Department of Economic Theory and Analysis

Makerere University
ECO 1108 Introduction to Mathematics for Economists
Yawe, Bruno Lule Mukisa Ibrahim Ssajjabbi Vincent
Email: Email: Email:
byawe2010@gmail.com mukisaibrahim@yahoo.com ssajjabbi.v@gmail.com

Rate of Change and the Derivative [Chiang (1984)]

Given a function y  f (x) , the variable y represents the dependent
variable/regressand/explained variable or endogenous variable while x will
be some exogenous variable/explanatory variable/regressor/independent
variable.

The Difference Quotient

When the variable x changes from the value x0 to a new variable x1 , the
change in x is measured by the difference x1  x0 . If we use the symbol 
(the Greek capital delta, for “difference”) to represent the change, we can
write x  x1  x0 . It follows that x1  ( x0  x) . We also need a way of
representing the value of the function f (x) at various values of x . The
standard practice is to use the notation f ( xi ) to represent the value of f (x)
when x  xi . Thus, for the function f ( x)  9  x 2 , we have f (0)  9  02 ; and
likewise, f (?)  9  ?2 , and so on.

When x changes from an initial value x0 to a new value ( x0  x) , the value
of the function y  f (x) changes from f ( x0 ) to f ( x0  x) . The change in y per
unit change in x can be represented by the following difference quotient:
y f ( x0  x)  f ( x0 )
 (1)
x x
This quotient, which measures the average rate of change of y , can be
computed if we know the initial value of x (i.e. x0 ) and the magnitude of the
y
change in x (i.e. x ). That is, is a function of x0 and x .
x

y
Example. Given y  f ( x)  7 x 2  4 find the Difference Quotient   if x
 x 
changes from an initial value x0 to a new value ( x0  x) .

1
Solution.

y
From equation (1), the Difference Quotient   is expressed as follows:
 x 
y f ( x0  x)  f ( x0 )

x x
Given y  f ( x)  7 x 2  4 , the difference quotient is computed as follows:
New y Old y

y 7( x0  x) 2  4  [7 x02  4]

x x
7( x0  x)( x0  x)  4  7 x02  4

x
7[( x0  x0 (x)  (x) x0  (x) 2 ]  7 x02
2

x
7[ x0  2 x0 (x)  (x) 2 ]  7 x02
2

x
7 x  14 x0 (x)  7(x) 2  7 x02
2
 0
x
14 x0 (x)  7(x) 2 14 x0 ( x) 7(x) 2
    14 x0  7(x)
x x x

The Derivative
Frequently, we are interested in the rate of change of y when x is very
y
small. In such a case, it is possible to obtain an approximation of by
x
dropping all the terms in the difference quotient that involve the expression
x . In the last example, for instance, if x is very small, we may simply
y
take the term 14x0 on the RHS as an approximation of . The smaller the
x
y
value of x , the closer is the approximation to the true value of .
x

As x approaches zero (meaning that it gets closer and closer to, but never
actually reaches, zero), (7x  14 x0 ) will approach the value 14x0 , and by the
y
same token, will approach 14x0 . Symbolically, this fact is expressed
x
either by the statement y x  14x0 as x  0, or by the equation
y
lim  lim (14 x0  7x)  14 x0 .
x 0 x x 0

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The symbol xlim
0
is read as follows: “The limit of ......as x approaches 0.” If,
y
as x  0 , the limit of the difference quotient exists, that limit is identified
x
as the derivative of the function y  f (x) .

The following should be noted about the derivative.

i. A derivative is a function. In this context, the term derivative means a
derived function. The original function y  f (x) is a primitive function
and the derivative is another function derived from it.

ii. Whereas the difference quotient is a function of x0 and x , the

derivative is a function of x0 only. This is because x is compelled to
approach zero and should not be regarded as another variable in the
function.

iii. We have used the subscripted symbol x0 only in order to stress the
fact that a change in x must start from some specific value of x. We
may now delete the subscript and state that the derivative like the
primitive function, is itself a function of the independent variable x.
That is for each value of x, there is a unique corresponding value for
the derivative function.

iv. Since the derivative is a limit of the difference quotient, which

measures a rate of change of y, the derivative must also be a
measure of some rate of change.

v. Derivative functions are denoted in two ways. Given a primitive

function y  f (x) , one way of denoting its derivative (if it exists) is to
use the symbol f (x) or simply f  (this notation is attributed to
dy
Lagrange). The other notation is devised by Leibniz.
dx

By means of the two notations, we may define the derivative of a given

function y  f (x) as follows:
dy y
 f ( x)  lim
dx x  0 x

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Do-It-Yourself. Given y  f ( x)  10 x 2  5x  1 find the:
y
(a) Difference Quotient   if x changes from an initial value x to a
 x 
new value x  x .
(b) Derivative.

Rules of Differentiation [Dowling (1986): Chapter 3]

Differentiation is the process of determining the derivative of the function,
i.e., finding the change in y for a change in x when the change in x (i.e. ∆x)
approaches zero. It involves nothing more complicated than applying a few
basic formulas or rules to the function. In explaining these rules, it is
common to use auxiliary functions such as u and v, where u is an
unspecified function of x, i.e. u(x) and v is an unspecified function of x, i.e.
v(x).

(a) The Constant Function Rule.

The derivative of a constant function, such as y=k, where k is any constant
dy
is zero. Given y = k,  0. Since y is constant, y will not change for any
dx
dy
change in x. Hence dy = 0 and no matter what the change in x,  0.
dx

Do-It-Yourself. Find the derivative given (i) y = s, (ii) y= -m

(b) The Linear Function Rule. The derivative of a linear function, y = a

dy
+ bx, is equal to b, the coefficient of x. Given y = a + bx,  b. The
dx
derivative dy dx measures the instantaneous rate of change of the function
i.e. its slope. The slope of a linear function is b, i.e. the coefficient of the
independent variable, and it is constant.

1
Do-It-Yourself. Find the derivative given (i) y = q + px (ii) y = nx (iii) 5  x .
7

(c) The Power Function Rule. The derivative of the following power
function, y  ax p is equal to the exponent p times the coefficient a, multiplied
by the variable x raised to the (p-1) power. Therefore, given y  ax p ,
dy
 pax p 1 .
dx

4
Do-It-Yourself. Find the derivative given (i) y = 4x9 (ii) y = 10x2 (iii) x90

(d) The Rule for Sums and Differences. The derivative of the following
sum y  u( x)  v( x) is equal to the sum of the derivatives of the individual
functions. The derivative of a difference is equal to the difference of the
dy du dv
derivatives of the individual functions. Given y  u( x)  v( x) ,   . To
dx dx dx
find the derivatives of the individual terms, apply whatever rule is
appropriate.

Do-It-Yourself. Find the derivatives for (i) y = 12x7 – 4x9 (ii) y = 9x4 + 2x – 9

(e) The Product Rule. The derivative of the following product

y  u( x)  v( x) is equal to the first function [i.e. u(x)] multiplied by the

derivative of the second function   plus the second function [v(x)]

dv
 dx 
multiplied by the derivative of the first function 
du 
. Thus, given
 dx 
dy dv du
y  u ( x)  v( x) , u v . Recall to add exponents in multiplication.
dx dx dx

Do-It-Yourself. Find the derivatives for (i) y  3x9 (3x  7) (ii) y  (7 x  3)3x9

u
(f) The Quotient Rule. The derivative of the following quotient y  is
v
equal to the denominator [v] times the derivative of the numerator   ,
du
 dx 
minus the numerator [u] times the derivative of the denominator   , all
dv
 dx 
 du dv 
 v u 
u ( x) dy  dx dx 
divided by the denominator squared. Thus, given y  ,  2
.
v( x) dx v
The order in the numerator of the formula for the derivative is important and
cannot be reversed. Remember to subtract exponents in division. For
6 x6
example,  2 x 4 and not 2x3.
3x 2

5
 4 x3 7 x4
Do-It-Yourself. Find the derivatives for (i) y  (ii) y  2
2x  5 8 x  3x  2

(g) The Rule for a Function of a Function. The derivative of a function

of the following function y = f(u), where u = g(x) is equal to the derivative of
the first function with respect to u [dy/du] times the derivative of the second
function with respect to x [du/dx]. This is known as the Chain rule. Thus,
dy dy du
given y  f (u), u  g ( x)  .
dx du dx

Do-It-Yourself. Find the derivative if y = u4 and u = 2x2 + 3.

HIGHER-ORDER DERIVATIVES
d2y
The second-order derivative denoted as measures the rate of change
dx 2
of the first-order derivative   , just as the first-order derivative measures
dy
 dx 
the rate of change of the original or primitive function [y = f(x)]. The third-
d3y
order derivative denoted as measures the rate of change of the
dx3
d2y
second-order derivative  2  and so on. Higher-order derivatives are found
 dx 
simply by applying the rule of differentiation to the derivative of the previous
order. Higher-order derivatives are found by applying the rules of
differentiation to lower-order derivatives.

USE OF DERIVATIVES IN ECONOMICS

Derivatives are in economics when analyzing the following:- Marginal
Concepts; Maximization and Minimization of a function; and Price Elasticity.

I MARGINAL CONCEPTS
Marginal Cost in economics is defined as the change in total cost incurred
due to the production of an additional unit of the product. Marginal Revenue
is defined as the change in the total revenue brought about by the sale of
an extra unit of the product. Since total cost and total revenue are both
functions of the level of output (Q), marginal cost and marginal revenue can
each be expressed mathematically as derivatives of their respective total
functions.

6
Therefore,
d dTC
If TC = TC (Q), then MC  TC 
dQ dQ
d dTR
And if TR = TR (Q), then MR  TR  .
dQ dQ
In short, the marginal concept of any economic function can be expressed
as the derivative of its total function.

Do-It-Yourself #1. Find the marginal concepts of the following functions:

(a) TC  97Q  9Q 4 (b) TR  Q 4  7Q3  46

Do-It-Yourself #2. Find the marginal revenue function, given the following
demand function P  60  3Q . [HINT: First find the total revenue function by
first multiplying the demand function (P) with the Quantity (Q), i.e. TR =
PQ].

II MAXIMIZATION AND MINIMIZATION OF A FUNCTION

To be at a relative Maximum or Minimum, a function must be at a plateau
(i.e. neither increasing nor decreasing at that point). If the function is
neither increasing nor decreasing, the derivative of the function at that point
must be zero.
1. The first, and necessary, condition for a relative maximum or
minimum, therefore, is that the first-order derivative be equal to zero.
2. The Second, and sufficient, condition is that the second-order
derivative be negative for a maximum and positive for a relative minimum.

Therefore, given y  f ( x)
dy d2y
for a relative maximum:  0; 0
dx dx 2
dy d2y
and for a relative minimum:  0; 0
dx dx 2

Do-It-Yourself #3. Given find the relative maximum or minimum for the
1
following total cost function: TR  50  24Q  5.5Q2  Q3 .
3
Solution.
1. First find the critical values by taking the first-order derivative and
setting it equal to zero.

7
 d
TR  24  11Q  Q 2  0
dQ
 (Q  8)(Q  3)  0
The critical values are Q = 8 and Q = 3.
2. Take the second-order derivative and evaluate its value at the critical
values to ascertain if at the critical values, the function is minimized or
maximized.
d 2TR
 11  2Q .
dQ 2

d 2TR
At Q = 8;  11  2(8)  5  0
dQ 2
d 2TR
At Q = 3;  11  2(3)  5  0
dQ2
Thus, at Q = 8, TR is at a relative minimum while at Q = 3, TR is at a
relative maximum.

1
3. Evaluate the original function [ TR  50  24Q  5.5Q2  Q3 ] at Q = 8 to find
3
the relative minimum and at Q = 3 to find the relative maximum.
1
TR  50  24(8)  5.5(8)(8)  (8)(8)(8)
3
512
At Q = 8,  50  192  352 
3
 242  352  170.7  60.7

1
TR  50  24(3)  5.5(3)(3)  (3)(3)(3)
3
At Q = 3,  50  72  49.5  9
 132  49.5  9  91.5

Do-It-Yourself
1. Maximize the following functions:
(a) TR = 32Q  Q 2
(b)   Q 2  11Q  24
1
(c)    Q3  8Q2  39Q  50
3
(d)   Q3  48Q 2  180Q  800

8
2. Minimize the following functions
(a) AC  200  24Q  Q 2
1
(b) TC  Q3  4.5Q2  14Q  22
3
1
(c) TC  Q3  8.5Q2  60Q  27
3

3. Given a firm’s demand function Q  90  2P  0 and its average cost

2
function AC  Q2  8Q  57  find the level of output which: (a) Maximizes
Q
total revenue, (b) Minimizes marginal costs, and (c) maximizes profits.

4. A firm has the following demand function 22  0.5  P  0 and the

1 90
following average cost function AC  Q2  8.5Q  50  find the level of
3 Q
output which: (a) Maximizes total revenue, (b) Minimizes total costs, and (c)
maximizes profits.

III PRICE ELASTICITY

In economics, price elasticity denoted by ϵ measures the responsiveness of
the quantity demanded/supplied to changes in the good’s own price, i.e. the
percentage change in the quantity demanded/supplied associated with a
percentage change in the good’s own price. Mathematically,
dQ / Q

dP / P
For ease of mathematical computation, price elasticity is frequently
expressed in the following alternate form:
dQ / dP M arg inal function dQ P
  or  
Q/P average function dP Q
There are price elasticities for both supply and demand. Price elasticity is
said to be:
Elastic if  1
Unitary elastic if  1
Inelastic if  1

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Example. Given the following demand function Qd  650  P2  5P where P =
10, find the price elasticity of demand.

dQ P
Solution. Using the following alternate form of the formula  
dP Q
dQ
First take the first-order derivative.  2 P  5
dP
Then substitute the given price level (i.e. P = 10)
dQ
 2(10)  5  25
dP
Next, find the level of output (Q) when P =10.
Qd  650  (10)2  5(10)  500
Substituting these values in the elasticity formula yields the elasticity as
follows.
10
  25  0.5
500
Do-It-Yourself.
1. Find the price elasticity of demand for each of the following functions
at P = 3 and P = 5.
(a) Q  42  6P (b) Q  75  5P (c) 8Q  2P  56  0

2. Find the price elasticity of supply for each of the following functions at
P = 3 and P = 5.
(a) Q  1.5P  3  0 (b) Q  2  0.8P  0

10