Basic Concept of Derivative

Derivative is a branch of calculus. It explains the rate of change in dependent variable due to change
in independent variable. The slope of variables can be derived from derivative.
Let y = f(x) such that a very small change in independent variable x by ∆x leads to a change in dependent

variable y by ∆y. In this case, limit ∆y is called derivative of y with respect to x.

∆x→0 ∆x

For convenience, dy can be used in order to perform derivative.

dx

Techniques of Differentiation:
The rules for calculating derivative are known as techniques of differentiation.
Rule 1: Power Rule
Let y = f(x) = xn
dy = dxn = nxn–1
dx dx
For example:
i. y = x4

dy = dx = 4x4–1 = 4x3
4

dx dx
ii. y = 3x5

dy =3dx = 3.5x5–1 = 15x4

5

dx dx
iii. y=x

dy = dx = 1
dx dx

Rule 2: Constant Rule

Let y = f(x) = k (= constant)
dy dk
= =0
dx dk

For Example:
y = 3x5 + 4x3 + 20
dy d3x5 d4x3 d20
dx
= + dx + dx
dx
= 3 . 5x5–1 + 4 . 3x3–1 + 0 = 15x4 + 12x2
Rule 3: Product Rule
Let y = f(x) = U.V
dy = d(U.V) = UdV + VdU
dx dx dx dx
 For Example:

If y = x3(x + 5) [x3 = U & (x + 5) = V]

dy = dx (x + 5)
3

dx dx
x3 d(x + 5) + (x + 5)dx
3
=
dx dx
dx d5
x3 dx + dx + (x + 5) dx
3
=
dx
=
x3 (1 + 0) + (x + 5) . 3x2

=
x3 + 3x3 + 15x2 = 4x3 + 15x2

Rule 4: Quotient Rule

Let y = f(x) = U/V
dy d(U/V)
=
dx dx
du dv
V dx – U dx
=
V2
For Example:
x4
y = [x4 = U, (x + 5) = V]
x+5
dx4 d(x + 5)
dy (x + 5) dx – x4 dx
=
dx (x + 5)2
dx4 dx d5
(x + 5) dx – x4 dx + dx 
dy
=  
dx (x + 5)2
(x + 5) 4x4 – 1 x4(1 + 0)
=
(x + 5)2
4x4 + 20x3 – x4
=
(x + 5)2
3x4 + 20x3
=
(x + 5)2

Rule 5: Chain Rule

Let y = f(U) & U = f(x)
dy dU dy
= .
dx dx dU
For Example:
y = (2x + 5)5
dy d(2x + 5)5
=
dx dx
d(2x + 5)5
= = 5(2x + 5)5–1 . 2 = 10(2x + 5)4
d(2x + 5)
 Partial Derivative
Many economic phenomena are described by multivariate functions (i.e., equations that have two or
more independent variables). Given a general multivariate function such as:
y = f(x, z)
The first partial derivative of y with respect to x, denoted as ∂y/∂x, indicates the slope relationship
between y and x when z is held constant. This partial derivative is found by considering z to be fixed
and taking the derivative of y with respect to x in the usual way. Similarly, the partial derivative of y
with respect to z (i.e. ∂y/∂z) is found by considering x to be a constant and taking the first derivative
of y with respect to z.
For example, consider the function:
y = x2 + 3xz + z2
To find the partial derivative ∂y/∂x, consider z as a constant and take the derivative. Thus,
∂y = 2x2–1 + (3z) + 0 = 2x + 3z
∂x
The partial derivative means that a small change in x is associated with y changing at the rate 2x + 3z
when z is held constant at a specified level. For example, if z = 2, the slope associated with y and x is
2z + 3(2) or 2x + 6. If z = 5, the slope associated with y and x would be 2x + 3(5), or 2x + 15.
Similarly, the partial derivative of y with respect to z would be:
∂y = 0 + 3x + 2z2–1 = 3x + 2z
∂x
This means that a small change in z is associated with y changing at the rate 3x + 2z when x is held
constant.

Economic Application of Derivative

1. Optimization (Maxima/Minima)
Let y = f (x)
First order condition/Necessary condition:
dy = 0
dx
Second order condition/Sufficient condition:
d y2 < 0 [Maxima]
2

dx
y2 > 0 [Minima]
d2

dx
Economic concept:
 Minimization of cost
dC d2C
= 0 and >0
dQ dQ2
 Maximization of revenue
dR d2R
= 0 and <0
dQ dQ2
 Maximization of profit
 dπ d2π
= 0 and <0
dQ dQ2
Where,
C = Cost of the firm
R = Revenue of the firm
π = Profit of the firm
Q = Level of output

2. Marginal Concepts
dR
 Marginal Revenue (MR) =
dQ
dC
 Marginal Cost (MC) =
dQ
dπ
 Marginal Profit (Mπ) =
dQ
3. Elasticity of Demand
dQ P
(i) eP = ×
dP Q
dQ M
(ii) eM = ×
dM Q
dQm Py
(iii) eC = ×
dM Qx
dQ A
(iv) eA = ×
dA Q
Where,
eP = Price elasticity
eM = Income elasticity
eC = Cross elasticity
eA = Advertisement elasticity
P = Price
Q = Output
M = Consumer's money income
Py = Price of Y
Qx = Quantity of X
A = Advertisement expenditure