ECN 2311

Mathematics for Economics

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 UNIT 3

DIFFERENTIATION

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 Comparative Statics and the derivative
• Comparative statics is concerned with the comparison of different
equilibrium states that are associated with different sets of values
of parameters and exogenous variables.
• In order to these comparisons we start by assuming a given initial
equilibrium state.
• Comparative statics disregards the process of adjustment of the
variables; we merely compare the initial (prechange) equilibrium
state with the final (postchange) equilibrium state.
• Comparative statistics also assumes the new equilibrium to be
attainable, that is, the possibility of instability of equilibrium is
ruled out.

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• A comparative-static analysis can be either qualitative or quantitative
in nature.
• Qualitative focuses only on the direction of change at times. For
instance, does an increase in investment 𝐼𝑜 will increase or decrease
the equilibrium income 𝑌 ∗ ,
• Quantitative on the other hand is concerned with the magnitude
(size) of the change. For example, what is the size of the chane in 𝑌 ∗
resulting from a given change in 𝐼𝑜 (that is, the size of the investment
multiplier).
• Since when we obtain a quantitative answer the direction of change is
known by looking at algebraic sign it implies that quantitative analysis
always embraces the qualitative.

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• Differential calculus is directly concerned with the notion of rate of
change.
• As has been seen comparative statics deals with problems of finding a
rate of change: the rate of change of the equilibrium value of an
endogenous variable with respect to the change in a particular
parameter or exogenous variable.
• Hence the mathematical concept of derivative (differential calculus)
takes on preponderant significance in comparative statics.
• Later on, moreover, we shall apply the concept of derivative to
optimization.

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 The concept of the derivative
• Let two variables be related to each other by the function
𝑦 = 𝑓 𝑥
• This gives the rate of change of any variable 𝑦 in response to a change
in another variable 𝑥.
• Let 𝑥 change from 𝑥𝑜 to 𝑥1 , the change, denoted by ∆, is measured by
the difference 𝑥1 − 𝑥𝑜 .
• We denote the value of the function 𝑓(𝑥) by 𝑓(𝑥𝑖 ) when 𝑥 = 𝑥𝑖 .
• When 𝑥 changes from an initial value 𝑥𝑜 to a new value 𝑥𝑜 + ∆𝑥
• The value of the function 𝑦 = 𝑓 (𝑥) changes from 𝑓(𝑥𝑜 ) to
f 𝑥𝑜 + ∆𝑥 .

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• This change in 𝑦 per unit of change in 𝑥 can be represented by the
difference quotient.
Δ𝑦 f(𝑥𝑜 + ∆𝑥)−f(𝑥𝑜 )
=
Δ𝑥 ∆𝑥
• The above measures the average rate of change of y, can be
calculated if we know the initial value of 𝑥 and the magnitude of
change in 𝑥.
Example
Given 𝑦 = 𝑓(𝑥) = 3𝑥 2 − 4, we find 𝑓 𝑥𝑜 and 𝑓(𝑥𝑜 + ∆𝑥) as follows:
𝑓 𝑥𝑜 = 3 𝑥𝑜 2 − 4
𝑓(𝑥𝑜 + ∆𝑥) = 3(𝑥𝑜 + ∆𝑥)2 − 4

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• Using the above implies that:

Δ𝑦 3(𝑥𝑜 + ∆𝑥)2 − 4 − [3 𝑥𝑜 2 − 4]
=
Δ𝑥 ∆𝑥

Δ𝑦 6𝑥𝑜 ∆𝑥 + 3 ∆𝑥 2
=
Δ𝑥 ∆𝑥
6𝑥𝑜 + 3∆𝑥

• As ∆𝑥 approaches zero, (6𝑥𝑜 + 3∆𝑥) will approach the value 6𝑥𝑜 .

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• This means that
Δ𝑦
l𝑖𝑚∆𝑥→0 = lim 6𝑥𝑜 + 3∆𝑥 = 6𝑥𝑜
Δ𝑥 ∆𝑥→0
• Thus if
Δ𝑦
l𝑖𝑚∆𝑥→0 does exist then it is called a Derivative 𝑜𝑓 𝑦 = 𝑓 𝑥 .
Δ𝑥
• Note that:
i. A derivative is a derived function
ii. The derivative measures the rate of change of 𝑦
iii. Given a primitive function 𝑦 = 𝑓(𝑥) a derivative is denoted as;
′ ′
𝑑𝑦
𝑓 𝑥 , 𝑓 𝑜𝑟
𝑑𝑥

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Differentiability of a function
• It is possible that a function 𝑦 = 𝑓(𝑥) may possess derivatives at
some values of 𝑥 but not at some other values.

• When the derivative exists at every point (𝑥, 𝑦), the function is
said to be differentiable; else it is non-differentiable.

• It is obvious that a discontinuous function is non-differentiable.

• At the point of discontinuity the derivative doesn’t exist.

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• Graphically, it is not possible to a tangent to the curve at this point.
• However, to be differentiable, it is not enough for a function to be
continuous.
• It must also not contain any kink or sharp points. If a kink exists, then
again no unique tangent can be drawn to the curve at this point.
• There will be an infinite number of lines that can be made at that
point.
• In general, continuity at a point only rules out the presence of a gap,
whereas differentiability requires the “smoothness” of the function
(curve) as well as its continuity.

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Rules of differentiation
• Differentiation is the process of finding the derivative of a function.
Instead of using the derivative
• Below are some rules of differentiation for the single independent
variable case.
Rule 1 (Constant function rule)
• If 𝑦 = 𝑏, where b is a constant:
𝑑𝑦
=0
𝑑𝑥

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Rule 2 (Linear function rule)
• If 𝑦 = 𝑎𝑥 + 𝑏, where 𝑎 is the coefficient of 𝑥 and 𝑏 is a constant:
𝑑𝑦
=𝑎
𝑑𝑥
Rule 3 (Power function rule)
• If 𝑦 = 𝑐𝑥 𝑛 , where 𝑐 is a constant and 𝑛 is any real number:
𝑑𝑦
= 𝑛𝑐𝑥 𝑛−1
𝑑𝑥
Example: Find the derivative of 𝑓 𝑥 = 3𝑥 −2 .
Solution:
𝑑𝑦
= 𝑓 ′ 𝑥 = −2 × 3𝑥 −2−1 = −6𝑥 −3
𝑑𝑥

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Rule 4 (Sum rule)
• If 𝑦 = 𝑔(𝑥) + ℎ(𝑥), where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions:
𝑑𝑦
= 𝑔′ 𝑥 + ℎ′ (𝑥)
𝑑𝑥
Rule 5 (Difference rule)
• If 𝑦 = 𝑔 𝑥 − ℎ(𝑥), where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions:
𝑑𝑦
= 𝑔′ 𝑥 − ℎ′ (𝑥)
𝑑𝑥
Rule 6 (Product rule)
• If 𝑦 = 𝑓(𝑥)𝑔(𝑥), where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions:

𝑑𝑦 𝑑𝑓 𝑑𝑔
= 𝑔 𝑥 + 𝑓(𝑥)
𝑑𝑥 𝑑𝑥 𝑑𝑥

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Rule 7 (Quotient rule)
𝑓 𝑥
• If 𝑦 = , where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions;
𝑔 𝑥
𝑑𝑓 𝑑𝑔
𝑑𝑦 𝑑𝑥 𝑔 𝑥 − 𝑓(𝑥)
= 𝑑𝑥
𝑑𝑥 𝑔(𝑥) 2
Rule 8 (Chain rule)
• Given a composite function, also called a function of a function, in which 𝑦 is
a function of 𝑢 and 𝑢 in turn is a function of 𝑥, that is, 𝑦 = 𝑓(𝑢) and 𝑢 =
𝑔(𝑥), then 𝑦 = 𝑓[𝑔(𝑥)] and the derivative of 𝑦 with respect to 𝑥 is equal to
the derivative of the first function with respect to 𝑢 times the derivative of
the second function with respect to 𝑥:
𝑑𝑦 𝑑𝑦 𝑑𝑢
=
𝑑𝑥 𝑑𝑢 𝑑𝑥

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Rule 9 (Inverse function rule)
• Given the function 𝑦 = 𝑓 (𝑥) has a one-to-one mapping, the function 𝑓 will
have an inverse function 𝑥 = 𝑓 −1 𝑦 . For inverse functions, the rule of
differentiation is:

𝑑𝑥 1
=
𝑑 𝑑𝑦Τ𝑑𝑥

Example
𝑑𝑦
• Given 𝑦 = 5𝑥 + 25, Find and hence the derivative of the inverse of the
𝑑𝑥

function.

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Solution
𝑑𝑦
= 5.
𝑑𝑥
• Inverse of 𝑦 = 5𝑥 + 25
5𝑥 + 25 = 𝑦
5𝑥 = 𝑦 − 25
1
𝑥 = 𝑦−5
5
𝑑𝑥 1
=
𝑑𝑦 5

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Rule 10 (Exponential function rule)
• If 𝑦 = 𝑒 𝑓(𝑥)

𝑑𝑦 𝑑𝑢
= 𝑓′ 𝑥 𝑒𝑓 𝑥 𝑢
𝑜𝑟 𝑒
𝑑𝑥 𝑑𝑥
Example
𝑥 2
𝑦= 𝑒

Solution

𝑑𝑦 𝑥 2
= 2𝑥𝑒
𝑑𝑥

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Rule 11 (Log-function rule)
• If 𝑦 = 𝑙𝑛𝑓(𝑥)

𝑑𝑦 𝑓 ′ (𝑥)
=
𝑑𝑥 𝑓(𝑥)

Example
𝑦 = 𝑙𝑛𝑥

Solution

𝑑𝑦 1
=
𝑑𝑥 𝑥

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Rule 12 (Implicit function rule)
• When we have a functional relationship between 𝑥 and 𝑦 in the implicit form
as 𝑓 𝑥, 𝑦 = 0, we can differentiate each term on the left hand side of the
𝑑𝑦
equation treating 𝑦 as a function of 𝑥 and then solve for .
𝑑𝑥

Example
Let 𝑥𝑦 2 − 2𝑥 2 + 𝑦 3 = 0
Differentiating with respect to 𝑥, we get

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 𝑑𝑦 2 2
𝑑𝑦
2𝑥𝑦 + 𝑦 − 4𝑥 + 3𝑦 =0
𝑑𝑥 𝑑𝑥

2
𝑑𝑦
2𝑥𝑦 + 3𝑦 = 4𝑥 − 𝑦 2
𝑑𝑥

𝑑𝑦 4𝑥 − 𝑦 2
=
𝑑𝑥 2𝑥𝑦 + 3𝑦 2

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Higher order derivatives
𝑑𝑦
• Recall that a derivative, , is simply a function derived from a
𝑑𝑥
primitive function, 𝑦 = 𝑓(𝑥).
• As a function this implies that a derivative can also be differentiated
with respect to 𝑥.
• Hence differentiating the primitive function 𝑦 = 𝑓(𝑥) is known as the
first derivative.
• If we differentiate the first derivative then we get the second
derivative; the derivative of the second derivative is the third
derivative and so forth.

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• We denote the first derivative as:
𝑑𝑦
𝑜𝑟 𝑓 ′ (𝑥)
𝑑𝑥
• Likewise the second derivative is:
𝑑2 𝑦 ′′ (𝑥)
𝑜𝑟 𝑓
𝑑𝑥 2
• The third derivative is:
𝑑3 𝑦 ′′′ (𝑥)
𝑜𝑟 𝑓
𝑑𝑥 3
• Hence in general the 𝑛𝑡ℎ derivative is:
𝑑𝑛 𝑦 𝑛
𝑛
𝑜𝑟 𝑓 (𝑥)
𝑑𝑥

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In-class exercise
• Find the successive derivatives of the following (from the first to the
highest order derivative):
1. 𝑦 = 3𝑥 4 + 5 6
2. 𝑦 = 𝑥 3 + 3𝑥 2 + 9𝑥 − 7
1
3. 𝑦 = 𝑥

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Partial derivatives
• If a function has two or more independent variables, the rate of change of
the dependent variable is analyzed using partial derivatives.
• Given a function
Z= 𝑓(𝑥, 𝑦)
• The partial derivative of 𝑍 with respect to 𝑥 measures the instantaneous
rate of change of 𝑍 with respect to 𝑥 while is 𝑦 held constant.
𝜕𝑍
• The partial derivative in this case would be denoted as 𝑍𝑥 (𝑥, 𝑦) or 𝑍𝑥 .
,
𝜕𝑥
Similarly, the partial derivative of 𝑍 with respect to 𝑦 measures the
instantaneous rate of change of 𝑍 with respect to 𝑦 while 𝑥 is held
constant.
𝜕𝑍
• The partial derivative in this case would be denoted as , , 𝑍𝑦 (𝑥, 𝑦) or 𝑍𝑦 .
𝜕𝑦

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In-class exercise
• Find the first order partial derivatives for the following functions:
1. Z= 8𝑥 2 + 14𝑥𝑦 + 5𝑦 2
2. 𝑍 = 3𝑥 2 (5𝑥 + 7𝑦)

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Economic Application
• Partial derivatives are widely used in economics to find the elasticity,
determine homogeneity of the function and many others.
Example
Suppose 𝑄 = 𝑓 𝐾, 𝐿 , where 𝑄 is output, 𝐾 is capital and 𝐿 is labour.
• Assume 𝐿 and 𝐾 are changed by a proportion 𝛿. If output also
increases by the same proportion 𝛿 then the production function
exhibits constant returns to scale. That is;
𝛿𝑄 = 𝑓 𝛿𝐾, 𝛿𝐿
• This implies that doubling of the inputs 𝐾 and 𝐿 will result in output
also doubling.

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• A production function that exhibits such characteristics is said to be
homogenous of degree one or linear homogenous.
• For a linear homogenous production function 𝑄 = 𝑓 𝐾, 𝐿 , the
Euler’s theorems states that:
𝜕𝑄 𝜕𝑄
𝐿 +𝐾 =𝑄
𝜕𝐿 𝜕𝐾
• Interpretation:
• If the price of labour are set equal to their respective marginal products then
the total payments made to labour and capital will together be equal to the
value of output produced.
• This is sometimes referred to as a solution to the adding up or product
exhaustion problem.

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 Example
• Consider a Cobb-Douglas production function:
𝑄 = 𝐴𝐿𝛽 𝐾 1−𝛽
Where 𝐴 and 𝛽 are constants.
𝜕𝑄
= 𝛽𝐴𝐿𝛽−1 𝐾 1−𝛽
𝜕𝐿
𝜕𝑄
= (1 − 𝛽)𝐴𝐿𝛽 𝐾 −𝛽
𝜕𝐿
• Thus
𝜕𝑄 𝜕𝑄
𝐿 +𝐾 = 𝐿 𝛽𝐴𝐿𝛽−1 𝐾 1−𝛽 + 𝐾 (1 − 𝛽)𝐴𝐿𝛽 𝐾 −𝛽 = 𝑄
𝜕𝐿 𝜕𝐾

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In-class exercise
Given the functions
𝑄1 = 𝑓 𝑝1 , 𝑞1 , 𝑄2 = 𝑓(𝑝2 , 𝑞2 )
Find the following:
i. Partial elasticity of demand 𝑄1 with respect to 𝑝1
ii. Partial elasticity of demand 𝑄2 with respect to 𝑝2
iii. Partial elasticity of demand 𝑄1 with respect to 𝑝2
iv. Partial elasticity of demand 𝑄2 with respect to 𝑝1

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Total differentials
• Consider a saving function
𝑆 = 𝑆(𝑌, 𝑖)
• where S is savings, Y is national income, and i is the interest rate and
assume that the function is continuous and possesses continuous (partial)
derivatives.
𝜕𝑆
• If 𝑑𝑌 is any change in 𝑌 then 𝑑𝑌 is the resulting change in 𝑆.
𝜕𝑌
𝜕𝑆
• Similarly, if 𝑑𝑖 is any change in 𝑖 then 𝑑𝑖 is the resulting change in 𝑆.
𝜕𝑖
• Thus the total change in 𝑆 is given by
𝜕𝑆 𝜕𝑆
𝑑𝑆 = 𝑑𝑌 + 𝑑𝑖
𝜕𝑌 𝜕𝑖
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Or can alternatively be written as
𝑑𝑆 = 𝑆𝑦 𝑑𝑌 + 𝑆𝑖 𝑑𝑖
• The expression 𝑑𝑆 is called the total differential of the saving function
and total differentiation refers to the process of obtaining a total
differential.
• It is possible, of course, that 𝑌 may change while 𝑖 remains constant.
• In that case, 𝑑𝑖 = 0, and the total differential will reduce to
𝑑𝑆 = (𝜕𝑆/𝜕𝑌)𝑑𝑌
• Let us consider a more general case of a function of 𝑛 independent
variables. Given
𝑈 = 𝑈(𝑥1 , 𝑥2 , . . . , 𝑥𝑛 )

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• The general form of the total differential could be written as:
𝜕𝑈 𝜕𝑈 𝜕𝑈
𝑑𝑈 = 𝑑𝑥1 + 𝑑𝑥2 + ⋯ + 𝑑𝑥𝑛
𝜕𝑥1 𝜕𝑥2 𝜕𝑥𝑛
Or
𝑑𝑈 = 𝑈1 𝑑𝑥1 + 𝑈2 𝑑𝑥2 + ⋯ + 𝑈𝑛 𝑑𝑥𝑛
In-class exercise
• Find the total differential for the following utility functions, where
𝑎, 𝑏 > 0:
i. 𝑈 𝑥1 , 𝑥2 = 𝑎𝑥1 + 𝑏𝑥2
ii. 𝑈 𝑥1 , 𝑥2 = 𝑥12 + 𝑥23 + 𝑥1 𝑥2
iii. 𝑈 𝑥1 , 𝑥2 = 𝑥1𝑎 𝑥2𝑏

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• Second order total differential
• Second order total differential can be obtained by differentiating the
first order total differential.
• The first order differential must be differentiated with respect to the
two variables that are in it in order to get the second order total
differential.
• It is simple to comprehend if we think of the first total differential as
the original function which must be totally differentiated.
• Thus we must get the change (in the total first differential) caused by
the two variables and then sum them.
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• We proceed as follows:
𝑑2 𝑦 = 𝑑 𝑑𝑦

𝜕(𝑑𝑦) 𝜕(𝑑𝑦)
𝑑2 𝑦 = 𝑑𝑥1 + 𝑑𝑥2
𝜕𝑥1 𝜕𝑥2

𝜕𝑦 𝜕𝑦 𝜕𝑦 𝜕𝑦
𝜕 𝑑𝑥1 + 𝑑𝑥2 𝜕 𝑑𝑥1 + 𝑑𝑥2
2 𝜕𝑥1 𝜕𝑥2 𝜕𝑥1 𝜕𝑥2
𝑑 𝑦= 𝑑𝑥1 + 𝑑𝑥2
𝜕𝑥1 𝜕𝑥2

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• The two terms of the first total differential will now be differentiated
with respect to each of the independent terms.

𝜕 2𝑦 𝜕 2𝑦 𝜕 2𝑦 𝜕 2𝑦
𝑑2 𝑦 = 2 𝑑𝑥1 + 𝜕𝑥 𝜕𝑥 𝑑𝑥2 𝑑𝑥1 + 𝜕𝑥 𝜕𝑥 𝑑𝑥1 + 2 𝑑𝑥2 𝑑𝑥2
𝜕𝑥1 1 2 2 1 𝜕𝑥2

𝜕 2𝑦 𝜕 2𝑦 𝜕 2𝑦 𝜕 2𝑦
𝑑2 𝑦 = 2 𝑑𝑥12 + 𝑑𝑥2 𝑑𝑥1 + 𝑑𝑥1 𝑑𝑥2 + 2 𝑑𝑥22
𝜕𝑥1 𝜕𝑥1 𝜕𝑥2 𝜕𝑥2 𝜕𝑥1 𝜕𝑥2

2 2 2
2
𝜕 𝑦 2
𝜕 𝑦 𝜕 𝑦 2
𝑑 𝑦 = 2 𝑑𝑥1 + 2 𝑑𝑥1 𝑑𝑥2 + 2 𝑑𝑥2
𝜕𝑥1 𝜕𝑥1 𝜕𝑥2 𝜕𝑥2

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• Let
𝜕2𝑦
𝑓𝑖𝑗 =
𝜕𝑥𝑖 𝜕𝑥𝑗
• Thus
𝑑2 𝑦 = 𝑓11 𝑑𝑥12 + 2𝑓12 𝑑𝑥1 𝑑𝑥2 + 𝑓22 𝑑𝑥22
• This result will be useful under optimisation

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 End of Lecture 3

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