ASSIGNMENT

COST ACCOUNTING

PREPARED BY

OKASHA OSAMA PARACHA

53006

BSBA 5TH A

DATE: 08/DECEMBER/2022
DERIVATIVES
Derivative is the rate of change of a function with respect to a variable. It is a method of finding
the value of a certain asset due to change in another variable function of the instrument.

There are various applications of derivatives not only in mathematics or real life but also in
business and economics etc as well.

APPLICATIONS OF DERIVATIVES IN ECONOMICS

In recent years, Economic decision making has become more and more mathematical oriented.
Faced with huge masses of statistical data, depending on hundreds or even thousands of different
variables, business analysts and economists have increasingly turned to mathematical methods to
help them describe what is happening, predict the effects of various policy alternatives, and
choose reasonable courses of actions from myriad of possibilities.

Derivatives are perfect for examining change. By their definition, they tells us how one variable
changes when another variable changes. In business and economics, this allows us to examine
how revenue and cost change as the quantity produced and sold changes. Marginal revenue and
marginal cost help a business determine compute these changes. Similarly, elasticity is used to
determine how changes in price affect the quantity demanded by consumers. Understanding this
relationship helps us to determine whether a price should be increased or decreased.

Marginal Function
Marginal function in economics is defined as the change in total function due to a one unit
change in the variable. If the total function is a continuous function and differentiable, by
differentiating the total function with respect to the corresponding variable, the marginal function
can be obtained. The term marginal is used to indicate the change in revenue or cost when an
additional unit is produced.

Marginal Revenue
The term marginal revenue is used when a change in total revenue occurs due to the selling of an
extra unit of output.

If the total revenue function is represented by TR(q), where q is the number of units produced and
sold. The derivative of the total revenue function will result as the corresponding marginal
revenue function.

IF TR=TR(q)

dTR
=MR(q)
dq
Example:
TR(x)=10Q MR(x)=10

TR(x)=15Q+9Q3 MR(x)=15+27Q2

Marginal Cost
The term marginal cost is used when a change in total cost occurs due to the production of an
extra unit of output.

If the total cost function is represented by TC(q), where q is the number of units produced. The
derivative of the total cost function will result as the corresponding marginal cost function.

IF TC=TC(q)

dTC
=MC(q)
dq

Example:
TC(Q)=13+7Q MC(Q)=7

TC(Q)=91+2Q-5Q2 MC(Q)=2-10Q

Marginal Product of Labor

The term marginal product of labor is used when a change in total product of labor occurs due to
the addition of an extra unit of labor.

If the total product of labor function is represented by TP (L), where L is the number of labors
added. The marginal product of labor will be,

IF TP=TP(L)

dTP
=MP(L)
dL

Example:
TP(L)=33L+L91 MP(L)=33+91L90
Marginal Utility
The term marginal utility is used when a change in total satisfaction of individual occurs due to
change in the quantity of consumption.

If the total utility function is represented by TU(x), where x is the quantity of goods consumed.
The marginal utility will be,

TU=TU(x)

dTU
=MUx
dx

Example:
TU(x)= 3x-7x2 MU(x)=3-14x

Elasticity
The term elasticity refers to the responsiveness of one economic variable to changes in another
economic variable. The elasticity is measured in terms of percentage changes instead of absolute
changes.

∆X
Percentage change in X=
X

The most common use of elasticity in economics is price elasticity of demand. This concept
allows us to explore the responsiveness of the consumer demand for some product or service to
changes in the price of that product or service.

APPLICATIONS OF DERIVATIVES IN BUSINESS

The derivatives are used in business for optimizing profits since the derivatives help

with understanding the methods of increasing or decreasing the price of commodities for
increasing revenue. It helps to solve problems of finding the maximum and minimum profits.

Optimizing Functions
With the help of derivatives, we can find maximum as well as minimum points of profit/loss,
cost, revenue etc. A producer who is facing continuous and differentiable profit function can find
the optimum level of output at corresponding profit through the process of optimization function.

Maxima and Minima

To find out the highest point (maximum profit) and the lowest point (lowest profit) this
derivative function is used.