Department of Mathematics, Faculty of Basic

Science, Foreign Trade University

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Part 2, Analysis
Chapter 1:

Economic Applications of Functions of One Variable

Instructor Dr. Son Lam

 CONTENTS
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I – Present and Future Value of Money

II – Application of Dirivatives in Economics
III – Economical optimization
 II – The Application of derivatives in economics
Definition

lim f ( x) = A ⇔ ∀ε > 0, ∃δ > 0

x → x0

satisfy : f ( x) − A < ε, ∀x ∈ ( x0 − δ, x0 + δ)
 II – The Application of derivatives in economics
Definition

lim f ( x) = A ⇔ ∀ε > 0, ∃δ > 0

x → x0

satisfy : f ( x) − A < ε, ∀x ∈ ( x0 − δ, x0 + δ)
 II – The Application of derivatives in economics
Definition

lim f ( x) = A ⇔ ∀ε > 0, ∃M > 0

x →+∞
satisfy : f ( x) − A < ε, ∀x > M

lim f ( x) = A ⇔ ∀ε > 0, ∃M > 0

x →−∞
satisfy : f ( x) − A < ε, ∀x < − M
 II – The Application of derivatives in economics
Definition

lim f ( x) = +∞ ⇔ ∀M > 0, ∃δ > 0

x → x0

satisfy : f ( x) > M , ∀x ∈ ( x0 − δ, x0 + δ)

lim f ( x) = −∞ ⇔ ∀M > 0, ∃δ > 0

x → x0

satisfy : f ( x) < − M , ∀x ∈ ( x0 − δ, x0 + δ)
 II – The Application of derivatives in economics
Definition

lim f ( x) = A ⇔ ∀{ xn } satisfy lim xn = x0

x → x0 n →+∞

then lim f ( xn ) = A
n →+∞
 II – The Application of derivatives in economics
Definition

f ( x) − f ( x0 )
f ′( x0 ) = lim
x → x0 x − x0
f ( x0 + ∆x) − f ( x0 )
= lim
∆x → 0 ∆x
 II – The Application of derivatives in economics
Example

f (x ) = 3x 2 , f ’ (2) = ?

2
f ( x) − f (2) 3x − 12
f ′(2) = lim = lim = lim ( 3x + 6 ) = 12
x →2 x−2 x →2 x − 2 x →2

f ( x) − f ( x0 ) 3x 2 − 3x 02
f ′( x0 ) = lim = lim = lim ( 3x + 3x 0 ) = 6x 0
x → x0 x − x0 x → 2 x − x0 x→2

 3x ( ) ' = 6x
2
 II – The Application of derivatives in economics
Example

g (x ) = x , g '(0) = ?
 II – The Application of derivatives in economics
Application
f ( x0 + ∆x) − f ( x0 )
f ′( x0 ) ≈
∆x

f ( x0 + ∆x) − f ( x0 ) ≈ f ′( x0 ).∆x

f ( x0 + 1) − f ( x0 ) ≈ f ′( x0 )
 II – The Application of derivatives in economics
Concept

Considering the economic function y = f(x) representing

the effect of the economic variable x on the economic
variable y.
My ( x0 ) = f ′( x0 )
is called the y-marginal value of x at the point x0.

Meaning: at the point x0, if x increases by 1 unit, then y

changes by an amount approximately equal to f ′( x0 ) units
 II – The Application of derivatives in economics
Example
Marginal Quantitives = Marginal Physical Product

Q = f ( L)  MPPL = f ′( L)
Q = g ( K )  MPPK = g ′( K )

Marginal Revenue TR = TR(Q)  MR = TR′(Q)

Marginal Cost TC = TC (Q)  MC = TC ′(Q)
Marginal Propensity to
Consume
C = C (Y )  MPC = C ′(Y )
 II – The Application of derivatives in economics
Concept

From a mathematical perspective, for the function

y = f(x) to obey the law of diminishing marginal utility, then
f ′′( x) < 0
When x is large enough.

Example:
Detemine the condition for the function to obey the law
of diminishing marginal utility
α
Q = aL , a > 0 ,α > 0 ,L > 0
 II – The Application of derivatives in economics
Concept

Considering the economic function y = f(x) representing the

effect of the economic variable x on the economic variable
y. y y′( xo )
ε x ( xo ) = .xo
y ( x0 )
Is called the elasticity of y with respect to x at the point x0.

Meaning: at the point x0, if x increases by 1%, then y

changes by an amount approximately equal to ε ( % )
Example: Calculate the price elasticity of demand at
p0=4$ given 2
D = 6p − p
 II – The Application of derivatives in economics
Example

Calculate the price elasticity of demand at p0=4$ given

demand function: 2
D = 6p − p
Condition : 0 < p < 6
−2
Q D′(p) 6 − 2p  εD
p (4) = .4 = −1( % )
εp = .p = .p 8
D(p) 6p − p 2
•Meaning:
At the price po = 4, if the price increases by 1%, the demand will
•decrease by approximately 1%.
•ofIfapproximately
the price increases by 2%, the demand will decrease by an amount
2*1% = 2%.
•If the price increases by 3.2%, the demand will decrease by
approximately 3.2*1% = 3.2%.
 II – The Application of derivatives in economics
Example

Calculate the labor elasticity of output, given demand

α
function: Q = aL , a > 0 ,α > 0 ,L > 0
α −1
Q Q'( L ) α aL
εL ( L ) = .L = α
L =α
Q( L ) aL
•Meaning:
if the labor increases by 1%, the output will increase by
approximately alpha %.
 II – The Application of derivatives in economics
Relationship between the average and marginal function
Given a economic y=f(x) then the average function and marginal
function are:
f ( x) y
Ay = = and My = f ′( x ) = y ′
x x
y
′ ′
y −
 y  y ′.x − (x ) '.y x M y − Ay
(Ay)′ =   = = = (x > 0)
x 2 x x
x
+)If My<Ay then Ay is failing
+) If My=Ay then Ay has a local maximum or local minimum
(is horizontal or is at a point of horizontal tangency)
+) If My>Ay then Ay is rising
 II – The Application of derivatives in economics
Relationship between the average and marginal function

Given the cost function:

2
TC(Q) = 3Q + 7Q + 27

+) Function Ay increases if and only if Q>3

+) Function Ay decreases if and only if Q<3
+) Function Ay reaches a minimum if Q=3
 II – The Application of derivatives in economics
Economical Optimization

Theorem:
On the interval (a; b) f(x) has only one local minimum
- x0, and has no local maximum, then f(x) reaches its
global minimum value on (a; b) at x0.
- On the interval (a; b) f(x) has only one local
- maximum x0, and has no local minimum, then f(x)
reaches its maximum value on (a; b) at x0
+)Example:
Define Q so that the average cost function reaches its
maximum value TC(Q) = Q3 − 9Q 2 + 80Q
 II – The Application of derivatives in economics
Example:
Define Q so that the average cost function reaches
maximum value
3 2
TC(Q) = Q − 9Q + 80Q

TC 9
AC = = Q2 − 9Q + 80  AC′(Q) = 2Q − 9 = 0 ⇔ Q =
Q 2
 9
•On the other hand AC′′ = 2 → AC′′  2  = 2 > 0
9
Q= is local minimum of function AC
2

• On the interval (0; positive infinity), AC has only one local

9
minimum and has no local maximum, so the optimal output level is Q =
2