'(x) = '(y)  f '(x)
 This chain rule can be extended indefinitely
• to the function of a function of a function of a…

Frank Cowell: Differentiation 9

Chain rule (3)
  Extend “function-of-a-function” approach to multivariate case
• now f is a function from to
•  is (again) a function from to
• y = f(x), z = (y) so that z = g(x) = (f(x))

 Partial derivative of g with respect to xi is:

 Now suppose  is from to so that z =  (y1,…, ym)
• with differentiable f 1, …,f m such that

• then the partial derivative is

Frank Cowell: Differentiation 10

Overview...
Differentiation

Basics

Practical Chain rule

application

Elasticities

l’Hôpital’s rule

Frank Cowell: Differentiation 11

Elasticity (1)
  Let’s look at the intuition and basic definition
 Let f be a function from to
• let y = f(x) and Dy = f(x+Dx)  f(x) for some Dx > 0
• ratio of Dy/y to Dx/x is (approximately) the elasticity h of f at x
• the proportionate change in y for a given proportionate change in x
 If f is differentiable, h is the limit of this ratio as Dx  0:

 Now for an alternative, equivalent form

• define u := log x and v := log y so that v = log ( f (eu))
• applying the chain rule: dv/du = f '(eu) eu / f (eu) = f '(x) x/y
• the right-hand side is just h
• so the elasticity can be expressed as

Frank Cowell: Differentiation 12

Elasticity (2)
 Consider a natural multivariate extension
 Suppose we have differentiable f 1, …,f m such that

 Then the elasticity of yj with respect to xi is

 An equivalent way of writing this elasticity is

Frank Cowell: Differentiation 13

Overview...
Differentiation

Basics

A useful result Chain rule

Elasticities

l’Hôpital’s rule

Frank Cowell: Differentiation 14

 l’Hôpital’s rule
  Let I = (x0, x1) be an interval in
 For two functions f and g and some x in I suppose that:
• f and g are everywhere differentiable on I\{x} (with derivatives f', g' )
• g'(x) ≠ 0 everywhere on I\{x}
• limx x f(x) = 0; limx x g(x) = 0
• limx x f'(x) / g'(x) exists (call this limit z)
 Then also

 Example. What happens to [ax  1] / x as x  0?

• let f(x) = ax  1 and g(x) = x so that f'(x) = ax log a and g'(x) = 1
• we have limx 0 f'(x) / g'(x) = log a
• therefore limx 0 [ax  1] / x = log a

Frank Cowell: Differentiation 15