ation of Calculus 4st Part: Applic culus to determine optimum level. mics is optimum level. Optimum Jevel js, the other is the minimum level. For exang hen his satisfaction reaches the maximy firm reaches the optimum level yi f the firm reaches t Application of cal ic concept of econo! maximum level and the optimum level w duction unit or a hen the cost of production, 0! ‘An important basi two types. One is the a consumer reaches t level. On the other hand, a pro respect to cost of production w! minimum level. There are mainly two proces: process and the other is the process of calculus. calculus. Optimisation is of two types, one is unconstrained optimisation and the other ist constrained optimisation. (a) Unconstrained optimisation : If the variables are completely independent i case of optimisation from the standpoint of maximisation or minimisation then iti called unconstrained optimisation or simple optimisation. s to determine the optimum level: One is the geometi Here we discuss the process (i) In case of one variable : For optimisation, two conditions are to be fulfill One is the necessary condition and the other is the sufficient condition. If the function is y = f(x), then the necessary condition of maximisation is ee ae r3 =0.; ie, f(x) =0 and the sufficient condition for maximisation is dy dx? 0 Fe, OK) <0 On the other hand, necessary conditi , ndition of minimisat ition is iene ax ee f(x) =0 and sufficient condition for minimisation is d’y G2 oi hen PX) > 0 Necessary condition i ‘onditio® is called first o1 iti called second order condition, it And the, chon oa 182 sa AAppendix : Ist Part : Application of Calculus economics, unconstrained optimisati 183 maximisation of the firm, to sitive market and under mon, ‘t) In case of two variables ; soditions of maximisation are a ax? she, fi, <0 ey ax? <2 phe, f,<0 on the other hand, necessary conditions of minimisation are faxpe Satndecces, <0 ey EGY subset =,0 and the sufficient conditions of minimisation are oy ah ae east aD, Ox? # ay *Cptd st pe Ox}? a Necessary condition is called first order condition and the sufficient condition is Second order condition. co} nomics ut i imisation of two variables is used to determine “tuilibtium of the mana icst monopoly market with price ie ipeonee ig ©) Constrained optimisation : If the conditions of optimisation are ie, inenined with Tespect to a constraint, as the variables are not te of Cnet, then itis called constrained optimisation. To solve the proble “nsrain Optimisation Lagrange multiplier process is used. 1 iat cx silt objective is to optimise the function y = f(x,, X,) th reseed equation is oye" Xs then to determine the conditions of optimisation Lagrat ined in the following process. We ing wa "ats , the equation of ee ee sere written in, the following, way © — 8%), X) = tiplier A i.e. 0 ‘econd step, this equation is to be multiplied by Lagrange ae Me - g(x, x)= 0Microeconomics I and Statistics > itten i following way third Langrange equation should be written in the y on we L=flx, x) + Ale - BC x] De ree ee Here the first order conditions of maximisation 4! & 9 Ho Ze x, Ox,” iti imisation is and the second order tn, 8 eet: 0 On the other,hand, first order conditions of minimisation are ' ee ne 9 Be pe Pe : and the second order condition of minimisation is ol, +e L,-22,81,,>0. The first order condition is called necessary condition and the second order condition is called sufficient condition. i Ae In economics, Lagrange multiplier process of constrained optimisation is used to determine consumer's equilibrium, output maximisation subject to a given cost, cost minimisation subject to a given output etc. ileaa H Explanation of the law of equimarginal utility or utility maximisation conditions with the help of calculus. Equilibrium condition of the consumer or law of equimarginal utility is now explained with the help of calculus. : Here it is assumed that the consumer purchases q, amount of commodity Q, and 4, amount of commodity Q, only. So the utility function of the consumer is U= fq, q,) Change in total utility due to increase in consumption of one extra unit of commodity q, keeping the amount of q; Temain constant is called marginal utility of commodity q,. So the marginal utility of commodity q, is we ox, In the same process the marginal utility of commodity q, is entire amount of income for purchasing th iti budge! equation of the consumer is SPeonoilies sidliiaieliesicl 4 Yo = PG, + pq, Here p, is the fixed rice of co} iy eee i a ! P Tmodity q, and p, is the fixed price of commodill The objective of the consumer is to maximj ili z . to the constraint of budget equation y= a vity function U = f(q,, 4.) subj! In this situation Lagrange equation is u: sed i ‘ i the consumer. Here the Lagrange equation is " Setermine the maximum wily L= fq, q, z Here A is the Lagrange ial in ah Pq, Pq.) ee inesy- Appendix : Ist Part : Application of Calculus 185 sion of the consumer are the partial differentiation of L with respect to q, i al to Zero ie, . mies ag 2 aq, *° Se | a? Le flay 4) * My, — Pits ~ P92] aL < dg +a p)=9 < etl (0) Lop +e-p)=0 a2” & @y,-pa,- Pie = 9 we (2) 3) From equation a) f,-Ap, = f, we (4) . : “_ % > eetel) Comparing equation (4) by equation (5) el RP Here 2, “ the marginal utility of one unit money] 0 Marginal utility of commodity Q, _ Marginal utility of commodity Qo Price Price of commodity Q, of commodity Q = Marginal utility of one unit money This isthe taw i of equimarginal utility. Therefore we get the law of equimarginal withthe help of alas m , aaa Application of calculus to determine the slope of budget line. 4 line can be expressed in terms of equation. The equation of the budget line 5 Digit Pq; Ys is the fixed i yi income of the consumer, P, ~ fixed price of commodity q;. : he p Rings of the equation of budget line we get Mere gy ue P,.dq, (Here p, and p, are fixed) “9 ay 0 as the income of the consumer y, is fixed. 14g, +p. dq, - is the fixed price of commodityBes | Microeconomics I and Statistics P,-dq, Here = is the slope of the budget line whose absolute value is equal to the mg of the priced of two commodities. So we get the slope of the budget line with the iy of calculus, | Short Notes-<4 :} De . 7 maximisation conditions of the consumer in Indifference Approach. 3 ; Equilibrium of the consumer in indifference curve approach is now explained wig the help of calculus. Here the consumer purchases two commodities by the amouy q, and q,. So the utility function of the consumer is. U=fq, 4, Where U is total utility. Here change in total utility due to increase in consumption of one extra unit ¢ commodity q,, keeping the amount of q, remain constant is the marginal utility g commodity q,, In terms of calculus the marginal utility of commodity q, is f Application of calculus to determine equilibrium or A ‘uy, oa. Cn In the same way, marginal utility of commodity q, is Here it is assumed that the entire amount of income for of the budget line is Y, = Pia + Pa, Here p, is the fixed price of co, is the fixed price of commodity 4, The objective of the consumer is to maximise utility function y = bjs to the constrain of budget equation. Y, = p,q, + pig once n this situation Lagrange equation i deen . consumer. Here the Lagrange » equation ig |” S¢=™ine the maximum wily of T= fq, 4.) + AV,- pia pq.) Here’ isthe Lagrange multiplier ‘ Peer lere the first order conditions fo iuceniiies ee maximisation of the consumer are the panial dite, sp eaubtium. or for the ull 4; and be equal to zero, ie. mation of L with respect 104 fixed income of the consumer is id the Purchasing the comm Y, and he spends odities q, and q, only. So equati mmodity q, and p, aaa anAppendix : Ist Part : Application of Calculus 187 (3) @ < yy — pyc) ~P242 = O--s From equation (1). Teun! Onf, = > Pi From equation (2) f,--p.=0 of f, = A Ps =~ pividing equation (4) by equation (5) - 4) ie. f, P2 Here dis the slope of the indifference curve and PL js the slope of the budget line. So the consumer is in equilibrium when the A the indifference curve and the slope of the budget line are equal. This is the first order condition or necessary condition for equilibrium. But for the equilibrium of the consumer second order condition or sufficient condition is to be fulfilled. The second order condition or sufficient condition for equilibrium is that the indifference curve is convex to the origin ie. 6 og So we get the equilibrium con approach with the help of calculus. Sa ccna Application of calculus to explain the relation among Average Product and Marginal Product. Relation among average product and marginal product is now explained with the help of calculus. Here the production function of the firm is q= f(x,,x,) X, and x, are the amount of two inputs and q is the amount of output. "es eS dition of the consumer in indifference curve q So average product (AP) of input x, is AP = and marginal product (MP) of input x, is MP = s 1 “QS APx APx, eis partial differentiation of q with respect to x,we get = AAP) OR, ae —188 Microeconomics I and Statistics &x, ; If AP is increased along with the increase in employment of input x,, then SAP) ox, :. Here MP>AP [from equation (1)] (AP) HAP). 9, and x,>0, So 2AP).x,>0- ex; ex, ; So it is seen that when average product is increased, then marginal product ig greater than average product. ; g Further if AP is decreased along with the increase in employment of input x,, then AP) ex 0. age Here MP < AP [from equation (1)] Because P<, and x,>0, So XAP) 4 1 So itis seen that when average product is decreased, then marginal product is less than average product. Further if AP is constant even though the employment of x, is increased, then AP) _ ax, 2 Here MP = AP [from equation (1)] or, MP = AP+- 1 so) [Pec St ve| >0 Because ok, <0- 0 Because AAP 0, and x>0, So XAP) + So it is seen that when AP is constant (i.e. when aver Product is maxiraum) thet average product and marginal product are equal. oe 2 ‘ So we get the relation among average product and 5 t of calculus. marginal product with the help EERIE emit espe ‘ Calculus. Pe ra ae ee Production function or the equation of isoquant is Gy = £%,, x,) Here x, and x, are the amount of two inputs and q, is the fixed amount of outpo By total differentiation of the production function we get. dq, = MP,.dx, + MP,.dx,. Here MP, is the marginal product of the input x, it inal of the input x, As ee fixed amount of coer ee = <0 = MP,. dx, + MP,.dx, aaa anAppendix : Ist Part : Application of Calculus or, MP,.dx, = ~ MP,.dx, 189 Here & is the slope of the isoquant whose absolute value is equal to the ratio xy of Marginal Products of two inputs. Here MP,>0, MP,>0, so the slope of the isoquant dx MP, <0 i.e. the slope of the isoquant is negative. dx. MP, Boao Determination of the slope of Isocost line with the help of Calculus. Isocost line can be expressed in terms of equation, The equation of the isocost line is Cia nX, #1, X, Here r, and r, are the fixed prices of the inputs x, and x, respectively, C, is the given fixed amount of cost for purchasing the inputs x, and x,. By total differentiation of the equation of isocost line we get dC, = r,.dx, + r,dx, (Here r, and ry are fixed) Here dC, = 0 as C,is the fixed amount of cost. 0 = r.dx, + ry.dx, Or, tydx, = = 1,.dx, orca eA dx, Ty Here a is the slope of the isocost line whose absolute value is equal to the ratio xy of the price of two inputs. So we get the slope of the isocost line with the help of calculus, EI Application of calculus to determine output maximisation subject to a given cost and given prices of two inputs. Output maximising conditions subject to a given cost and given prices of two puts is now explained with the help of calculus. x ~ Here the firm uses two inputs by the amount x, and x,. So the production function of the firm is “ Rare ont q= fx, x) Te q is total output, lere change in total output due to increase in the use of one extra unit of input Xv keeping X, remain constant is the marginal product of input x,. In terms of calculus ‘he marginal product of input x, is Sime, 1 'n the same way marginal product of input x, is ween Fo190 Microeconomics I and Statistics Here it is assumed that C, is the given fixed amount of cost for purchasing the inputs x, and x,. : Here the equation of the isocost line of the firm is C, = 1,X,+ fh Here r, and r, are the fixed prices of the inputs x, and x, respectively. The objective of the firm is to maximise production function q = £(X,, X,) ‘subject to the constraint of isocost equation C= rx, + 1x, In this situation, Lagrange equation is used to determine maximum output. Here the Lagrange equation is L=f x) +ACH1x,-5x,) , Here A is the Lagrange multiplier. Here the: first order conditions for fi equilibrium or for output maximisation of the firm are the partial differentiati with respect to x,, x, and A be equal to zero ie. Ae a a, Be ye gee = ae Here L = f(x,, x.) +. (C,-1,x,-1,x)) . © ** fags oe +2(-1))=0... aL. Oxy 7 MEEtACh) «0... A COTE Bk = From equation (1) MP,-Ar, = 0 or, MP, = Ar,... from equation (2) MP,-Ar; = 0 or, MP, = Ar seou(5) Dividing equation (4) by equation (5) one, 2 Ty Here MP, ig the slope of the isoquent and 1 fd it and Isle Stone oF the isccast:Bne.S0. the firm is in equilibrium (maximise output) when the Slope of the isocost line are equal. This is the first Slope of the j. Ofder cot iSoquant and theAppendix : Ist Part: Application of Calculus 191 for output maximisation or for equilibrium of the firm. But for output ication oF for equilibrium of the firm second order condition or sufficient imisg to be fullfilled. The second order condition or sufficient condition for i axiisation or for equilibrium of the firm is that the isoquant is convex to rgin be. gition eee >0 as two conditions are to be satisfied for output maximisation subjects to a = en cost and given prices of two inputs. $0 we get the conditions of output maximisation with the help of calculus. Application of calculus to determine cost minimisation subject to a given output. Cost minimising conditions subject to a given output is now explained with the jp of calculus. Here the firm uses two_inputs by the amount x, and x, for a fixed or given level output. So the production function is = fix, x). Here q, is the fixed or given level of output, Change in total output due to increase in the use of one extra unit of input x,, ping x, remain constant is the marginal product of input x,. In terms of calculus marginal product of input x, is oq _ as MP, Inthe same way marginal product of input x, is 4 = MP, Here the equation of the isocost line of the firm is C=rx, + 1x, Here C is the amount of cost for purchasing the inputs x, and x,. r, and r, are the “" Drices of the inputs x, and x, respectively, elses os {n this situation the objective of the firm is to minimise cost C = r,x, +1, x, subject Constraint of production function q =f, x). “this situation Lagrange equation is used to determine minimum cost of the firm ee @ given or fixed output. Here the Lagrange equation is nM t TX, +2 [q, — £%,, x] Pe ae the Lagrange multiplier, eH ee? f first order conditions for firm’s equilibrium or for cost minimisation of 0 ig” {he Partial differentiation of L with respect to x,, x, and A be equal to aaa an192 Microeconomics I and Statistics o oe ns, +A(-MP,)=0. bo» 0. arginal cost is now explained with the of calculus. By definition, Total Cost Average Cost (AC) = ee Total amount of Production (q) ie. AC _ TC q . or, TC = ACq. Marginal Cost (MC) <= | y Fr PTAppendix : Ist Part : Application of Calculus 193 ere TC = AC. a(t) 149) g4ac “ iq dq de d(AC) 4 mc = AC + eat “4 (1) [Because = 4(TC) ~ MC] dq When average cost (AC) is falling, then 24°) <0, further q>0. dq 5 AO. 4 <0. ‘Thu: ‘Therefore from equation (1) we get, MC < AC. je. when average cost (AC) is falling then marginal cost (MC) is less than average (AC)- ‘When average cost (AC) is rising, then AQ) >0, further q > 0. dq d(AC) Thus ——-q>0- 4q + Therefore from equation (1) we get MC > AC. ie.when average cost (AC) is rising then marginal cost (MC) is greater than age cost. d(AC) When average cost (AC) is minimum or fixed, then dq =0, further q > 0, Thus HAC) 4 _ 0, dq Therefore from equation (1) we get MC = AC. ie, when average cost (AC) is fixed or minimum then marginal cost is equal to cost, Thus with the help of calculus it is seen that when AC is falling ie. when AC uve is downward sloping then MC curve is below the AC curve. In otherwards AC an eis downward sloping so long as MC curve is below the AC curve. Further when is rising ie. when AC curve is upward rising then MC curve is above the AC ve. In otherwards AC curve is upward sloping so long as MC curve is above the Curve, Again when average cost is fixed i.e. at the minimum point of AC curve, Curve passes through the minimum point of AC curve. MCSE Explanation of the Relation between Average Revenue, Marginal Revenue and Elasticity of Demand with the help of Relati Calculus. eh f by tion between average revenue, marginal revenue and elasticity of demand is ; 'scussed with the help of calculus . o Revenue of the firm (TR) = Price per unit of commodity (p) x amount ofi d Statistics i nomics I ant 194 Microecol i py the amount of sell is the Aver Total Revenue of the firm divided by Further Total Revenue (AR). TR _p. ee te rice. So average revenue is equal ee 2 ti Additional total revenue earne ey oie product in the market is the marg! =p. ‘m by selling one we unit Or ig (MR). In terms of calculus, _a(TR) Marginal Revenue (MR) =~ qo Here TR = P-4- wil aR) ee it is assumed that p is variable . MR= =Paae dq (Here i (1) dq p os ee dp q 1 cord e dqp Oran ASPs ep dq “MR = i-2) [from equation (1)1 : ; Or, MR = an{t- ‘) because p = AR. e Thus we get the relation between average revenue, marginal revenue and elas of demand with the help of calculus. : If e =1, then MR = 0 en If e >1, then MR > 0 re If e <1, then MR <0. Seay Application of calculus to explain the equilibrium condi of the firm or profit maximising conditions of the firm uti perfect competition in the short run. Equilibrium conditions of the firm or profit maximising, under perfect competition in the short run are now explained with the help o! Profit is the difference between total revenue and total cost. Total revenue of the firm (R) = Price (P) x Amount of sell (q) Thus R = p.q. aia Here price is fixed because the market is perfectly competitive market. Here Marginal Revenue (MR) = & A, a 4Appendix : : i ppendix : Ist Part: Application of Calculus 195 ie Re : run total cost consi. the sho ists of two parts, one is fix able cost. The fixed cost does not dependent on the saan ee ae ny ariable cost is dependent on the amount of Production. pata page and aref0"€s total cost of the firm in the short run (TC) = a fixed cost (a) + total variable cost [c(q)] 4 micsat cq) * 4a’ is fixed which does not depend ‘a | pendent on the amount i i total variable cost of production which is dependent on * sens ais 4 ion so here ee a the firm (zt) = Total revenue (R) - Total cost (TC) .q - [a + c(q)] og, B= pq - 4 - c() Here the first order condition of profit maximisation is the first order differentiation ‘x with respect to ‘q’ be equal to zero ie. - 0 aq Here m= p.q - a ~ c(q) . dn aq or, P= & a) [ As p is constant ] dq orp= #|e 5 Here pis the price of the commodity and 2° is the marginal cost of the firm. So aq first order condition of profit maximisation of the firm is, Price = Marginal Cost. Funher here, Price = Marginal Revenue. So the first order condition of profit maximisation of the firm is, os Price = Marginal Revenue = Marginal Cost. BP "3 is the necessary condition for equilibrium of the firm. Second order condition ‘ufficient condition for equilibrium or for profit maximisation of the firm is the nd order differentiation of ‘x’ with respect to ‘q’ be negative (<0) i196 Microeconomics I and Statistics 26 ie S250, dq? 2, Here dC is the slope of the marginal cost (MC) curve. This means that Matging dq? cost curve will be upward rising at the point of equilibrium. This is the sufficient condition for equilibrium or for profit maximisation of i, firm. For profit maximisation both the conditions are to be fulfilled. Thus we get ti equilibrium conditions with the help of calculus. Bas