MSc FM, MTF, QF Induction Programme

Advanced Mathematics

Academic year 2010/2011

Lecture notes

prepared by Laura Ballotta and George Harrison

 Section I

Linear Algebra
Differential Calculus
Integral Calculus
Difference and Differential Equations
Table Content
1 LINEAR ALGEBRA .................................................................................................................................... 5
1.1. WHAT IS A MATRIX? ................................................................................................................................. 5
1.2. SPECIAL TYPES OF MATRICES .................................................................................................................... 6
1.2.1. Vectors............................................................................................................................................ 6
1.2.2. Square matrix.................................................................................................................................. 6
1.2.3. Diagonal matrix .............................................................................................................................. 7
1.2.4. Identity Matrix ................................................................................................................................ 7
1.3. MATRIX OPERATIONS ............................................................................................................................... 7
1.3.1 Adding and subtracting matrices .................................................................................................... 7
1.3.2 Scalar multiplication ....................................................................................................................... 8
1.3.3. Transpose of a Matrix ..................................................................................................................... 8
1.3.4. Vector multiplication ...................................................................................................................... 9
1.3.5 Matrix multiplication .................................................................................................................... 10
1.3.6 Properties of matrix multiplication ............................................................................................... 12
1.4. THE DETERMINANT ................................................................................................................................. 13
1.4.1. How to find the determinant of a (2 x 2) matrix ........................................................................... 13
1.4.2. The determinant of a (3 x 3) matrix .............................................................................................. 14
1.4.3. Method of cofactors in determining determinants ........................................................................ 14
1.4.4. Properties of Determinants ........................................................................................................... 17
1.5. INVERSE OF A MATRIX ............................................................................................................................. 18
1.5.1. Definition of an inverse matrix ..................................................................................................... 18
1.5.2. How to find the inverse of a square matrix................................................................................... 18
1.6. TRACE OF A MATRIX ............................................................................................................................... 19
1.7. SYSTEM OF LINEAR EQUATIONS ............................................................................................................. 20
1.8. PARTITIONED MATRICES ......................................................................................................................... 22
1.9. VECTOR SPACES ...................................................................................................................................... 22
1.9.1 Rank of a matrix ........................................................................................................................... 25
1.10 EIGENVALUES AND EIGENVECTORS ................................................................................................... 26
1.10.1 General results for characteristic roots and vectors ...................................................................... 28
1.10.2 Further results on determining the rank of a matrix.................................................................... 29
1.11 DEFINITE MATRICES .......................................................................................................................... 29
2. DIFFERENTIAL CALCULUS .................................................................................................................. 32
2.1. DIFFERENTIATION ................................................................................................................................... 32
2.1.1. Definitions .................................................................................................................................... 32
2.1.2. Rules of Differentiation ................................................................................................................ 35
2.1.3. Derivatives of Exponential and logarithmic functions.................................................................. 37
2.1.4. Higher order derivatives ............................................................................................................... 38
2.2. APPLICATIONS OF DERIVATIVES ............................................................................................................. 39
2.2.1. Taylor and Maclaurin Series......................................................................................................... 39
2.2.2. Increasing and decreasing functions ............................................................................................. 41
2.2.3. Concavity and Convexity.............................................................................................................. 42
2.2.4. First derivative test for relative extremum.................................................................................... 44
2.2.5. Second derivative test for relative extremum................................................................................ 45
2.2.6. The Nth-derivative test ................................................................................................................. 46
2.2.7. Economic applications of derivatives ........................................................................................... 46
3. DIFFERENTIAL CALCULUS (THE MULTIVARIATE CASE) ............................................................. 53
3.1. MULTIVARIATE FUNCTIONS .................................................................................................................... 53
3.2 LIMITS AND CONTINUITY......................................................................................................................... 53
3.3 DIFFERENTIATION ................................................................................................................................... 55
3.4 APPLICATION OF DIFFERENTIATION ........................................................................................................ 61
3.4.1 Critical Values of Bivariate Functions.......................................................................................... 61
3.4.2. Critical Points of Multivariate Functions...................................................................................... 64
3.4.3. Constrained Optimisation ............................................................................................................. 67
4 INTEGRAL CALCULUS........................................................................................................................... 72
4.1. INTEGRATION .......................................................................................................................................... 72

2
 4.1.1. Definite and Indefinite Integrals ................................................................................................... 72
4.1.2. Properties of definite integrals ...................................................................................................... 74
4.1.3. Rules of Integration - Indefinite Integral ...................................................................................... 75
4.1.4. Auxiliary Conditions..................................................................................................................... 79
4.2. APPLICATIONS OF INTEGRALS ................................................................................................................. 79
4.2.1. Deriving Totals (Revenue/Cost) from Marginals (Revenue/Cost)................................................ 79
4.2.2. Present Value of Cashflows .......................................................................................................... 80
4.2.3. Measuring Probabilities ................................................................................................................ 81
4.3 MULTIPLE INTEGRATION ......................................................................................................................... 81
4.3.1. Double Integral of a Function of Two Variables .......................................................................... 81
4.3.2 Geometric Interpretation of the Double Integral........................................................................... 82
5. DIFFERENCE AND DIFFERENTIAL EQUATIONS .............................................................................. 84
5.1. BASIC IDEA OF A DIFFERENCE EQUATION ............................................................................................... 84
5.2. LINEAR DIFFERENCE EQUATIONS ........................................................................................................... 84
5.3. NUMERICAL EXAMPLE ............................................................................................................................ 85
5.4. SOLUTION OF A FIRST-ORDER LINEAR DIFFERENCE EQUATION .............................................................. 85
5.4.1. Equilibrium Solution..................................................................................................................... 85
5.4.2. General Solution ........................................................................................................................... 86
5.4.3. Stability Analysis.......................................................................................................................... 87
5.5. SOLUTION OF A SECOND-ORDER LINEAR DIFFERENCE EQUATION .......................................................... 90
5.6. ORDINARY DIFFERENTIAL EQUATIONS ................................................................................................... 91
5.6.1. A Simple Growth Model............................................................................................................... 91
5.6.2. First-Order Differential Equations................................................................................................ 93
5.6.3. Second-Order Differential Equations............................................................................................ 94
5.7. INTRODUCTION TO PARTIAL DIFFERENTIAL EQUATIONS......................................................................... 96
REFERENCES ..................................................................................................................................................... 99

3
CHAPTER ONE

Linear Algebra

4
1 Linear Algebra
1.1. What is a Matrix?
A matrix is a common device for displaying numbers or data in an organised form. Therefore
a matrix can be viewed as a simple table of data. Using matrices to represent data makes the
storage, displaying and manipulation of data quite convenient. For example, the test scores
for a class of five students on three examinations. The best way to report these scores is to
use the following table;

Student test 1 test 2 test 3

1 75 82 86
2 91 95 100
3 65 70 68
4 59 80 99
5 75 76 74

and in matrix form;

⎡ 75 82 86 ⎤
⎢ 91 95 100⎥⎥
⎢
test scores S = ⎢ 65 70 68 ⎥
⎢ ⎥
⎢59 80 99 ⎥
⎢⎣ 75 76 74 ⎥⎦

• The number of columns and rows of the table, (5 x 3) in this case, are now the number of
column and rows of the matrix, (5 x 3) and is known as the dimension of the matrix.

• Matrices are named by capital bold letters, A, S, etc.

• Each number in a matrix is called an element of that matrix and is denoted by the name
of that matrix with a subscript noting the row and column of the element.

Therefore the general form of a matrix is

⎡a1,1 a1, 2 L a1,n ⎤

⎢ ⎥
a2,1 a 2, 2 L a 2,n ⎥
A=⎢
⎢M O M ⎥
⎢ ⎥
⎢⎣am,1 a m, 2 L a m,n ⎥⎦

A is a (m x n) matrix and ai,j represents the element in the ith row and jth column.

Examples:
Identify the elements S1,3 , S2,2 , S5,3 , S4,1 , in the matrix S.
S1,3 = 86 , S2,2 = 95 , S5,3 =74 , S4,1 =59

5
1.2. Special types of matrices
There are special type of matrices according to the dimension, elements and the pattern of the
elements inside the matrix.

1.2.1. Vectors
Vectors are special matrices with only one row or column. Therefore there are two types of
vectors, a row vector and a column vector.

• A row vector, R, is a matrix which has dimension (1 x n).

R = [ r1,1 r1,2 ... r1,n ]

As an example consider the test scores of the first student;

S1 = [ 75 82 86 ]

• A column vector, C, is a matrix which has dimension ( m x 1).

⎡c1,1 ⎤
⎢ ⎥
c2,1
C =⎢ ⎥
⎢M ⎥
⎢ ⎥
⎢⎣cm ,1 ⎥⎦

As an example consider the test scores of the students in the first subject;

⎡ 75⎤
⎢ 91⎥
⎢ ⎥
S2 = ⎢ 65⎥
⎢ ⎥
⎢59⎥
⎢⎣ 75⎥⎦

1.2.2. Square matrix

A matrix with equal number of rows and columns is known as a square matrix.
⎡1 3 5⎤
⎡1 3⎤ ⎢
A(1 x1) = [21] B(2 x2) = ⎢ ⎥ C(3 x3) = ⎢ 7 9 11 ⎥⎥
⎣5 7 ⎦ ⎢⎣13 15 17 ⎥⎦

6
1.2.3. Diagonal matrix
In a square matrix, the elements which have the same row and column index numbers (i.e. ai,j
where i=j) are known as diagonal elements. Consequently, a matrix with non-zero diagonal
elements and zeros elsewhere is called a diagonal matrix.

1.2.4. Identity Matrix

The Identity Matrix is a diagonal matrix in which the diagonal elements are equal to one and
all off diagonal elements are zero.

⎡1 0 L 0⎤
⎢0 1 0⎥⎥ if i = j
L ⎧1
I=⎢ or ai , j = ⎨
⎢M O M ⎥ ⎩0 if i ≠ j
⎢ ⎥
⎣0 0 L 1⎦

If the upper diagonal elements of a square matrix equal to the lower diagonal elements,
ai,j = aj,i , then the matrix is called symmetric.

⎡1 3 5⎤
Y = ⎢⎢ 3 9 11 ⎥⎥
⎢⎣ 5 11 17 ⎦⎥

1.3. Matrix Operations

1.3.1 Adding and subtracting matrices
1) Two matrices can be added or subtracted if and only if they have same dimensions.

2) Only the corresponding elements are added together or subtracted from each other.

Therefore, for A (n × m) and B (n × m) ;

C(n × m) = A(n × m) + B(n × m) where c i,j = ai,j + b i,j

C(n × m) = A(n × m) - B(n × m) where c i,j = ai,j - b i,j

⎡1 3 ⎤ ⎡2 4 ⎤
A (2× 2) = ⎢ ⎥ B (2× 2) = ⎢ ⎥
⎣5 7⎦ ⎣ 6 8⎦

⎡1 3 ⎤ ⎡2 4 ⎤ ⎡1 + 2 3 + 4 ⎤ ⎡3 7⎤
C (2×2) = A (2×2) + B (2×2) = ⎢ + =
7⎥⎦ ⎢⎣6 8⎥⎦ ⎢⎣5 + 6 7 + 8⎥⎦ ⎢⎣11 15⎥⎦
=
⎣5
⎡1 3 ⎤ ⎡2 4 ⎤ ⎡1 - 2 3 - 4 ⎤ ⎡- 1 - 1⎤
C (2×2) = A (2×2) − B (2×2) = ⎢ − =
7⎥⎦ ⎢⎣6 8⎥⎦ ⎢⎣5 - 6 7 - 8⎥⎦ ⎢⎣- 1 - 1⎥⎦
=
⎣5

7
• Properties of matrix addition;

1) Commutative law A+B = B+A

2) Associative law (A+B)+C =A+(B+C)

These properties hold for matrix subtractions too, knowing that A-B=A+(-B).

1.3.2 Scalar multiplication

The product of matrix times a scalar is a new matrix in which each element is multiplied by
the scalar

⎡ka1,1 ka1,2 L ka1,n ⎤

⎢ ⎥
ka2,1 ka2,2 L ka2,n ⎥
kA=Ak= ⎢
⎢ M O M ⎥
⎢ ⎥
⎢⎣kam,1 kam,2 L kam,n ⎥⎦

This process is known as scalar multiplication, since the matrix is scaled by the size of the
scalar (number).

For example the test scores of the students can be scaled by 0.2, i.e. multiplying the score
matrix by 0.2;

⎡75 82 86 ⎤ ⎡ 75 (0.2) 82 ( 0.2) 86 (0.2) ⎤

⎢91 95 100 ⎥⎥ ⎢⎢ 91( 0.2) 95 (0.2) 100 ( 0.2) ⎥⎥
⎢
0.2S = 0.2 ⎢65 70 68 ⎥ = ⎢65 (0.2) 70 (0.2) 68 (0.2) ⎥
⎢ ⎥ ⎢ ⎥
⎢59 80 99 ⎥ ⎢ 59 (0.2) 80 (0.2) 99 ( 0.2) ⎥
⎢⎣75 76 74 ⎥⎦ ⎢⎣75 (0.2) 76 (0.2) 74 ( 0.2) ⎦⎥

⎡15 16.4 17.2 ⎤

⎢18.2 19 20 ⎥⎥
⎢
= ⎢13 14 13.6 ⎥
⎢ ⎥
⎢11.8 16 19.8 ⎥
⎢⎣15 15.2 14.8 ⎥⎦

1.3.3. Transpose of a Matrix

The transpose of a matrix A, denoted by A’ (or AT), where A is (m × n) with elements ai,j , is
an (n × m) matrix with elements equal to aiT, j = a j ,i .

8
 ⎡a1,1 a1,2 ⎤
⎢ ⎥ ⎡a1,1 a2,1 a3,1 ⎤
A = ⎢a2,1 a2,2 ⎥ A' = ⎢ ⎥
⎢a ⎣a1,2 a2,2 a3,2 ⎦
⎣ 3,1 a3,2 ⎥⎦

⎡1 4 ⎤
⎡1 3 5 ⎤
A = ⎢⎢3 6 ⎥⎥ A' = ⎢ ⎥
⎢⎣5 8 ⎥⎦ ⎣4 6 8 ⎦

• The columns of AT are the rows of A and vice versa.

• The transpose of a row vector is a column vector and the transpose of a column vector is a
row vector.
• The transpose of a symmetric matrix is equal to the matrix itself. For example

⎡1 3 5⎤ ⎡1 3 5⎤
Y = ⎢⎢ 3 9 11 ⎥⎥ Y’ = ⎢⎢ 3 9 11 ⎥⎥
⎢⎣ 5 11 17 ⎥⎦ ⎢⎣ 5 11 17 ⎥⎦

1) The transpose of a transposed matrix is equal to the original matrix:

(A’)’=A
2) The transpose of a sum:
(A+B)’= A’+B’
3) The transpose of a product:
(A B)’= B’A’

1.3.4. Vector multiplication

In order to compute the inner product of two vectors the number of elements in each vector
have to be equal. The inner product of two vectors is a scalar.

This product is found by multiplying the individual elements of the row vector by the
corresponding column elements of the column vector and adding them together.

Thus following the vector multiplication rule, the product of vectors R and C can be written
as:

⎡c1,1 ⎤
⎢ ⎥
c2,1
R = [ r1,1 r1,2 . . . r1,n ] C =⎢ ⎥
⎢M ⎥
⎢ ⎥
⎣⎢cn ,1 ⎦⎥

9
 ⎡c1,1 ⎤
⎢ ⎥
RC = [r1,1 M r1,n ]⎢ ⎥ = [r1,1c1,1 + r1,2 c2,1 + M + r1,n cn ,1 ]
c2,1
r1,2
⎢M ⎥
⎢ ⎥
⎢⎣cn,1 ⎥⎦

Example;
⎡1 ⎤
⎢ 2⎥
⎢ ⎥
AB = [2 4 6 8 10]⎢3 ⎥ = [(2 × 1) + (4 × 2) + (6 × 3) + (8 × 4) + (10 × 5)]
⎢ ⎥
⎢ 4⎥
⎢⎣5 ⎥⎦
= [(2) + (8) + (18) + (32) + (50)] = 110

1.3.5 Matrix multiplication

In order to multiply two matrices, A and B to get AB, the necessary and sufficient condition
is that the number of columns of the first matrix should be equal to the number of rows of the
second matrix.

A × B
(m × n) (p × q)

The matrices can be multiplied if and only if n=p

The product of two matrices can be computed using the inner product. This is done by
computing the inner product of the ith row of A and jth column of B. This inner product will
represent the i,jth element, ci,j , of the product matrix, C which will have dimension (m x q).

A × B = C

(m × n) (n × q) (m× q)

a) As an example, consider the following matrices

⎡1 3 2⎤
A = ⎡2 4⎤
3 B = ⎢2 4 1⎥⎥
⎢5 6 7 ⎥ ⎢
⎣ ⎦
⎢⎣5 6 3⎥⎦

10
 Note that the number of columns of A is equal to the number of rows of B, therefore,
we can perform the multiplication.

⎡2(1) + 3(2) + 4(5) 2(3) + 3(4) + 4(6) 2(2) + 3(1) + 4(3) ⎤

C = AB = ⎢
⎣5(1) + 6(2) + 7(5) 5(3) + 6(4) + 7(6) 5(2) + 6(1) + 7(3) ⎥⎦

⎡28 42 19⎤
=⎢
⎣52 81 37 ⎥⎦

It can be seen that the dimension of the product matrix is (2 x 3).

b) For the second example consider the following matrices

⎡2 - 3 ⎤
A(2×2) = ⎢ ⎥ B(2×1) = ⎡⎢ − 1 ⎤⎥
⎣ -5 6 ⎦ ⎣ 2 ⎦

⎡2 - 3 ⎤ ⎡- 1⎤ ⎡2( −1) + (−3)(2)⎤ ⎡- 8 ⎤

C (2×1) = A (2×2) B (2×1) = ⎢ ⎥ ⎢ ⎥ = ⎢ ⎥ = ⎢ ⎥
⎣- 5 6 ⎦ ⎣ 2 ⎦ ⎣(-5)(-1) + 6(2) ⎦ ⎣17 ⎦

• Product of a matrix with the identity matrix is the matrix itself

i.e. P(n×m) I(m×m) =P(n×m).

⎡1 3 2⎤
⎢ -2 4 1⎥ ⎡1 0 0⎤
P(4×3) = ⎢ ⎥ I(3×3)= ⎢ 0 1 0 ⎥⎥
⎢5 0 3⎥ ⎢
⎢ ⎥ ⎢⎣ 0 0 1 ⎥⎦
⎣2 1 -1⎦

11
 ⎡1 3 2⎤
⎢ -2 4 ⎡1 0⎤
1⎥ ⎢
0
P( 4 × 3) I ( 3× 3) =⎢ ⎥ 0 1 0 ⎥⎥
⎢5 0 3⎥ ⎢
⎢ ⎥⎢ 0 1⎥⎦
-1⎦ ⎣
0
⎣2 1

⎡ 1(1) + 3( 0) + 2( 0) 1(0) + 3(1) + 2(0) 1(0) + 3(0) + 2(1) ⎤

⎢ -2(1) + 4(0) +1(0) - 2(0) + 4(1) +1(0) - 2(0) + 4(0) +1(1) ⎥
=⎢ ⎥
⎢ 5(1) + 0(0) + 3(0) 5(0) + 0(1) + 3(0) 5(0) + 0(0) + 3(1) ⎥
⎢ ⎥
⎣2(1) +1(0) + (-1)(0) 2(0) +1(1) + (-1)(0) 2(0) +1(0) + (-1)(1) ⎦

⎡1 3 2⎤
⎢ -2 4 1⎥
=⎢ ⎥ = P( 4 × 3)
⎢5 0 3⎥
⎢ ⎥
⎣2 1 -1⎦

Note that it is also possible to multiply two vectors in the following way

⎡1 ⎤ ⎡2 4 6 8 10⎤
⎢ 2⎥ ⎢4 8 12 16 20 ⎥⎥
⎢ ⎥ ⎢
BA = ⎢3 ⎥[2 4 6 8 10] = ⎢6 12 18 24 30 ⎥
⎢ ⎥ ⎢ ⎥
⎢ 4⎥ ⎢8 16 24 32 40 ⎥
⎢⎣5 ⎥⎦ ⎢⎣10 20 30 40 50 ⎥⎦

1.3.6 Properties of matrix multiplication

1) The commutative law does not hold for matrix multiplication, however, the
commutative law holds for scalar and matrix multiplication

AB≠BA
kA=Ak

1) Associative law holds in matrix multiplication

(AB)C=A(BC)

2) Distributive law holds in matrix multiplication

A(B+C) =AB+AC

4) Commutative law holds when one of the matrix is the Identity matrix

AI=IA=A

12
1.4. The Determinant
For every square matrix, A(n×n) , a real number can be computed from the elements which is
called determinant of that matrix and is denoted as |A| or DA . When the determinant of a
square matrix is equal to zero, |A| = 0 , the matrix is called singular. When the determinant
of a matrix is not zero, |A| ≠0, the matrix is non-singular.

The concept of determinant is quite important and useful in matrix operations and solving
simultaneous equations.

The determinant of a (1 x 1) matrix is the value of the element inside the matrix. For
example;

A=[20] , |A|=20 and M=[-2] , |M|=-2

1.4.1. How to find the determinant of a (2 x 2) matrix

For a (2 x 2) matrix of the following form
⎡ a 1,1 a 1,2 ⎤
A=⎢ ⎥
⎣ a 2 ,1 a 2,2 ⎦

the determinant of A can be computed by deducting the product of the elements on the
secondary diagonal of A from the product of the elements on the principal diagonal of A.

Secondary diagonal
⎡ a 1,1 a 1,2 ⎤
A=⎢ ⎥
⎣ a 2 ,1 a 2,2 ⎦
Principal diagonal

Therefore, determinant of A can be computed by the following formula

a1,1 a1,2
+ −
A= = a1,1a22 − a1,2 a2 ,1

a2 ,1 a2,2

As an example calculate the determinants of the following (2 x 2) matrices:

⎡2 - 2⎤ ⎡2 4 ⎤
A=⎢ ⇒ A = 2(1) - (-2)(3) = 8 ; B=⎢ ⎥ ⇒
1 ⎥⎦
a) b) B = 2(12) - (4)(6) = 0
⎣3 ⎣6 12⎦

13
1.4.2. The determinant of a (3 x 3) matrix
The determinant of a (3 x3) matrix can be computed using the following procedure;

1) rewrite the first two columns of the matrix on the right hand side of the matrix.
2) add the products of the elements on the primary diagonals (P1 P2 P3 ).
3) add the products of the elements on the secondary diagonals (S1 S2 S3 ).
4) deduct the result from stage 3 from the result from 2.

S1 S2 S3
⎡ a 1,1 a 1,2 a 1,3 ⎤ a 1,1 a 1,2
⎢ ⎥
A = ⎢ a 2,1 a 2,2 a 2,3 ⎥ a 2,1 a 2,2
⎢a a 32 a 3,3 ⎥⎦ a 3,1 a 32
⎣ 3,1
P1 P2 P3

Therefore, the determinant of a (3 x3) matrix can be formulated as follows;

A = a1,1 a 2 ,2 a 3,3 + a1,2 a 2 ,3 a 3,1 + a1,3 a 2 ,1 a 3,2 − a 3,1 a 2 ,2 a1,3 − a 3,2 a 2 ,3 a1,1 − a 3,3 a 2 ,1 a1,2

As an example, compute the determinant of the following (3 x 3) matrix;

⎡3 1 2⎤ S1 S2 S3
A = ⎢⎢- 1 2 4 ⎥⎥ ⎡3 1 2⎤ 3 1
⎢⎣ 3 - 2 1 ⎥⎦
⎢- 1 2 4⎥⎥ -1 2
⎢
⎢⎣ 3 - 2 1 ⎥⎦ 3 -2
P1 P2 P3
The determinant of A is;

|A|=[(3)(2)(1)+ (1)(4)(3)+ (2)(-1)(-2)]-[(3)(2)(2)+(-2)(4)(3)+(1)(-1)(1)]

= [(6+12+4)-(12-24-1)]=22-(-13)=35

1.4.3. Method of cofactors in determining determinants

A more general method of finding the determinant of a square matrix is the method of
cofactors.
For any square matrix A , there exists a matrix of cofactors with the same dimension as A
which is denoted as Ac. For each element in A, ai,j , there is a corresponding element in Ac ,
a’i,j, which is called cofactor. In order to find the cofactor of the element (i,j) of matrix A, we
follow this procedure:

1) Cross the ith row and jth column of the matrix.

2) Find the determinant of the remaining sub-matrix of the original matrix.
2) Call this determinant the minor of element (i,j).

14
4) Multiply the minor of the i,jth element by (-1)(i+j). This means that if i+j is even, then the
sign assigned to the minor is positive. Similarly, if the sum of i+j is an odd number, then
the sign assigned to the minor should be negative.

The cofactor of ai,j is a’i,j =(-1)(i+j) (minor i,j)

As an example consider the (2 x 2) matrix A = ⎡⎢2 -2⎤

3 ⎣ 1 ⎥⎦

To find sub-matrix minor using formula cofactor

⎡2 - 2⎤ (1+1)
a’1,1 a'1,1 = (−1) (1)
⎢3 1 ⎥⎦
⎣ 1 1
= (-1) (1) = 1
2

a’1,2 ⎡2 - 2⎤ a' 1,2 = ( −1) (1+ 2 ) ( 3)

⎢3 1 ⎥⎦
⎣ 3 = (-1) 3 ( 3) = −3 -3
a’2,1 ⎡2 - 2⎤ a ' 2 ,1 = ( −1) ( 2 +1) ( −2)
⎢3 1 ⎥⎦ -2 2
⎣ = (-1) 3 ( −2) = 2
a’2,2 ⎡2 - 2⎤ a ' 2, 2 = (−1) ( 2+ 2 ) ( 2)
⎢3 1 ⎥⎦ 2 2
⎣ = (-1) 4 (2) = 2

⎡1 -3 ⎤
Therefore, the matrix of cofactors for A can be written as; A c = ⎢
⎣2 2⎥⎦

Let us find the matrix of cofactors for a (3 x 3) matrix, A,

⎡ 3 1 2⎤
A = ⎢⎢ -1 2 4 ⎥⎥
⎢⎣ 3 -2 1 ⎥⎦

15
 To find sub-matrix using formula cofactor
a’1,1 ⎡ 3 1 2⎤ a' 1,1 = ( −1) (1+1) (10)
⎢ -1 2 4 ⎥⎥ 10
⎢ = (-1) 2 (10) = 10
⎢⎣ 3 -2 1 ⎥⎦
a’1,2 ⎡ 3 1 2⎤ a' 1,2 = ( −1) (1+ 2 ) ( −13)
⎢ -1 2 4 ⎥⎥ 13
⎢ = (-1) 3 ( −13) = 13
⎢⎣ 3 -2 1 ⎥⎦
a’1,3 ⎡ 3 1 2⎤ a' 1, 3 = ( −1) (1+ 3) ( −4)
⎢ -1 2 4 ⎥⎥ -4
⎢ = (-1) 4 ( −4) = −4
⎢⎣ 3 -2 1 ⎥⎦
a’2,1 ⎡ 3 1 2⎤ a' 2 ,1 = ( −1) ( 2 +1) (5)
⎢ -1 2 4 ⎥⎥ -5
⎢ = (-1) 3 (5) = −5
⎢⎣ 3 -2 1 ⎥⎦
a’2,2 ⎡ 3 1 2⎤ a' 2 ,2 = ( −1) ( 2 + 2 ) ( −3)
⎢ -1 2 4 ⎥⎥ -3
⎢ = (-1) 4 ( −3) = −3
⎢⎣ 3 -2 1 ⎥⎦
a’2,3 ⎡ 3 1 2⎤ a' 2 , 3 = ( −1) ( 2 + 3) ( −9)
⎢ -1 2 4 ⎥⎥
9
⎢ = (-1) 5 ( −9) = 9
⎢⎣ 3 -2 1 ⎥⎦
a’3,1 ⎡ 3 1 2⎤ a' 3,1 = ( −1) ( 3+1) ( 0)
⎢ -1 2 4 ⎥⎥ 0
⎢ = (-1) 4 ( 0) = 0
⎢⎣ 3 -2 1 ⎥⎦
a’3,2 ⎡ 3 1 2⎤ a' 3,2 = ( −1) ( 3+ 2 ) (14)
⎢ -1 2 4 ⎥⎥ -14
⎢ = (-1) 5 (14) = −14
⎢⎣ 3 -2 1 ⎥⎦
a’3,3 ⎡ 3 1 2⎤ a' 3, 3 = ( −1) ( 3+ 3) ( 7)
⎢ -1 2 4 ⎥⎥ 7
⎢ = (-1) 6 ( 7) = 7
⎢⎣ 3 -2 1 ⎥⎦

Therefore the matrix of cofactors for A(3 x3) is;

⎡ 10 13 -4 ⎤
A c = ⎢ -5 -3 9⎥
⎢ ⎥
⎢⎣ 0 -14 7 ⎥⎦

16
Example: How to find the determinant of the matrix using cofactors
1) Select one row or column of the matrix
2) Add up the product of the elements of the row (or column) by their
corresponding cofactors.
Therefore, selecting the first row of A, in the above example, the determinant of A can be
computed as follows:
|A| = [(3)(10) + (1)(13) + (2)(-4)]=[30+13-8] = 35

or using the first column of A:

|A| = [(3)(10) + (-1)(-5) + (3)(0)]=[30+5+0] = 35

This general method can be used to find the determinant of any matrix with dimension
greater than 2.

1.4.4. Properties of Determinants

• The determinant of a matrix will be zero, if all the elements of one row or column of that
matrix are zero.
⎡0 0 0 ⎤ ⎡8 0 12⎤
A = ⎢⎢2 4 1 ⎥⎥ ⇒ A = 0 B = ⎢⎢ 8 0 4 ⎥⎥ ⇒ B =0
⎢⎣3 2 7 ⎥⎦ ⎢⎣12 0 28 ⎥⎦
• If two rows or columns of a matrix are interchanged, the sign of the determinant of that
matrix will change.
⎡2 1 3 ⎤ ⎡2 1 3 ⎤
A = ⎢⎢2 4 1 ⎥⎥ ⇒ A = 17 B = ⎢⎢3 2 7 ⎥⎥ ⇒ B = −17
⎣⎢3 2 7⎥⎦ ⎣⎢2 4 1 ⎥⎦
• If a row or a column of a matrix is multiplied by a scalar, the determinant of the matrix
will be multiplied by that scalar too.
⎡2 1 3 ⎤ ⎡ 4 2 6⎤
A = ⎢⎢2 4 1 ⎥⎥ ⇒ A = 17 B = ⎢⎢2 4 1 ⎥⎥ ⇒ B = 2 *17 = 34
⎢⎣3 2 7⎥⎦ ⎢⎣3 2 7 ⎥⎦
• If any one column or row of a matrix is a linear combination of one or more columns or
rows, then the determinant of the matrix is zero.
⎡2 1 3 ⎤
A = ⎢⎢ 4 2 6 ⎥⎥ ⇒ A = 0
⎣⎢ 3 2 7 ⎦⎥
• If a multiple of a row or column of a matrix is added to another row or column of that
matrix, the value of the determinant will not change.

• If a square matrix, A(n×n), is multiplied by a scalar, λ, then the determinant of the resultant
matrix, B(n×n)=λA, will be; B = (λn )( A )
e.g.
⎡2 1 3 ⎤ ⎡8 4 12⎤
A = ⎢⎢2 4 1 ⎥⎥ ⇒ A = 17 B = 4 * A = ⎢⎢ 8 16 4⎥⎥ ⇒ B = (4 3 )(17) = 1088
⎢⎣3 2 7 ⎥⎦ ⎢⎣12 8 28⎥⎦

17
1.5. Inverse of a matrix
1.5.1. Definition of an inverse matrix
If the determinant of a matrix is not zero, i.e. the matrix is non-singular, there can be
identified a matrix known as the inverse and is denoted as A-1 , with the following
property.

AA −1 = A −1 A = I

The inverse matrix is a unique square matrix with the same dimension as the original matrix.

As an example consider the following (2 x 2) matrices.

⎡2 3⎤ ⎡8 -3⎤
A=⎢ B= ⎢
⎣5 8 ⎥⎦ ⎣-5 2 ⎥⎦

Let us find the product of A and B,

⎡2 3⎤ ⎡ 8 - 3 ⎤ ⎡(2)(8) + (3)(−5) (2)(-3) + (3)(2) ⎤

AB = ⎢ =
⎣5 8 ⎥⎦ ⎢⎣- 5 2⎥⎦ ⎢⎣(5)(8) + (8)(-5) (5)(-3) + (8)(2)⎥⎦

⎡(16) + (−15) (-6) + (6) ⎤ ⎡1 0⎤

=⎢ = =I
⎣(40) + (-40) (-15) + (16)⎥⎦ ⎢⎣0 1⎥⎦

Therefore B is the inverse matrix of A.

1.5.2. How to find the inverse of a square matrix

The following procedure uses the matrix of cofactors to determine the inverse matrix;

1) In order to find the inverse of A, first find the matrix of cofactors, AC .

2) Using cofactors, find the determinant of the matrix, |A|.

3) If the determinant of the matrix is non zero, |A| ≠ 0, then find the adjoint matrix,
A j = A' C , which is the transpose of matrix of cofactors.

4) Dividing each element in the Adjoint matrix, Aj , by the determinant of the matrix, |A|,
yields the inverse matrix , A-1.

Example:
⎡3 7⎤
Find the inverse of A = ⎢
⎣2 5⎥⎦

18
 ⎡ 5 - 2⎤
1) matrix of cofactors AC = ⎢ ⎥
⎣-7 3 ⎦

2) determinant of A |A|=(3)(5)-(7)(2)=15-14=1

⎡ 5 - 7⎤
3) the Adjoint matrix A j = A' C = ⎢ ⎥
⎣-2 3 ⎦
⎡5 - 7⎤
1 ⎢ 1 ⎥ = ⎡ 5 -7 ⎤
4) the inverse of A A -1 = A j = ⎢1 ⎥
|A| ⎢- 2 3 ⎥ ⎢⎣- 2 3⎥⎦
⎣⎢ 1 1 ⎦⎥

5) verify the answer

⎡3 7 ⎤ ⎡ 5 - 7 ⎤ ⎡(3)(5) + (7)(−2) (3)(-7) + (7)(3) ⎤ ⎡1 0⎤
AA −1 = ⎢ = = =I
⎣2 5⎥⎦ ⎢⎣- 2 3⎥⎦ ⎢⎣(2)(5) + (5)(-2) (2)(-7) + (5)(3)⎥⎦ ⎢⎣0 1⎥⎦

Example:
⎡0 1 2⎤
Find the inverse of B = ⎢-1 1 0⎥
⎢ ⎥
⎢⎣ 2 -1 3 ⎥⎦

1) the matrix of cofactors: 2) the adjoint matrix:

⎡3 3 -1⎤ ⎡3 -5 - 2⎤
BC = ⎢-5 -4 2⎥ Bj = ⎢ 3 -4 - 2⎥
⎢ ⎥ ⎢ ⎥
⎣⎢-2 -2 1 ⎥⎦ ⎢⎣-1 2 1 ⎥⎦

3) the inverse of B:

⎡3 -5 -2 ⎤ ⎡ 3 -5 -2 ⎤
1⎢
- 4 - 2 ⎥⎥ = ⎢⎢ 3 - 4 - 2 ⎥⎥
1
-1
B = Bj = ⎢ 3
|B| 1
⎢⎣- 1 2 1⎥⎦ ⎢⎣- 1 2 1⎥⎦

4) verify the answer:

⎡0 1 2⎤ ⎡ 3 -5 - 2⎤ ⎡ 1 0 0⎤
BB = ⎢-1
-1
1 0 ⎥⎢ 3 -4 - 2⎥ = ⎢ 0 1 0⎥ =I
⎢ ⎥⎢ ⎥ ⎢ ⎥
⎢⎣ 2 -1 3 ⎥⎦ ⎢⎣-1 2 1 ⎥⎦ ⎢⎣ 0 0 1⎥⎦

1.6. Trace of a Matrix

Definition: Trace of a Matrix

19
The trace of a square NxN matrix is the sum of its diagonal elements
N
tr (A) = ∑ aii
Properties: i =1
1- tr(cA)=c(tr(A)),
2- tr(A')=tr(A)
3- tr(A+B)=tr(A)+tr(B)
4- tr(IN)=N
5- tr(AB)=tr(BA)

tr(A'A)= ∑i =1 ∑ j =1 aij2
N N
6-

7- tr(ABCD)=tr(BCDA)=tr(CDAB)=tr(DABC)

1.7. System of Linear Equations

A system of simultaneous equation equations can be written in matrix form.
Ax=b

Where A is a known matrix of coefficients, x is a vector of unknowns and b is vector of

constants.

Definition: Homogeneous Equation System

A homogenous system is of the form Ax=0. A nonzero solution to such a system will exist if
and only if A is singular; that is |A|=0.

Definition: Nonhomogeneous Equation System

A nonhomogeneous system of equations is of the form Ax=b, where b is a nonzero vector.
The solution to a nonhomogeneous system of equations exists and is unique if A is non-
singular, i.e., |A|≠0.
This means that the inverse of A exists and can be obtained. If we multiply both sides of the
matrix equation by the inverse of the parameter matrix A-1 we can write:
A -1 Ax = A -1b
Now we know that:
A -1 A = I and Ix = x
therefore we can write:
A -1 Ax = Ix = x = A -1b or x = A -1b
Therefore, a system of simultaneous equations can be solved by pre-multiplying the inverse
of the parameter matrix by the column vector of constants, if this matrix exists.
The only condition for the system to have a solution is for the parameter matrix to be non-
singular. In other words, the determinant of the parameter matrix should be different from
zero.

Example
Find the values of x and y, which satisfy the following system of equations

20
 ⎧3x + 2 y = 80
⎨
⎩x + 2 y = 40

the above equation can be written in a matrix form by separating the variables and
parameters as follows;

⎡3 2⎤ ⎡ x ⎤ ⎡80⎤
⎢1 =
2 ⎥⎦ ⎢⎣ y ⎥⎦ ⎢⎣40⎥⎦
or Ax=x
⎣

where A is a (2 x 2) matrix of parameters, X is (2 x 1) matrix of variables and B is (2 x 1)

matrix of constants. The inverse of A can be determined as;
⎡ 2 -2 ⎤
⎡2 -1⎤ ⎡2 - 2⎤ 1 ⎢ 4 4⎥
AC = ⎢ A j = A' C = ⎢ A -1 = Aj = ⎢ ⎥
⎣-2 3 ⎥⎦ ⎣-1 3⎥⎦ |A| ⎢ −1 3⎥
⎢⎣ 4 4 ⎥⎦
and the values of x and y

⎡⎛ 2 ⎞ ⎛ −2⎞ ⎤
⎡2 -2 ⎤ ⎢⎜ 4 ⎟(80) + ⎜ 4 ⎟(40)⎥ ⎡(40) + (−20)⎤
⎝ ⎠ ⎝ ⎠
⎢
x = A −1b = ⎢ 4 4 ⎥ ⎡80 ⎤ = ⎢ ⎥ ⎢ ⎥ = ⎡20⎤
⎥⎢ ⎥ ⎢ ⎥=⎢ ⎥ ⎢10 ⎥
⎢ −1 3 ⎥ ⎣40⎦ ⎢ ⎥ ⎢
− + ⎥ ⎣ ⎦
⎢⎣ 4 ⎥ ⎢ ⎛ − 1 ⎞ ⎛ 3 ⎞ ⎥ ⎣ ( 20) (30) ⎦
4⎦ ⎜ ⎟(80) + ⎜ ⎟(40)
⎢⎣⎝ 4 ⎠ ⎝ 4⎠ ⎥⎦

Example

Solve the following system of equations

⎧ y + 2z = 25
⎪
⎨- x + y =4
⎪2x - y + 3z = 27
⎩
We write the system in a matrix form
⎡0 1 2⎤ ⎡ x ⎤ ⎡25⎤ ⎡0 1 2⎤ ⎡25⎤
⎢-1 0 ⎥ ⎢ y ⎥ = ⎢4 ⎥
⎢
1
⎥⎢ ⎥ ⎢ ⎥ A = ⎢⎢- 1 1 0⎥⎥ b = ⎢⎢4 ⎥⎥
⎢⎣ 2 -1 3 ⎥⎦ ⎢⎣ z ⎥⎦ ⎢⎣27⎥⎦ ⎢⎣ 2 - 1 3 ⎥⎦ ⎢⎣27⎥⎦

We compute the inverse of A, A-1 by the method of cofactors

Matrix of cofactors
⎡3 3 -1⎤
A C = ⎢-5 -4 2⎥ determinant of A= |A|=1
⎢ ⎥
⎢⎣-2 -2 1 ⎥⎦

Adjoint matrix Inverse matrix

⎡3 -5 - 2⎤ ⎡3 -5 - 2⎤
Aj = ⎢ 3 -4 - 2⎥ A =⎢3
-1
-4 - 2⎥
⎢ ⎥ ⎢ ⎥
⎢⎣-1 2 1 ⎥⎦ ⎢⎣-1 2 1 ⎥⎦

21
Multiplying the inverse by the matrix of constant yields the solutions

⎡3 -5 - 2 ⎤ ⎡25⎤ ⎡(3)(25) + (−5)(4) + (−2)(27) ⎤ ⎡75 − 20 − 54 ⎤ ⎡1 ⎤

X = A b = ⎢⎢ 3
-1
-4 - 2 ⎥⎥ ⎢⎢4 ⎥⎥ = ⎢⎢(3)(25) + (−4)(4) + (−2)(27)⎥⎥ = ⎢⎢75 − 16 − 54 ⎥⎥ = ⎢⎢5 ⎥⎥
⎢⎣- 1 2 1⎥⎦ ⎢⎣27⎥⎦ ⎢⎣(−1)(25) + (2)(4) + (1)(27) ⎥⎦ ⎢⎣− 25 + 8 + 27 ⎥⎦ ⎢⎣10⎥⎦

1.8. Partitioned Matrices

Sometimes, it is useful to group some of the elements in a matrix into sub-matrices as follows

⎛ A11 A12 ⎞
A = ⎜⎜ ⎟
⎝ A 21 A 22 ⎟⎠

Where A is known as the partitioned matrix.

⎛1 4 5⎞
⎜ ⎟
A = ⎜2 9 3⎟
⎜8 9 6 ⎟
⎝ ⎠
The determinant of a partitioned matrix A can be written as:

A 11 A 12 −1 −1
A= = A 11 * A 22 − A 21 A 11 A 12 = A 22 * A11 − A 12 A 22 A 21
A 21 A 22

The inverse of the partitioned matrix can be obtained as follows:

−1
⎛ A 11 A 12 ⎞ ⎛ A11
−1 −1
(I + A 12 F2 A 21 A 11 ) −1
− A 11 A 12 F2 ⎞
⎜⎜ ⎟⎟ = ⎜ ⎟
⎜ ⎟
⎝ A 21 A 22 ⎠ -1
⎝ - F2 A 21 A 11 F2 ⎠
−1
Where F2 = (A 22 − A 21 A 11 A 12 ) −1 .

Note that in order to apply the above operations for partitioned matrices, they must be
conformable.

1.9. Vector spaces

R2 is a two dimensional space which is represented as the xy-plane using a coordinate
system. Each vector v=(v1,v2) in R2 has associated with it a unique point in the plane. The
vector v can be represented geometrically by the arrow that begins at the origin and
terminates at the point (v1,v2). The length or magnitude of v=(v1,v2) is defined to be the length
of the arrow.
v = v12 + v12

22
 10

0
-10 -8 -6 -4 -2 0 2 4 6 8 10
-2

-4

-6

-8

-10

• R2 is closed under scalar multiplication; every scalar multiple of a vector in the plane is
also in the plane.
• R2 is closed under addition; the sum of any two vectors in the plane is always a vector in
the plane.

Definition:
For each integer number n, we define the n-dimensional space Rn to be the set of all n-tuples
(x1, x2,…,xn) of real numbers.

Definition: Magnitude of a vector in Rn

Let v=(v1,v2,…,vn) be a vector in Rn. The magnitude of v is
v = v12 + v22 + ... + vn2

Definition: Orthogonal Vectors

Two vectors v and w are orthogonal, v⊥w, if and only if their inner product is zero.

Definition: Parallel Vectors

Two vectors v and w are parallel, v⎥⎥w, if one is a scalar multiple of the other, i.e, v=cw, with
c in R.

Definition: Vector space

A vector space is any set of vectors that is closed under scalar multiplication and addition,
together with some properties that these operations must satisfied.

Theorem: Test for a subspace

A nonempty subset W of a vector space V is a subspace if and only if it is close under vector
addition and scaler multiplication.

Example
R2 is a subspace of R3.

23
Theorem: Subspace generated or spanned by vectors
Let v1,v2,…,vn be vectors in a vector space Rn. The set
W = sp(v1,v2 ,… ,vn ) = {r1v1 + r2v2 + ... + rn vn / ri ∈ R}
of all linear combinations of these vectors is a subspace of V.

W is referred as the subspace of V generated or spanned by the vectors. The set

{v1,v2,…,vn} is a spanning or generating set for V.

Example
Any vector nonzero in R2 generates a one-dimensional subspace of R2

Definition: Linear Dependence

A set of vectors is linearly dependent if any one of the vectors in the set can be written as a
linear combination of the others.

Example
Consider vectors a, b and c. These vectors are linearly dependent because any of them can be
written as linear combination of the other two.

⎡1 ⎤ ⎡3⎤ ⎡10⎤
a=⎢ ⎥ , b=⎢ ⎥ , c=⎢ ⎥
⎣ 2⎦ ⎣3⎦ ⎣14⎦
2a + b − 12 c = 0 or a = 14 c − 12 b b = 12 c − 2a

Definition: Linear Independence

A set of vectors {v1,v2,…,vn}is linearly independent if
α1v1 + α 2v2 + α 3v3 + ... + α k vk = 0 ⇒ α i = 0∀i
Example
Any two non-parallel vectors in R2 are linearly independent.

Example
Two orthogonal vectors are linearly independent.

Definition: Basis for a vector space

A set of vectors in a vector space V is a basis for V if the following conditions are met
• The set of vector generates V.
• The set of vectors is linearly independent.

Example
On a two-dimensional plane, if we have two vectors a and b non parallel, any other vector
can be obtained as a linear combination of a and b.
Consider vectors a and b in R2. We can find numbers α1 and α2 such that the arbitrary vector
c can be written as c=α1 a+ α2b

⎡a1 ⎤ ⎡b1 ⎤ ⎡c1 ⎤ c1 = α 1a1 + α 2 b1

a=⎢ ⎥ , b=⎢ ⎥ , c=⎢ ⎥
⎣a2 ⎦ ⎣b2 ⎦ ⎣c 2 ⎦ c2 = α 1a2 + α 2 b2

24
a and b are a basis and the solutions to this pair of equation are

b2 c1 − b1c2 a1c2 − a2 c1
α1 = , α2 =
a1b2 − b1a2 a1b2 − b1a2

this will have a unique solution provided a1b2 − b1a 2 ≠ 0 . Therefore, any two vectors whose
elements satisfy the condition a1b2 − b1a 2 ≠ 0 can be used as basis and any other vector, c, can
be formed as a unique linear combination of a and b.

Definition: Dimension
The dimension of a vector space is the number of elements in any basis for V.

Observation
If vectors a and b are a basis for R2 and c is another vector in R2, the space spanned by {a, b,
c} is, again, R2.

Example
Consider the set of three coordinate vectors whose third element is zero. For instance,

⎡a1 ⎤ ⎡b1 ⎤
a = ⎢⎢a 2 ⎥⎥ , b = ⎢⎢b2 ⎥⎥
⎢⎣0 ⎥⎦ ⎢⎣0 ⎥⎦

The vectors a and b do not span the three-dimensional space R3. Any linear combination of a
and b has a third coordinate equal to zero, therefore they do not span the whole space R3.
However the vectors, a and b, span a subspace of R3.

Theorem: Coordinate vector relative to a basis

Let B={b1,b2,…,bn} be a basis in the vector space Rn and let
v = r1b1 + r2b2 + ... + rnbn .
The vector (r1,r2,…,rn) is the coordinate vector of v relative to the basis B.

1.9.1 Rank of a matrix

If we view a matrix as a set of column vectors, then the number of columns in the matrix
equals the number of vectors in the set, and the number of rows equals the number of
coordinates in each column vector.

Definition: Column Space

The column space of a matrix is the vector space that is spanned by its column vectors.

For instance,
⎡1 5 6⎤
A = ⎢⎢2 6 8 ⎥⎥
⎢⎣7 1 8 ⎥⎦

25
Matrix A contains three vectors from R3, however, the third is the sum of the first two. Thus,
the column space of the matrix has dimension two.

Definition: The column (row) rank of a matrix is the dimension of the vector space that is
spanned by its columns (rows).

Theorem: Equality of Row and Column Rank

The column rank and row rank of a matrix are equal. We call it the rank of a matrix.

By the definition of row rank and its counterpart for column rank, we obtain the corollary

Corollary
The row space and column space of a matrix have the same dimension.

Lemma
• rank ( A ) = rank ( A ' ) ≤ min( number of columns, number of rows )
• rank (AB) = min(rank (A), rank (B))
• rank (A) = rank (A' A) = rank (AA' )

Theorem:
In a square matrix the rank is the number of linearly independent rows or columns in the
matrix.

Definition:
Matrix A(nxn) is full rank if rank(A)=n. Also matrix A(nxn) is reduced rank if rank(A)=r, where
r<n.

Theorem:
The determinant of a matrix is nonzero (the matrix is non-singular) if and only if it has full
rank.

1.10 Eigenvalues and Eigenvectors

Definition: Eigenvalues and eigenvectors
Let A be an nxn matrix. A scalar λ is an eigenvalue of A if there is a non zero vector v in Rn
such that Av=λv. The vector v is then an eigenvector of A corresponding to λ (the terms
characteristic vector and characteristic value are also used).

We may chose v with length one, i.e. v′v=1, to remove indeterminacy. The solution is then λ
and the n-1 unknown elements in v.

In principle, equation Av=λv or Av=λIv can be solved as follows

Av=λIv ⇒ (A- λI)v=0

This is a homogenous system that has a nonzero solution only if the matrix (A- λI) is singular
i.e has a zero determinant. Therefore, if λ is a solution,

26
 A − λI = 0

This polynomial in λ is known as the characteristic equation of A. For a (nxn) matrix, the
characteristic equation is an nth-order polynomial in λ. The solution may be n real or complex
values that may be distinct or repeated.

Example
If
⎛ 5 1⎞
A = ⎜⎜ ⎟⎟
⎝ 2 4⎠
Then
5−λ 1
A − λI = ⇒ (5 - λ )(4 - λ ) - 2 *1 = 0 ⇒ λ2 − 9λ + 18 = 0
2 4-λ
The characteristic roots of A are the solutions to the above equation; that is, λ1=6 and λ2=3.

2−λ 0
= (2 − λ ) 2 ⇒ λ1 = λ2 = 2
0 2-λ

1− λ 0
= λ2 − 5λ = 0 ⇒ λ1 = 5 and λ2 = 0
0 4-λ

With λ in hand, the characteristic vectors are derived from the original problem,
Ac=λv or (A-λI)v=0

⎛ 5 − λ 1 ⎞⎛ v1 ⎞ ⎛ 0 ⎞
⎜⎜ ⎟⎟⎜⎜ ⎟⎟ = ⎜⎜ ⎟⎟
⎝ 2 4 - λ ⎠⎝ v2 ⎠ ⎝ 0 ⎠

Using the two value derived for λ (λ1=6, λ2=3) we can write two sets of simultaneous
equations as follows

For λ=6 -v1+v2=0

2v1-2v2=0

for λ=3 2v1+v2=0

2v1+v2=0

Imposing the additional condition v’v=1 we find:

⎛ 1
⎞ ⎛ 15 ⎞
For λ = 6 ⇒ v = ⎜ ⎟ For λ = 3 ⇒ v = ⎜ 2 ⎟
2
and
⎜ 1 ⎟ ⎜− ⎟
⎝ 2⎠ ⎝ 5⎠

27
1.10.1 General results for characteristic roots and vectors

Theorem:
A (nxn) symmetric matrix has n distinct characteristic vectors, c1, c2, ..., cn. The
corresponding characteristic roots λ1, λ2, ..., λn are real but not necessarily distinct.

Theorem:
The characteristic vectors of a symmetric matrix are orthogonal, i.e. ci′cj=0 for every i≠j.

Diagonilisation of a Matrix:
The characteristic vectors can be collected in (nxn) matrix C, in which the ith column is ci
corresponding to λi.
C = (c1 c 2 ... c N )

Similarly the n characteristic roots (eigenvalues) can be collected in the following diagonal
matrix.
⎛ λ1 0 L 0 ⎞
⎜ ⎟
⎜0 λ2 0 ⎟
Λ =⎜
M O 0 ⎟
⎜ ⎟
⎜0 0 L λ N ⎟⎠
⎝

Then we can write the full set of equations Aci=λici i=1,2, … n in the form
AC=CΛ (*)

On the other hand, since the eigenvectors are orthogonal ( c 'i c j = 0 for i ≠ j ) and of length one
(c’c=1), it can be seen that C'C=I and thus C'=C-1.

⎛ c1' c1 c1' c 2 L c1' c N ⎞

⎜ ⎟
⎜ c' c c '2 c 2 L c '2 c N ⎟
C' C = ⎜ 2 1 ⎟=I
⎜ M O M ⎟
⎜c c c c L
' '
c N c N ⎟⎠
'
⎝ N 1 N 2

Multiplying both sides of (*) by C’ we find that

C'AC=C'CΛ=Λ

We say that matrix A can be diagonalised.

28
1.10.2 Further results on determining the rank of a matrix

Note:
If A can be diagonalized the rank of A is equal to the rank of Λ. Also since Λ is a diagonal
matrix, its rank is just the number of nonzero values on its diagonal.

Theorem: Rank of a symmetric matrix

The rank of a symmetric matrix is equal to the number of nonzero characteristic roots of the
matrix.

Theorem: Rank of a matrix

The rank of a matrix is equal to the number of nonzero characteristic roots of A'A.

Theorem: Determinant of a matrix.

If A can be diagonalized, its determinant is equal to the product of its characteristic roots.

We know that C’AC= Λ, therefore, |C’AC|=|Λ|.

|C’AC|= |C’| . |A| . |C|= |C’| . |C|. |A|= |C’C| . |A|

= |I| . |A|=1 . |A|
= |A| = |Λ|

Theorem: Characteristic roots of the Inverse Matrix. If A-1 exists, the characteristic roots
of A-1 are the reciprocal of those of A, and the characteristic vectors are the same.
⎛ λ1 0 L 0 ⎞ ⎛1 / λ1 0 L 0 ⎞
⎜ ⎟ ⎜ ⎟
⎜ 0 λ2 0 ⎟ ⎜ 0 1/λ2 0 ⎟
for A ⇒ Λ A = ⎜ , A ⇒ Λ A −1 = ⎜
-1

M O 0 ⎟ M O 0 ⎟
⎜ ⎟ ⎜ ⎟
⎜0 0 L λ ⎟ ⎜ 0 0 L 1/λ ⎟
⎝ N ⎠ ⎝ N ⎠

Theorem: Trace of a Matrix of the Inverse Matrix. If A can be diagonalised the trace is
the sum of its characteristic roots.

∑ λi
N
tr(A)= i =1

1.11 Definite Matrices

• Definition: Positive definite matrix. Matrix A is said to be positive definite if x'Ax>0

for all nonzero x.

• Definition: Negative definite matrix. Matrix A is said to be negative definite if x'Ax<0

for all nonzero x.

• Definition: Positive semi-definite (nonnegative) matrix. Matrix A is said to be positive

semi-definite if x'Ax≥0 for all nonzero x.

29
• Definition: Negative semi-definite (nonpositive) matrix. Matrix A is said to be negative
semi-definite if x'Ax≤0 for all nonzero x.

Theorem: Definite Matrices

If all the characteristic roots of A are positive, then A is positive definite, while if all the
characteristic roots of A are negative, then A is negative definite. Also, if some of the roots
are zero and the remaining are positive (negative), then A is nonnegative (nonpositive)
definite. If A has both negative and positive roots, then A is said to be indefinite.

The following are some useful results

• If A is nonnegative definite, then A ≥ 0 ,

• If A is positive definite, so is A-1,

• The identity matrix is positive definite,

• If A is positive definite and B is a non-singular matrix, then B'AB is positive definite.

30
CHAPTER TWO

Differential Calculus
(The one variable case)

31
2. Differential Calculus
2.1. Differentiation
2.1.1. Definitions

Definition: Limit
The limit of f(x) as x approaches a equals L if we can make the values of f(x) arbitrarily close
to L (as close to L as we like) by taking x to be sufficiently close to a (on either side of a) but
not equal to a. We write
lim f ( x ) = L
x →a

Definition: Continuous function

A function f is continuous at a number a if
lim f ( x ) = f (a )
x →a

Definition: Slope of a line

The slope of a line is define as the amount by which its vertical co-ordinate changes for a unit
increase along the horizontal axis, i.e.
change in the dependent variable
slope =
unit change in the indep. variable
Geometrically, the slope of a line is just the tangent of the angle created by the intersection of
the line and the horizontal axis.

Definition: Average rate of change

The average rate of change of y=f(x) with respect to x over the interval [x1,x2] is the
difference quotient
∆y f ( x2 ) − f (x1 )
= ,
∆x x2 − x1
and can be interpreted as the slope of the secant line through the points P(x1,f(x1)) and
Q(x2,f(x2)) .

Definition: Instantaneous rate of change

The instantaneous rate of change of y=f(x) with respect to x at x=x1, which is interpreted as
the slope of the tangent to the curve y=f(x) at P(x1,f(x1)), is define as

∆y f ( x2 ) − f ( x1 )
lim = lim
x2 → x1 ∆x x2 → x1 x2 − x1

Definition: The derivative

The derivative of a function f at a number a, is
f ( x ) − f (a ) f (a + h ) − f (a )
f ' (a ) = lim = lim
x →a x−a h →0 h
provided this limit exists.

Continuity is a necessary condition for differentiability but it is not sufficient. That is,
although differentiability implies continuity, the converse it is not true.

32
Continuity at a point only rules up the presence of a gap, whereas differentiability rules out
“sharpness” as well. Therefore, differentiability calls for “smoothness” of the function as well
as its continuity.

Example:
The function
y = f ( x) =| x − 2 | +1
is continuous at x=2,but it is not differentiable at x=2.

Observations:
1. The tangent line to the curve y=f(x) at P(a,f(a)) is the line through P whose slope is f’(a) ,
the derivative of f at a.
2. The derivative f’(a) is the instantaneous rate of change of y=f(x) with respect to x when
x=a.
3. The derivative f’(x) is itself a function
4. If y=f(x) is a linear function of x, the concepts of average rate of change and the
instantaneous rate of change (the derivative) are equivalent. In other words, the tangent
line to a straight line is the line itself. Also the slope of a line is constant.

35

30

25

20

15

10

0
1 3 5 7 9
-5

The tangent line as limit of secant lines

It can be seen that as ∆x gets smaller and smaller the secant lines becomes the tangent line to
the curve at point A.

Example: rate of change of linear function

The production function of a company has the following form:

y = 3x + 2

Where, y is the output and x is the input, find change in the production for a unit
change in input.

1) Choose two points on the domain, and find the respective function values

33
 y = f ( x ) = 3x + 2
x1 = 1 y1 = 3(1) + 2 = 5
x2 = 2 y 2 = 3(2) + 2 = 8

2) Compute the slope:

∆y y2 − y1 8 − 5 3
m= = = = =3
∆x x 2 − x1 2 − 1 1

The rate of change in the company’s production function is 3. This means that if the input for
this company increase by one unit the production will increase three times.

Example: rate of change of non linear function

The revenue of a company is given by the non-linear form:

y = 5 + 10 x − x 2

Where x represents the units of output (for example, cars).

35

30

25

20

15

10
1 3 5 7

The rate of change in the revenue (slope of the tangent to the curve) is not the same at
different levels of output. It increases in the beginning and reaches a maximum, and declines
after the maximum.

If we plot the graph of the different values taken by the tangent on the curve, we find:

34
 15

10

0
-1 1 3 5 7 9 11

-5

-1 0

Plot of the derivative function of the revenue

The plot shows that the rate of change of the function is positive for values of output lower
than 5 and negative for values of output bigger than 5.

2.1.2. Rules of Differentiation

1) The Constant Function Rule

Derivative of a constant is zero, f ( x ) = c

y' = f ' ( x ) = 0

e.g. y = f (x) = 4 y '= f '( x) = 0

2) The Power Function Rule

Derivative of an exponent, f ( x ) = x n , is:

y' = f ' ( x ) = nx n−1

e.g. a) y = f (x) = 2x 2 y '= f '( x) = 4 x

b) y = f ( x ) = 3x 6 y ' = f ' ( x ) = 18 x 5
1
c) y = f ( x) = x 3 y '= f '( x) = x 2
3

3) Constant times a Function Rule

f (x) = c.g(x)
Derivative of a constant times a function is equal to the constant times the
derivative of that function:
y' = f ' ( x ) = c. g' ( x )

35
4) The Sums of Functions Rule
Derivative of sums and differences of two functions f ( x) = g ( x) ± h( x) , is:

y ' = f '( x ) = g '( x ) ± h '( x )

e.g. a) y = f ( x ) = 2 x 2 − 3x 5 y ' = f ' ( x ) = 4 x − 15 x 4

1 3
x y ' = f ' ( x ) = 18 x + x
5 2
b) y = f ( x ) = 3x 6 +
3

5) Product Rule
Derivative of product of two functions f ( x ) = g( x ). h( x ) , is:

y' = f ' ( x ) = g' ( x ). h( x ) + g( x ). h' ( x )

e.g. a) y = f ( x ) = 2 x 2 (1 − 3 x )
y ' = 4 x ( 1 − 3 x ) + ( − 3)( 2 x 2 ) = 4 x − 12 x 2 − 6 x 2 = 4 x − 18 x 2

b) 1 3
y = f ( x ) = ( 2 + 3x 2 ) x
3
1 3
y '= 6x( x ) + ( 2 + 3x 2 ) x 2 = 2 x 4 + 2 x 2 + 3x 4 = 5x 4 + 2 x 2
3

6) Quotient Rule
The derivative of the ratio of two functions, f(x)= g(x) / h(x) is:

g ' ( x ) h( x ) − h' ( x ) g ( x )
y ' = f ' ( x) =
[h( x)]2
Where g(x) is a differentiable function

3x 2 − x + 3
e.g y=
x3 −1
( x 3 − 1)(6 x − 1) − (3x 2 − x + 3)(3x 2 )
y' = f' (x) =
(x 3 - 1) 2
[6 x 4 − x 3 − 6 x + 1] − [9 x 4 − 3x 3 + 9 x 2 ]
y' = f' (x) =
( x 3 − 1) 2

7) The Power of a Function Rule

The derivative of a function raised into the power of n, f ( x ) = [ g ( x )]n is:

y ' = f '( x ) = n[ g( x )]n −1 g '( x )

Where g(x) is a differentiable function

36
 e.g. a) y = f ( x ) = (1 − 3 x 2 ) 3
g ( x ) = 1 − 3x 2 g '( x) = −6 x
y ' = 3 (1 − 3 x ) ( − 6 x ) = − 18 x (1 − 3 x 2 ) 2
2 2

= ( − 18 x )(1 − 6 x 2 + 9 x 4 )
= -162x 5
+ 108 x 3 − 18 x

8) If, y = f ( u) and u = g ( x ) , where g(x) and f(x) are both differentiable

functions, then the chain rule of derivatives can be applied as follows:

dy dy du
y' = = ⋅
dx du dx

e.g. a) y = ( x 2 + 3x − 1) 3 let us assume y = u 3 and u = x 2 + 3x − 1

dy dy du d (u 3 ) d ( x 2 + 3 x − 1)
= ⋅ = ⋅
dx du dx du dx

= 3u 2 ⋅ (2 x + 3) = 3( x 2 + 3x − 1) 2 (2 x + 3)

b) y = ( x 3 − 3) 2 let us assume y = u 2 and u = x 3 − 3

dy dy du d (u 2 ) d ( x 3 − 3)
= ⋅ = ⋅
dx du dx du dx

= 2u ⋅ (3x 2 ) = 2( x3 − 3)(3x 2 ) = 6 x 5 − 18 x 2

2.1.3. Derivatives of Exponential and logarithmic functions

1) The Natural Exponential Function Rule

i) f ( x) = e x f'(x) = e x
ii) f(x) = e g(x) f'(x) = g'(x)e g(x)
iii) f(x) = ke g(x) f'(x) = kg'(x)e g(x)
iv ) f(x) = a g(x) f'(x) = g'(x)a g(x) . ln a

e.g. a) y = e2x y' = 2 e 2 x

− x2 − x2
y = ex y' = ( 3 x 2 − 2 x)e x
3 3
b)
−1 ) −1 )
y = e 3(x y' = 6 xe 3(x
2 2
c)

37
2) The Natural Logarithmic Function Rule

1
i) f(x) = ln x f'(x) =
x
g '(x)
ii) f(x) = ln g ( x ) f'(x) =
g (x)
iii) f(x) = log a g (x)
ln g ( x ) g '(x)
= f'(x) =
ln a g ( x ) ln a

36 x 2 3
e.g. a) y = ln 12 x 3 ⇒ y' = 3
=
12 x x
2x − 1
b) y = ln( x 2 − x + 1) ⇒ y' = 2
x − x +1
5 1
c) y = ln( 5 x ) ⇒ y' = =
5x x
2x 1
d) y = log( x 2 + 4 ) ⇒ y' = 2 *
x + 4 ln 10

2.1.4. Higher order derivatives

It is possible to find the derivative of a derivative of a function. This is called the second
derivative of a function and measures the slope and the rate of change of the first derivative.

The notation for the second derivative is y’’ or f’’(x). Similarly, the third derivative of a
function, f’’’(x), measures the slope and the rate of change of the second derivative and so on
and so forth. The rules for taking the second and higher derivatives are the same as before.

Examples:

a) y = f ( x ) = 2 x 2 − 3x 5 y ' = f ' ( x ) = 4 x − 15 x 4
y ' ' = f ' ' ( x ) = 4 − 60 x 3
y ' ' ' = f ' ' ' ( x ) = − 180 x 2

1 3
b) y = f ( x ) = 3x 6 + x y ' = f ' ( x ) = 18 x 5 + x 2
3
y ' ' = f ' '( x ) = 90 x 4 + 2 x
y ' ' ' = f ' ' ' ( x ) = 360 x 3 + 2

38
2.2. Applications of Derivatives
So far we learned how to find the derivative of a function. Now we study the use of these
derivatives in applications such as plotting functions, finding maximum, minimum, point of
inflection and curvature of a function. We also study some economic applications of
derivatives.

2.2.1. Taylor and Maclaurin Series

dy d{f (x)}
Let y = f(x), then ≡ ≡ f 1(x)
dx dx
2
d y d{f 1(x)}
2
≡ ≡ f 2(x)
dx dx
d y d{f 2(x)}
3
≡ ≡ f 3(x), etc .
dx 3 dx

Taylor's Series

A function, f(x), may be approximated at some point, xo , by the following:

1 2
f(x) = f(x0 ) + f 1 (x0 ) (x - x0 ) + f (x0 ) (x - x0 ) 2
2!
1 3 1 n
+ f (x0 ) (x - x0 )3 + K + f (x0 ) (x - x0 ) n + Remainder
3! n!

where f(x0) is the value of f(x) at the point x0 and n! reads n factorial where
n! = n × (n - 1 ) × (n - 2 ) K 2 × 1 .
Note 0! = 1! = 1.

Maclaurin's Series

A special case of the Taylor Series is when x0 = 0 , in which case

1 2 1 3 1 n
f(x) = f( 0 ) + f 1 ( 0 )x + f ( 0 ) x2 + f ( 0 ) x3 + K+ f ( 0 )x n + Remainder
2! 3! n!

Examples of Maclaurin series expansion

Example 1: Let f(X) = ( 1 + X)3

We know that ( 1 + X)3 = 1 + 3 X + 3 X 2 + X 3 . Use MacLaurin's Series to prove it.

f(X) = ( 1 + X)3 f( 0 ) = 1
f 1(X) = 3( 1 + X)2 f 1( 0 ) = 3
f 2(X) = 6( 1 + X) f 2( 0 ) = 6

39
f 3(X) = 6 f 3( 0 ) = 6
f 4 (X) = 0 f 4 (0) = 0

1 1
∴ f(X) = 1 + 3 X + 6 X2 + 6 X3
2! 3!
Thus (1 + X)3 = 1 + 3X + 3X + X
2 3

Example 2: Find the value of e

Let f(X) = e x then f(X) = e x f( 0 ) = e 0 = 1
f 1(X) = e x f 1( 0 ) = e 0 = 1
f 2(X) = e x f 2( 0 ) = e 0 = 1
M M

X2 X3 Xn
∴ e = 1 + X +
x
+ + K + + ...
2! 3! n

Another example of Taylor Series

Taylor series expansion is used to measure the sensitivity of bond prices with respect to
changes in interest rates. Using the first two terms of a Taylor series expansion to
approximate the price change we can write
dP 1 d 2P
dP = dy + 2
(dy)2 + error
dy 2 dy

Dividing both sides of equation by P to find the percentage price change results in

dP dP 1 1 d 2P 1 error
= dy + 2
(dy ) 2 +
P dy P 2 dy P P
The duration of the bond is define as
1 dP
D=− .
P dy
The convexity of the bond is defined as
d 2P
C= 2
dy

40
 Bond Price

Actual
price
increase
The line representing slope of the curve

Actual
price fall

Current rate Interest rate

Rate decrease Rate increase

2.2.2. Increasing and decreasing functions

Definition:
A function f(x) is said to be increasing (or monotonically increasing), if successively larger
values of the independent variable x always lead to successively larger values of f(x), that is if
x1>x2 ⇒ f(x1)>f(x2)

On the other hand, if successive increase in x always lead to successive decrease in f(x), that
is,
x1>x2 ⇒ f(x1)<f(x2)

then the function is said to be decreasing (or monotonically decreasing) .

Proposition:
If a function is differentiable and decreasing at an interval, its first derivative is negative,
f’(x)<0 at this interval. This indicates that the slope of the curve at any point, within that
interval, is negative. The figure below illustrates a decreasing function, which has a negative
first derivative at point A and within the chosen interval.

41
 ∆x
0.8

0.7

0.6
∆y0.5

0.4

0.3

0.2

0.1

0
-1 -0.8 -0.6 -0.4 -0.2 0 0.2

[Decreasing function]

Proposition:
By the same token, a function with a positive first derivative within an interval is an
increasing function. The slope or value of the tangent to any point on an increasing function
is positive. The following figure shows an increasing function

0.8

0.7

0.6

∆y 0.5

0.4

0.3
∆x 0.2

0.1

0
-1.8 -1.6 -1.4 -1.2 -1

[Increasing function]

2.2.3. Concavity and Convexity

Definition:
A function is said to be concave at x=a, if at some small region close to the tangent to the
line at point [x=a, f(a)], the graph of the function lies below the tangent line. On the other
hand a function is said to be convex at x=a, if at some small region around the point
[x=a,f(a)], the graph of the function lies completely above the tangent line. The figures
below show the graphs of two concave and convex functions.

42
 -0.1 0.8
1 1.2 1.4 1.6 1.8 2
-0.2 0.7
0.6
-0.3
0.5
-0.4
0.4
-0.5 0.3
0.2
-0.6
0.1
-0.7
0
-0.8 -1.8 -1.6 -1.4 -1.2 -1

a) A convex function b) A concave function

The first derivative measures the rate of change of a function. The second derivative is the
measure of the rate of change of the first derivative.
We can distinguish the following cases (see the figures):
1. If
f ' ( x0 ) > 0 and f '' ( x0 ) > 0
then the value of the function at x0 is increasing at an increasing rate.
2. If
f ' ( x0 ) > 0 and f '' ( x0 ) < 0
then the value of the function at x0 is increasing at a decreasing rate.
3. If
f ' ( x0 ) < 0 and f '' ( x0 ) > 0
then the slope at x0 is negative and increasing.
4. If
f ' ( x0 ) < 0 and f '' ( x0 ) < 0
then the slope at x0 is negative and decreasing.

The first derivative a function f tells us about its slope. The second derivative of a function
informs us about the curvature of its graph.
We can find whether a function is concave or convex at a point by finding the value of its
second derivative at that point.

Proposition:
If at x=a y''=f''(a)>0 then f(x) is convex at x=a

If at x=a y''=f''(a)<0 then f(x) is concave at x=a

43
 a) f’(x)>0 b) f’(x)<0
f’’(x)>0 f’’(x)>0

c) f’(x)>0 d) f’(x)<0
f’’(x)<0 f’’(x)<0

Examples:
Find the slope and curvature of following functions at x=3;

a) y = −x 2 + 1
y ' = f ' ( x ) = −2x f ' ( 3) = -6 < 0
y ' ' = f ' ' ( x ) = −2 f' ' (3) = -2 < 0
Therefore, the function has a negative slope and is concave at x=3.

b) y = x3 + x
y ' = f ' ( x) = 3x 2 + 1 f ' (3) = 28 > 0
y'' = f''(x) = 6 x f''( 3 )=18>0
Therefore, the function has a positive slope and is convex at x=3.

2.2.4. First derivative test for relative extremum

At a relative maximum or minimum point the function is neither decreasing nor increasing.
Therefore if a relative extremum occurs, either the first derivative does not exist or if it does
is zero. We restrict ourselves to continuous and differentiable function. Thus
f ' ( x0 ) = 0
it is a necessary condition for a relative extremum. However it is not a sufficient condition.
The points of the domain at which the first derivative of the function is zero, are called
critical values. For example, in the figure below, the slope of the tangent lines at x= -1 and

44
x=1 are zero and at these two point there are a relative maximum and a relative minimum,
respectively.

2.2.5. Second derivative test for relative extremum

If x=x0 is a critical value of f(x), then f(x0) will be
1. A relative maximum if f’(x) changes its sign from positive to negative from the immediate
left of the point x0 to its immediate right. Equivalently,
If f’’(x0)<0, then the point [x=x0, f(x0 )] is a maximum
2. A relative minimum if f’ (x) changes its sign from negative to positive from the
immediate left of the point x0 to its immediate right. Equivalently,
If f’’(x0)>0, then the point [x=x0, f(x0 )] is a minimum

Note:
In order to find maximum and
minimum points on a curve (function), 0.8
we follow two steps; 0.6

i) Take the first derivative of the 0.4

function, f’(x), set it equal to 0.2
zero and solve for the critical
point(s), x=x1 , x=x2 , etc. This 0
step is known as the first-order -2 -1 0 1 2
-0.2
condition, FOC.
-0.4
ii) Take the second derivative of -0.6
the function, f’’(x), and evaluate
it at the critical point(s). This -0.8
step is known as second-order [Relative maximum and minimum]
condition, SOC.

Example:
Find relative maximum and minimum points of the following functions;
a) y = −x2 + 1
FOC : y ' = f ' ( x) = −2 x − 2x = 0 ⇒ x = 0

SOC : y ' ' = f ' ' ( x) = −2 f ' ' ( x) = −2 < 0

Therefore, the function has a relative maximum at [x=0 , y=1].
a) y = 2 x 3 − 6 x + 12
FOC : y ' = f ' ( x) = 6 x 2 - 6 6 x 2 − 6 = 0 ⇒ x1 = 1 , x 2 = −1

SOC : y ' ' = f ' ' ( x) = 12 x f ' ' (1) = 12 > 0

f ' ' (−1) = −12 < 0
Therefore, the function has a relative maximum at [x=-1, y=16] and a relative
minimum at [x=1, y=8].

45
2.2.6. The Nth-derivative test
If f’(x0)=0 and f’’(x0)=0 then f(x0) can be either a relative maximum or minimum, or an
inflectional value (an inflectional value is a point of the graph in which the curvature changes
from concave to convex or vice-versa).
In this case we proceed with the n-th derivative test. If
f ' ( x0 ) = 0, f '' ( x 0 ) = 0,...., f n −1 ( x0 ) = 0, f n (x 0 ) ≠ 0
then the critical value f(x0) will be
• A relative maximum if n is an even number and fn(x0)<0
• A relative minimum if n is an even number and fn(x0)>0
• An inflection point if n is an odd number.

2.2.7. Economic applications of derivatives

2.2.7.1. Relationship between total, marginal, and average concepts

• The sum of money that flows into a firm is referred to as revenue.

• The sum of money, which flows out of a firm is known as costs.
There are different ways to define revenue and costs.

2.2.7.2. Marginal and Average Revenue

• Total Revenue, TR, is defined as the revenue derived from all sales of particular goods
and is the product of the total number of unit sold, Q, and the unit price of the goods, P.
Mathematically,

TR = P ⋅ Q

• Marginal Revenue, MR, is defined as the change in the Total Revenue caused by a unit
increase in production. Therefore, using derivative notation

MR = d(TR)
d(Q)

• Average revenue, AR, is defined as the revenue from the sale of each unit, and can be
obtained by dividing the total revenue by the number of units sold as follows;

TR PQ
AR = = =P
Q Q
Find the average and marginal revenues for the following total revenue function and evaluate
them at Q=10 and Q=5.
TR = 200Q − 3Q 2

46
 d (TR) TR 200Q − 3Q 2
MR = = 200 − 6Q AR = = = 200 − 3Q
dQ Q Q

If Q = 10 MR = -6(10) + 200 = 140 If Q = 10 AR = -3(10) + 200 = 170

If Q = 5 MR = -6(5) + 200 = 170 If Q = 5 AR = -3(5) + 200 = 185

2.2.7.3. Marginal and Average Cost (cost minimisation)

• Total Cost, TC, is defined as the total cost of all factors of production involved in the
production of a certain level of output. Total cost consist of two parts, Total Fixed Cost
(TFC) and Total variable Cost (TVC). Where, Fixed cost are those which are constant
and do not vary with the output level, while, the variable cost are those which vary with
different levels of output. Therefore we can write;

TC=f(Q)=TVC+TFC

• Marginal Cost, MC, can be defined as the change in the total cost caused by producing an
additional unit of output.
d(TC)
MC = f ' ( Q ) =
d(Q)

• Average Cost, AC, is the cost of production of one unit which can be obtained by
dividing the total cost by the number of units produced in the following form;
TC F ( Q )
AC = =
Q Q

Example 1:
Find the average cost, AC, and marginal cost, MC, for the following total cost, TC, function
and evaluate them at Q=10 and Q=5.

TC = Q 3 − 10 Q 2 + 30 Q + 20

d (TC) TC Q 3 − 10Q 2 + 30Q + 20

MC = = 3Q 2 − 20Q + 30 AC = = = Q 2 − 10Q + 30 + (20 / Q)
dQ Q Q

If Q = 10 MC = 3(10)2 - 20(10) + 30 = 130 If Q = 10 AC = (10)2 - 10(10) + 30 + (20/10) = 32

If Q = 5 MC = 3(5)2 - 20(5) + 30 = 5 If Q = 5 AC = (5)2 - 10(5) + 30 + (20/5) = 9

Now, if we sketch the graphs of total and marginal cost curves, we see that;

1) Total cost first rises until reaches a maximum and then falls until reaches its minimum and
then rises again.

47
2) Marginal cost curve is positive until the total cost reaches its maximum, at this point
marginal cost becomes negative indicating that total cost is falling. Marginal costs stays at the
negative region until total cost reaches its minimum. At this point, marginal cost will become
positive indicating that the total cost is rising again.

75

65

55

45
Cost

35

25

15

-5 0 1 2 3 4 5 6 7 8 9 10 11 12
Q u a n tity

TC MC

Now let us find the minimum and maximum of the total cost function. This is equivalent to
setting the MC to zero and solve it to find where the MC cuts the horizontal axis.

20 ± 400 − 4 * 3 * 30
MC = 3Q 2 − 20Q + 30 = 0 ⇒ Q1 , Q2 =
6
20 + 40 20 − 40
⇒ Q1 = = 4.38 and Q 2 = = 2.79
6 6

2.2.7.4. Profit Maximization

Profit, Π, of an organisation is the total revenue less total cost and can be shown as;

⎧⎪TC = 4Q 2 − 12Q + 10
Π = TR − TC Where ⎨
⎪⎩TR = 3Q 2 + 8Q + 5
Therefore, using the cost and revenue functions above, the profit function will be;

Π = TR − TC
Π = f (Q) = (3Q 2 + 8Q + 5) − (4Q 2 − 12Q + 10) = −Q 2 + 20Q − 5

Having the firm’s total cost and revenue functions (above examples), it is possible to find the
output level, which maximises its profit.

Profit can be maximised by optimising the profit function, as follows;

48
 FOC : f ' (Q) = -2Q + 20 = 0 ⇒ Q = 10
SOC : f ' ' (Q) = -2 < 0

Maximum Profit = −(10) 2 + 20(10) − 5 = 95

Total cost = 4(10) 2 − 12(10) + 10 = 290
TotalRevenue = 3(10) 2 + 8(10) + 5 = 385

Therefore at Q=10, the firm will have the maximum Revenue.

2.2.7.5. Elasticities

In economics, price elasticity ε of demand (supply) is defined as the percentage change in

quantity demanded (supplied) divided by the percentage change in price. Mathematically,

∆Q
× 100
Percentage change in quantity Q
ε= =
Percentage change in price ∆P
× 100
P
This is equivalent to:
dQ
dQ P Q dQ P
ε= ⋅ or ε= or ε= ⋅
Q dP dP dP Q
P

Therefore, it is the shape of the demand (supply) curve that defines the elasticity of demand
(supply). For example, if the demand for a commodity does not change with the changes in
the price of that commodity, the demand for the commodity is said to be perfectly inelastic,
figure (b) below.

The price elasticity of demand is unitless and negative, and in practice, we are interested in
the absolute value of this number. Therefore, the higher the number, the more elastic is the
demand curve. Following figure shows three special cases of demand curve;

a) A horizontal demand curve, which is perfectly elastic,

b) A vertical demand curve, which is perfectly inelastic,
c) A demand curve with a negative slope, which is elastic

49
 P P P

Ed>1

Ed→+∞ Ed=0 P1 Ed< 1

Ed=1
Q Q Q
(a) (b) (c)

Example 1:
Find the price elasticity of demand at prices, P=£100, P=£300, for the following demand
function
Q = 1000 − 2 P
i) Find the first derivative of the demand equation with respect to price

dQ d (1000 − 2 P)
= = −2
dP dP

ii) Find the demand when P=£100

P=£100 Q=1000-2*100=800

iii) Multiply the price-demand ratio by the value of derivative found in stage (i).

⎛ 100 ⎞ 1 1
E d = (−2)⎜ ⎟=− ⇒ (-1/4) = <1 ⇒ inelastic demand
⎝ 800 ⎠ 4 4

ii) Now we must find the price elasticity of demand when P=300

P=£300 Q=1000-2*300=400

iii) Multiply the new price-demand ratio by the value of derivative found in stage (i).

⎛ 300 ⎞ 3
E d = (−2)⎜ ⎟=− then ⇒ (-3/2) = 1.5 > 1 ⇒ elastic demand
⎝ 400 ⎠ 2

Next, we need to find the quantity and price at which the elasticity is equal to one, i.e. the
demand curve is unit elastic. For this purpose, we need to set the elasticity equal to one (note
that it should be -1), and solve for value of Q in terms of P as follows.

dQ P P
Ed = 1 ⇒ * = −1 ⇒ - 2 * = −1 ⇒ - 2P = -Q ⇒ Q = 2P
dP Q Q

50
Substituting the value of Q in terms of P in the demand equation will result in the price at
which the price elasticity of demand is equal to one.

Q = 1000 − 2 P ⎫
⎬ ⇒ 2P = 1000 - 2P ⇒ 4P = 1000 ⇒ P = 250
Q = 2P ⎭

Therefore, at P=250 the price elasticity of demand is equal to one. It has is also been proved
that the price elasticity of demand of a linear demand curve with a negative slope depends on
the level of the price.

The summary of different forms of price elasticity of demand is presented in the table below.
Elasticity of Demand Types of elasticity
Ed =0 • Perfectly Demand is not sensitive to changes in price.
Inelastic
0< Ed <1 • Inelastic Demand is relatively insensitive to changes in
price.
Ed =1 • Unit elasticity Changes in demand are equal to changes in
price.
1< Ed <∞ • Elastic Demand is relatively sensitive to the changes
in price.
Ed →∞ • Perfectly Elastic Demand is sensitive to the change in price.

51
CHAPTER THREE

Differential Calculus
(The multivariate case)

52
3. Differential Calculus (The Multivariate Case)
3.1. Multivariate Functions
So far we analysed functions of one variable. In real life, economic systems involve functions
of more than one independent variable. For example, the demand for a commodity depends
not only on the price of that commodity, but also on the price for substitute commodities as
well as the income of the consumers. Therefore, it is more realistic to use functions of several
variables in investigating the relationship between economic variables.

Definition: Function of two variables

A function f of two variables is a rule that assigns to each ordered pair of real numbers (x,y)
in a set D a unique real number denoted by f(x,y). The set D is the domain of f and its range is
the set of values that f takes on, that is,
{ f (x, y ) / (x, y ) ∈ D}
The variables (x,y) are the independent variables and z=f(x,y). is the dependent variable.

Definition: Graph of a function

If f is a function of two variables with domain D, then the graph of f is the set of all points
(x,y,z) in ℜ 3 such that z=f(x,y).and (x,y) is in D.

So the graph of a function f of two variables is a surface S with equation z=f(x,y).

3.2 Limits and continuity

Definition: Limit
Let be a function of two variables whose domain D includes points arbitrarily close to (a,b).
Then we say that the limit of f(x,y) as (x,y) approaches (a,b) is L and we write
lim f ( x, y ) = L
( x , y )→ ( a , b )
if for every number ε > 0 there is a corresponding number δ > 0
such that
f ( x, y ) − L < ε whenever ( x, y ) ∈ D and 0 < ( x − a )2 + ( y − b ) 2 < δ

Example 1:
(The example is taken from: Stewart J; 2003; Calculus; Thomson, Brooks/Cole; p 940)

If f ( x, y ) = xy /( x 2 + y 2 ) , does lim f ( x, y ) exist?

( x , y ) →( 0 , 0 )

Solution:
If y = 0, then f ( x,0) = 0 / x 2 = 0 . Therefore
f ( x, y ) → 0 as ( x, y ) → (0,0) along the x-axis
If x = 0, then f (0, y ) = 0 / y 2 = 0 , so
f ( x, y ) → 0 as ( x, y ) → (0,0) along the y-axis
Although we have obtained identical limits along the axes, that does not show that the given
limit is 0. Let’s now approach (0,0) along another line, say y = x. For all x ≠ 0 ,

53
 x2 1
f ( x, x ) → =
x +x
2 2
2
1
Therefore, f ( x, y ) → as ( x, y ) → (0,0) along y = x
2
Since we have obtained different limits along the different paths, the given limit does not
exist. The figure below illustrates the previous example. The ridge that occurs above the line
1
y = x corresponds to the fact that f ( x, y ) = for all points (x,y) on that line except the origin.
2

[INSERT GRAPH 1]

Definition: Continuous function

A function f of two variables is called continuous at (a,b) if
lim f ( x, y ) = f (a, b ) .
( x , y )→ ( a , b )
We say f is continuous on D if f is continuous at every point (a,b) in D.

Example 2:
(The example is taken from: Stewart J; 2003; Calculus; Thomson, Brooks/Cole; p 943)

⎧ 3x 2 y
⎪ if ( x, y ) ≠ (0,0)
Let f ( x, y ) = ⎨ x 2 + y 2
⎪0 if ( x, y ) = (0,0)
⎩

[INSERT GRAPH 2]

54
We know f is continuous for ( x, y ) ≠ (0,0) since it is equal to a rational function there. It can
be shown that
3x 2 y
lim f ( x, y ) = lim = 0 = f (0,0)
( x , y ) →( 0 , 0 ) ( x , y ) →( 0 , 0 ) x 2 + y 2

Therefore, f is continuous at (0,0), and so it is continuous on ℜ 2 .

Example 3:
(The example is taken from: Stewart J; 2003; Calculus; Thomson, Brooks/Cole; p 943)

Where is the function h( x, y ) = arctan(y/x) continuous?

Solution:
The function f ( x, y ) = y / x is a rational function and therefore continuous except on the line
x = 0. The function g (t ) = arctan t is continuous everywhere. So the composite function
g ( f ( x, y )) = arctan( x, y ) = h( x, y )
is continuous except where x =0. The graph below shows the break in the graph of h above
the y-axis.

[INSERT GRAPH 4]

3.3 Differentiation
Let f be a function of two variables x and y, suppose we let only x vary while keeping y
fixed, say y=b, where b is a constant. Then we are really considering a function of a single
variable x, namely, g(x)=f(x,b). If g has a derivative at a, then we call it the partial derivative
of f with repect to x at (a,b)
∂f
(a, b ) = g ' (a ) where g (x ) = f (x, b )
∂x
By the definition of the derivative we have
g (a + h ) − g (a )
g ' (a ) = lim
h →0 h
and therefore

55
 ∂f f (a + h, b ) − f (a, b )
(a, b ) = lim .
∂x h→0 h

Similarly, the partial derivative of f with respect to y at (a,b) is obtained by keeping x fixed
(x=a) and finding the ordinary derivative at b of the function G(y)=f(a,y)

∂f f (a, b + h ) − f (a, b )
(a, b ) = lim
∂y h→0 h

Letting (a,b) vary in the definitions above, the partial derivatives become functions of two
variables

Definition: Partial derivatives

If f is a function of two variables x and y, its partial derivatives are the functions defined by

∂f f ( x + h, y ) − f ( x, y )
(x, y ) = lim
∂x h → 0 h
∂f f ( x, y + h ) − f ( x , y )
(x, y ) = lim
∂y h → 0 h

Notations for partial derivatives

If z = f ( x, y ) , we write
∂f
(x,y ) = ∂f = f x (x,y ) = f x = f1 = ∂z = D1 f = Dx f
∂x ∂x ∂x

∂f
(x,y )= ∂f = f y (x,y ) = f y = f 2 = ∂z = D2 f = Dy f
∂y ∂y ∂y

Rules for finding partial derivatives of z = f ( x, y )

1. To find fx, regard y as a constant and differentiate f(x,y) with respect to x

2. To find fy, regard x as a constant and differentiate f(x,y) with respect to y

Interpretation of partial derivatives

The value of the partial derivative of f with respect to x at (x0,y0) is the slope of the curve
z=f(x,y0) at the point P(x0,y0,f(x0,y0)) in the vertical plane y=y0. The tangent line to the curve
at P is the line in the plane y=y0 that passes through P with this slope. The partial derivative
∂f / ∂x at (x0,y0) gives the rate of f with respect to x when y is held fixed at the value y0.
The value of the partial derivative of f with respect to y at (x0,y0) is the slope of the curve
z=f(x0,y) at the point P(x0,y0,f(x0,y0)) in the vertical plane x=x0. The tangent line to the curve
at P is the line in the plane x = x0 that passes through P with this slope. The partial derivative
∂f / ∂y at (x0,y0) gives the rate of f with respect to y when x is held fixed at the value x0.

56
 [INSERT THREE FIG. 1, 2, 3]
[Geometric interpretation of partial derivatives]

57
Higher derivatives

If f is a function of two variables, then its partial derivatives are also functions of two
variables, so we can consider their partial derivatives, which are called second partial
derivatives of f.
If z = f ( x, y ) , we use the following notation
∂ 2 f ∂ 2 z ∂ ⎛ ∂f ⎞
= = ⎜ ⎟ = ( f )xx = f xx = f11
∂x 2 ∂x 2 ∂x ⎝ ∂x ⎠
∂ 2 f ∂ 2 z ∂ ⎛ ∂f ⎞
= = ⎜ ⎟ = ( f )yy = f yy = f 22
∂y 2 ∂y 2 ∂y ⎜⎝ ∂y ⎟⎠
∂2 f ∂2 z ∂ ⎛ ∂f ⎞
= = ⎜⎜ ⎟⎟ = ( f )yx = f yx = f 21
∂x∂y ∂x∂y ∂x ⎝ ∂y ⎠
∂2 f ∂2 z ∂ ⎛ ∂f ⎞
= = ⎜ ⎟ = ( f )xy = f xy = f12
∂y∂x ∂y∂x ∂y ⎝ ∂x ⎠

Example 1:

Find the first second and cross partial derivatives of the following function

y = 3x 3 + 5z - 6xz 2

∂y ∂y
First order partial derivatives = 9 x2 - 6 z2 and = 5 - 12 x z
∂x ∂z
∂2y ∂2y
Second order partial derivatives = 18x and = - 12 x
∂x 2 ∂z 2
∂2y ∂2y
Cross partial derivatives = - 12z and = - 12z
∂x∂z ∂z∂x

Theorem:
Suppose f is defined on a disk D that contains the point (a,b). If the functions fxy and fyx are
both continuous on D, then
f xy (a, b ) = f yx (a, b )

Proposition: Tangent plane to a surface

Suppose f has continuous partial derivatives. An equation of the tangent plane to the surface
z=f(x,y) at the point P(x0,y0,f(x0,y0)=z0) is
z − z0 = f x ( x0 , y 0 )( x − x0 ) + f y ( x0 , y 0 )( y − y0 )

Definition Linear approximation

Suppose f has continuous partial derivatives. The approximation
f ( x, y ) = f ( x0 , y0 ) + f x ( x0 , y 0 )( x − x0 ) + f y ( x0 , y 0 )( y − y0 )
is called linear approximation or the tangent plane approximation of f at (x0,y0).

58
Example 2:
(The example is taken from: Stewart J; 2003; Calculus; Thomson, Brooks/Cole; p 960)

Find the tangent plane to the elliptic paraboloid z = 2 x 2 + y 2 at the point (1,1,3).

Solution:
Let f ( x, y ) = 2 x 2 + y 2 . Then
f x ( x, y ) = 4 x f y ( x, y ) = 2 y
f x (1,1) = 4 f y (1,1) = 2

Then the equation of the tangent plane at (1,1,3) is

z − 3 = 4( x − 1) + 2( y − 1)
or
z = 4x + 2 y − 3
The figures below show the paraboloid and its tangent plane as we zoom in toward the point
(1,1,3) by restricting the domain of the function f ( x, y ) = 2 x 2 + y 2 . Notice that the more we
zoom in, the flatter the graph appears and the more it resembles its tangent plane.

[INSERT GRAPH 5]

Definition: Differentiability
If z=f(x,y) then f is differentiable at (a,b) if it is possible to write
f (a + ∆x, b + ∆y ) − f (a, b ) = f x (a, b )∆x + f y (a, b )∆y + ε1∆x + ε 2 ∆x
where
ε1 → 0 ε 2 → 0 as (∆x, ∆y ) → (0,0)
In other words, a differentiable function is one for which the tangent plane approximates the
graph of f well near the point of tangency.

Theorem:
If the partial derivatives exist near (a,b) and are continuous at (a,b), the f is differentiable at
(a,b).

59
The chain rule
Suppose that z=f(x,y) is a differentiable function, where x=g(t) and y=h(t) are both
differentiable functions of t. Then z is a differentiable function of t and
dz ∂f dx ∂f dy
= +
dt ∂x dt ∂y dt

Example 3:
(The example is taken from: Stewart J; 2003; Calculus; Thomson, Brooks/Cole; p 968)

If z = x 2 y + 3xy 4 , where x = sin 2t and y = cos t, find dz / dt when t =0.

Solution:
The Chain Rule gives
dz ∂z dx ∂z dy
= +
dt ∂x dt ∂y dt
= (2 xy + 3 y 4 )(2 cos 2t ) + ( x 2 + 12 xy 3 )(− sin t )
It is not necessary to substitute the expressions for x and y in terms of t. We simply observe
that when t = 0 we have x = sin 0 = 0 and y = cos 0 = 1. Therefore,
dz
= (0 + 3)(2 cos 0) + (0 + 0)(− sin 0) = 6
dt t =0

The derivative can be interpreted as the rate of change of z with respect to t as the point (x,y)
moves along the curve C with parametric equations x = sin 2t, y = cos t. In particular, when t
= 0, the point (x,y) is (0,1) and dz / dt = 6 is the rate of increase as we move along the curve
C through (0,1).

Theorem: Implicit differentiation

Suppose that an equation of the form F(x,y) = 0 defines y implicitly as a differentiable
function of x, that is, y = f(x), where F(x,y) = 0 for all x in the domain of f. If F is
differentiable we can apply the chain rule to differentiate F(x,y) = 0 with respect to x. We
obtain

∂F dx ∂F dy dx
+ = 0 , because = 1 we have
∂x dx ∂y dx dx
∂F ∂F dy
1+ =0
∂x ∂y dx
∂F dy
If ≠ 0 we solve for and obtain
∂y dx
∂F
= − ∂x = − x
dy F
dx ∂F Fy
∂y

60
Example 4:
(The example is taken from: Stewart J; 2003; Calculus; Thomson, Brooks/Cole; p 972-973)

Find y ' if x 3 + y 3 = 6 xy .
Solution:
The given equation can be written as
F ( x, y ) = x 3 + y 3 − 6 xy = 0
So
dy F 3x 2 − 6 y x2 − 2y
=− x =− 2 =− 2
dx Fy 3y − 6x y − 2x

3.4 Application of Differentiation

3.4.1 Critical Values of Bivariate Functions

Definition: Local extremum

A function of two variables has a local maximum at (a,b) if f ( x, y ) ≤ f (a, b ) for all domain
points (x,y) in an open disk centered in (a,b). The number f(a,b) is called a maximum value.
If f ( x, y ) ≥ f (a, b ) for all domain points (x,y) in an open disk centered in (a,b), then f(a,b) is
a local minimum value.

Theorem: First Derivative Test

If f has a local maximum or minimum at (a,b) and the first-order partial derivative of f exist
there, then
∂f
(a, b ) = 0 and ∂f (a, b ) = 0.
∂x ∂y

Definition: Critical point

A point (a,b) is called a critical point (or stationary point) if
∂f
(a, b ) = 0 and ∂f (a, b ) = 0
∂x ∂y
or if one of the partial derivatives do not exist.

Remark
At a critical point a function could have a local maximum, a local minimum or neither.

Definition Saddle point

A differentiable function f(x,y) has a saddle point at a critical point (a,b) if in every open disk
centered at (a,b) there are domain points (x,y) where f(x,y)>f(a,b) and domain points (x,y)
where f(x,y)<f(a,b).

61
Theorem: Second Derivatives test
Suppose the second partial derivatives of f are continuous on a disk with center (a,b), and
suppose that (a,b) is a critical point of f. Let
D = D(a, b ) = f xx (a, b ) f yy (a, b ) − ( f xy (a, b ))
2

Then:
a) If D>0 and fxx(a,b)>0, then f(a,b) is a local minimum
b) If D>0 and fxx(a,b)<0, then f(a,b) is a local maximum
c) If D<0 then f(a,b) is a saddle point
d) If D=0 the test is inconclusive

In summary

TURNING First Order Necessary *Second Order Sufficient Condition

POINT TO BE
Condition
Maximum ∂y ∂y ∂ 2y ∂ 2y ∂ 2y ∂ 2y ⎛ ∂ 2y ⎞
2
= 0 and =0 < 0 and <0 ⋅ >⎜ ⎟
∂x ∂z ∂x 2 ∂z 2 ∂ x 2 ∂ z 2 ⎜⎝ ∂ z∂ x ⎟⎠
Minimum ∂y ∂y ∂ 2y ∂ 2y ∂ 2y ∂ 2y ⎛ ∂ 2y ⎞
2
= 0 and =0 > 0 and >0 ⋅ >⎜ ⎟
∂x ∂z ∂x 2
∂z 2 ∂ x 2 ∂ z 2 ⎜⎝ ∂ z∂ x ⎟⎠
Saddle Point ∂y ∂y ∂ 2y ∂ 2y ∂ 2y ∂ 2y ⎛ ∂ 2y ⎞
2
= 0 and =0 >0 , <0 ⋅ <⎜ ⎟
∂x ∂z ∂x ∂z 2 ∂x 2 ∂z 2 ⎜⎝ ∂z∂x ⎟⎠
2

or vice versa
* Applies only if the first order necessary condition is met

Example 1:
A firm producing two goods x and z has the following profit function

Π = 64 x − 2 x 2 + 4 xz − 4 z 2 + 32 z − 14

Find the profit maximising level of output for each of the goods, that is find the combination
of x and z that gives maximum profit.

i) Take the first order partial derivatives and set them equal to zero. Then solve for x and z
simultaneously.

∂Π
FOC : = 0 ⇒ 64 - 4x + 4z = 0
∂x
∂Π
= 0 ⇒ 4x - 8z + 32 = 0
∂z
⎧- 4x + 4z = -64
Solve the simultaneous equations ⎨ ⇒ z = 24 x = 40
⎩ 4x - 8z = -32

Now we should check that this turning point, A(x=40,z=24) is a maximum or minimum.
∂ 2Π ∂ 2Π
SOC : = - 4 < 0 = -8 < 0
∂x 2 ∂z 2

62
Since both the second partial derivatives are less than zero, the turning point might be a
maximum. In order to ensure the existence of this maximum, we should take the cross partial
derivatives and test whether the product of the second partial derivatives is greater than the
product of the cross partial derivatives.

∂ 2Π ∂ 2Π
Cross partial derivatives : =4 =4
∂x∂z ∂z∂x
Therefore
2
∂ 2Π ∂ 2Π ⎛ ∂ 2Π ⎞
>⎜ ⎟ ⇒ (-8)(-4) > (4) 2
∂x 2 ∂z 2 ⎜⎝ ∂x∂z ⎟⎠

This means that there is a maximum point A(x=40,z=24). Now the task is to find the
maximum value of profit, that is to substitute the values of x=40 and z=24 in the profit
function.
P = 64 x - 2 x 2 + 4 xz - 4 z 2 + 32 z - 14
p = 64(40) - 2(40 2 ) + 4(40)(24) - 4(24 2 ) + 32(24) - 14 = 1650

Example 2:
A firm's total costs are related to its work force (L) and capital equipment (K) by the function,
TC = 10 L2 + 10 K 2 - 25 L - 50 K - 5 L K + 2000 . Find the combination of K, L to minimise
TC.
∂ (TC )
FOC: = 20 L - 25 - 5 K = 0 (1)
∂L
∂ (TC )
= 20 K - 50 - 5 L = 0 (2)
∂K
This is a system of two equations and two unknowns, K and L.

4 x (1) + (2) gives : 75 L - 150 = 0, ⇒ L = 2

L = 2 ⇒ K = 3.
To verify it is a minimum take the SOC's
SOC:
∂ 2 (TC ) ∂ 2 (TC )
= 20 > 0 and = 20 > 0
∂L2 ∂K 2

Now test the existence using the product of the cross partial derivatives:

2
∂ 2 (TC ) ∂ 2 (TC ) ⎛ ∂ 2 (TC ) ⎞
≡ =-5 ⇒ ⎜⎜ ⎟⎟ = 25
∂K ∂L ∂L ∂K ⎝ ∂K ∂L ⎠

∂ 2 (TC ) ∂ 2 (TC )
× = 400 > 25
∂L2 ∂K 2

∴ There is a turning point at K = 3, L = 2, and it is a minimum.

At the above point, TC is:
TC = 10 × 2 2 + 10 × 3 2 - 25 × 2 - 50 × 3 - 5 × 2 × 3 + 2000 = 1900

63
3.4.2. Critical Points of Multivariate Functions
Let us consider a function y=f(x) = f(x1, x2, …, xN). We define the gradient vector (or simply
gradient) as
⎛ ∂y / ∂x1 ⎞
⎜ ⎟
∂f (x) ⎜ ∂y / ∂x2 ⎟
=⎜ ⎟
∂x M
⎜ ⎟
⎜ ∂y / ∂x ⎟
⎝ N ⎠

Similarly, we define the Hessian as the matrix containing the second partial derivatives and
cross partial derivatives; it is a square symmetric matrix with the following form

⎛ ∂ 2 y / ∂x1∂x1 ∂ 2 y / ∂x1∂x2 L ∂ 2 y / ∂x1∂x N ⎞

⎜ ⎟
∂ 2 f (x) ⎜ ∂ y / ∂x2 ∂x1 ∂ y / ∂x2 ∂x2 L ∂ y / ∂x2 ∂x N ⎟
2 2 2
H= =⎜ ⎟
∂x∂x' ⎜ M O M ⎟
⎜ ∂ 2 y / ∂x ∂x ∂ y / ∂x N ∂x2 L ∂ y / ∂x N ∂x N ⎟⎠
2 2
⎝ N 1

The necessary and sufficient conditions for the maximisation (minimisation) problem in the
multivariate case are generalization of the two variable case.

First order condition

For a general function of n variables, say y = f (x 1 ,..., x n ), the FOC's for a turning point
amounts to:
∂y ∂y ∂y
= = K = =0
∂x 1 ∂x 2 ∂x n

Second order conditions

Let the Hessian be
⎛ f 11 f 12 K f 1n ⎞
⎜ ⎟
⎜ f 21 f 22 K f 2 n ⎟
Η= ⎜
M M O M ⎟
⎜ ⎟
⎜f L ⎟
⎝ n1 n 2
f f nn ⎠

∂2 y ∂2 y ∂2 y ∂2 y
where f 11 = 2 , f 12 = , f 22 = , f 21 = , etc
∂x 1 ∂x 1∂x 2 ∂x 22 ∂x 2 ∂x 1

Denote successive principal minors of H by

f 11 f 12
Η 1 = f 11 , Η 2 = , K , Ηn = Η
f 21 f 22

64
Then, the SOCs are as follows:
• for a maximum, H must be negative definite. Equivalently:
, H 1 < 0, H 2 > 0, H 3 < 0, K
• for a minimum H must be positive definite; that is:
H 1 > 0, H 2 > 0, H 3 > 0, K

a) Plot of a multivariate function b) Maximum and minimum

Example 1:
Consider the function y = x 12 - 2x 1 x 2 + 2x 22 + 2x 1 x 3 + 4x 32 - 2x 3

FOC: ∂y/∂x 1 = 2x 1 - 2x 2 + 2x 3 = 0
∂y/∂x 2 = - 2 x 1 + 4 x 2 = 0
∂y/∂x 3 = 2 x 1 + 8 x 3 - 2 = 0

When solved simultaneously, the system gives x1 = -1, x2 = -0.5, x3 = 0.5. That is, there is a
turning point at (-1, -0.5, 0.5).

SOC: When all the 2nd order and cross partial derivatives of the function are derived and
evaluated at the turning point, the following (3x3) Hessian matrix describes the curvature of
the function at the turning point.
⎛ 2 − 2 2⎞
⎜ ⎟
Η = ⎜− 2 4 0⎟
⎜ 2 0 8 ⎟⎠
⎝

The values of its successive principal minors are:

2 −2
Η1 = 2 , Η 2 = = 4 , Η = 16
−2 4

Since they are all positive, i.e. the Hessian is positive definite, thus the turning point is a
minimum.

65
Example 2:
A firm uses three types of advertisements, (TV commercials, Radio commercials and
magazine advertisements). The costs of these advertisements are as follows; x1, x2 and x3 (in
million pound) for TV, Radio and Magazine ads, respectively. The firms total revenue can be
explained as a function of these advertisements as follows;

TR = −5 x12 + 10 x1 + x1 x3 − 2 x 22 + 4 x 2 + 2 x 2 x3 − 4 x32

Find the optimum amount of the expenditure on these commercials, which maximises the
firm’s total revenue.

First and Second Partial derivatives:

∂y ∂y ∂y
= y1 = −10 x1 + 10 + x3 = y 2 = - 4x 2 + 2 x3 + 4 = y3 = x1 + 2 x2 − 8 x3
∂x1 ∂x2 ∂x3

y11 = −10 y12 = 0 y13 = 1

y 21 = 0 y 22 = −4 y 23 = 2
y31 = 1 y 32 = 2 y 33 = −8

FOC: Setting the first partial derivative equal to zero and solving the system of 3 equations
and three unknowns will result in

⎧10 x1 − x3 = 10
⎪
⎨ 4 x 2 − 2 x3 = 4 ⇒ x 1 ≅ 1.04 , x 2 ≅ 1.22 , x 3 ≅ 0.43
⎪x + 2 x − 8x = 0
⎩ 1 2 3

SOC: Construct the Hessian using the second partial derivatives and calculate the
determinants of principle minors

− 10 0 1
H = 0 -4 2
1 2 -8
− 10 0 1
- 10 0
H 1 = −10 < 0 , H2 = = 40 > 0 , H3 = 0 -4 2 = -276 < 0
0 -4
1 2 -8

Determinants of principle minors alternate sign, therefore the turning point is a maximum;
that is the revenue of the firm would be maximum if the expenditure of advertisements is set
to be x 1 ≅ £1.04m , x 2 ≅ £1.22m and x 3 ≅ £0.43m, for TV, Radio and magazines,
respectively. Maximum revenue would be?

66
3.4.3. Constrained Optimisation
Since resources are limited in everyday life, we often have to take decisions of the type:
1. The firm wants to maximise revenue subject to costs.
2.The household wants to maximise utility subject to the budget constraint.

Therefore, we need to consider such restrictions in our optimisation process.

This means optimising an objective function, f(x), subject to certain limitations or constraints,
let the constraint be a function itself, g(x).

For simple functions it may be possible to substitute the constraint into the objective function
and optimise this new function in the usual way.

3.4.3.1.Method of substitution

When the constraint function is simple; that is linear and bivariate (az+bx=c). It is convenient
to find the one variable with respect to the other one and substitute the result in the objective
equation and perform optimisation.

Example 1:
Minimise y = 1 + 2 x + 5 z 2 subject to x = z.
Substitute the constraint in the objective function to eliminate x, y = 1 + 2z + 5z 2 .
Minimisation yields dy/dz = 2 + 10z = 0 . Whence z= -1/5, and as a result x= -1/5.

3.4.3.2.Lagrange Multiplier

In many cases the optimisation is done with respect to more than two or three variables or the
constraint might be nonlinear. Therefore, it is not always easy to use the substitution method.
An alternative is to use the Lagrange Multiplier method. This method adds a multiple of the
constraint function to the objective function and optimises the new function know as
Lagrangean. Another advantage of the Lagrange Multiplier method is that it provides
additional information regarding the economic relationship between the constraint and the
objective function.

Let y be a function of x and z, y=f(x,z). Let’s also assume we want to optimise subject to the
following constraint: g(x,z)=k. In general, to find the solution to a constrained optimisation
problem we want to optimise a new function called the Lagrangean:

L(x, z, λ ) = f(x, z) + λ[k − g(x, z)],

where λ is some constant to be determined. Note that the term in the square bracket is equal
to zero by construction, therefore, the Lagrangean function only restrict the values that x and
z can take but do not affect f(x,z).

67
Example 1:
Suppose that a company produces two different types of goods, x and z, and has the following
total cost function;

TC = 8 x 2 − xz + 12 z 2

The company is also bound by the existence of the raw material to produce a total number of
42 units. Find the values of x and z that optimises the cost of the company, subject to the
constraint using Lagrange Multiplier method.

In order to optimise the cost function subject to the constraint, first rearrange the constrain
function to get zero in one side.

x + z = 42 ⇒ 42 - x - z = 0

then construct the lagrangean function using the constrain function;

L = f ( x, z ) + λ[k − g ( x)] = 8 x 2 − xz + 12 z 2 + λ[42 − x − z ]

L = 8x 2 − xz + 12 z 2 + 42λ − λx − λz
Take the first partial derivatives of L with respect to x,z and λ.
∂L
= 16 x − z − λ = 0
∂x
∂L Solve the system of 3 variable 3 equations.
= 24 z − x − λ = 0
∂z
∂L
= 42 − x − z = 0
∂λ

⎧λ = 16 x − z ⎧ 25z
⎪ ⎧16x - z = 24z - x ⎧17x = 25z ⎪x =
⎨λ = 24 z − x ⇒ ⎨ ⇒ ⎨ ⇒ ⎨ 17
⎪42 − x − z = 0 ⎩42 - x - z = 0 ⎩42 - x - z = 0 ⎪⎩42 − x − z = 0
⎩

⎧ z = 17
⎧ 25 z ⎪
⎨42 − −z=0 ⇒ z = 17 ⇒ ⎨ x = 25
⎩ 17 ⎪λ = 383
⎩

If the production held at x=25 and z=17, the total cost of the company is minimised while the
constraint is also met. That is x+z=17+25=42.

Example 2:
The production function of a firm describes the technological relationship between inputs
(raw materials, labour etc) and output. Assume, a particular firm wants to optimise a Cobb-
Douglas production function, Q = 10 L1/2 K 1/2 , subject to the cost of input, 4 L + 10 K = 100 ,
where L and K are Labour and Capital inputs.

68
Rearrange the constraint to get: 100 - 4 L - 10 K = 0 , and build the Lagrangean:

L* = 10 L1/2 K 1/2 + λ (100 - 4 L - 10 K).

We want to maximise this with respect to L, K and λ. The FOC yields:

∂L* 5K1/2
≡ 5 L-1/2 K 1/2 - 4 λ = 0 ⇒ λ =
∂L 4L1 / 2
∂L* 5L1/2
≡ 5 L1/2 K -1/2 - 10 λ = 0 ⇒λ=
∂K 10K 1/2
∂L*
≡ 100 - 4 L - 10 K = 0 ⇒ 100 - 4 L - 10 K = 0
∂λ

This is a system of 3 equations in 3 unknowns, L, K and λ. Hence

5K 1 / 2 5L1 / 2 5
1/ 2
= 1/ 2
∴ 50 K = 20 L ∴L = K
4L 10K 2

100 - 4 L - 10 K = 0 ∴ 100 - 4L - 10K = 0 ∴10K + 10K = 100

therefore, K = 5 and L = 12.5 maximise production. Also λ = 0.79.

The number of production units at the maximum is (K=5, L=12.5) =79.06

The Lagrange multiplier, λ, is also known as the shadow price. It shows by how much the
optimum Q would change when the constraint is relaxed by 1 unit.
In the above example λ = 0.79. Thus, if the constraint is relaxed from 100 to 101 the optimal
level of output would increase by 0.79 units to Q* = 79.85.

Note: When λ = 0 the constraint is not binding; it does not affect the solution.

3.4.3.3.Bordered Hessian

Just as with unconstrained optimization problems, the SOC's need to be considered in

constrained optimization problems to determine the nature of the turning point of the
Lagrangean function.

Assuming f(x) is the objective function and g(x) is the constraint, the following Bordered
Hessian matrix determines the curvature of the Lagrangean function.

⎛ 0 g1 g2 K gn ⎞
⎜ ⎟
⎜ g1 f 11 + λ g11 f 12 + λ g12 K f 1n + λ g1n ⎟
HB = ⎜ g 2 f 21 + λ g 21 f 22 + λ g 22 K f 2n + λ g 2n ⎟
⎜ ⎟
⎜M M M O M ⎟
⎜ g f nl + λ g nl f n 2 + λ g n 2 K f nn + λ g nn ⎟⎠
⎝ n

69
At the turning point (when the FOC's are satisfied), there is a:
maximum when successive principal minors of HB greater than second order alternate in
sign, starting from a positive value: HB 3 > 0, HB 4 < 0, HB 5 > 0, K
minimum when successive principal minors of HB are negative
HB 3 < 0, HB 4 < 0, HB 5 < 0, K

It is also possible to have several constraints in a constrained optimisation problem. In this

case the Lagrangean function may be written as

L( x , λ1 , λ 2 ,..., λ n ) = f( x ) + [ λ1g 1 ( x ) + λ 2 g 2 ( x ) + K + λ n g n ( x ) ]

These are complex mathematical programming problems, which may be solved using
specialised computer software.

• Consider the Bordered Hessian for Example 1

0 1 1
HB = 1 16 - 1 ⇒ HB3 = −42 < 0 therefore the turning point is a minimum.
1 - 1 24

70
CHAPTER FOUR

Integral Calculus

71
4 Integral Calculus
4.1. Integration
4.1.1. Definite and Indefinite Integrals
Consider the graph below, where the curve represents a function f(x). The shaded portion of
the figure consists of those points, which lie below the curve C and above the horizontal axis.

1. Divide the range of values of x into n subinterval, each of size ∆x.

2. Calculate the value of the function at the end-point of each subinterval, say
f(x1 ), f(x2 ), K ,f(xn ).

3. Sum the area of the rectangles

n
S n = Σ f(xi ) ∆x
i =1

If we let ∆x → 0 , or equivalently n → ∞ , the sum of the area of the rectangles tends to the
area under the curve
n
A = lim Σ f(xi ) ∆x
n→∞ i =1

f(x1)
f(x2)

f(x3)

f(x4)

∆x1 ∆x2 ∆x3 ∆x4 X

This limit is known as the integral of f(x) between values a and b, and is written
symbolically as
b
A = ∫ f(x) dx .
a

More rigorously, an integral is defined as follows:

72
Definition: Definite Integral
Let f(x) be defined on [a,b] and let x0, x1, … ,xn be a partition of [a,b]. For each [xi-1,xi], let xi*
∈ [xi-1, xi]. Then we define the (definite) integral of f between a and b as:

b n

∫ f ( x)dx = lim
max ∆x →0
∑ f ( x )∆x
i =1
*
i i
a

Definition: Primitive (anti-derivative) of a function

We now define a primitive function (or anti-derivative) F of a function f to be any function
for which
dF ( x )
F ' ( x ) = f (x ), i.e. = f (x )
dx
The symbol ∫ f ( x )dx is used to denote a general primitive function of f. In this notation an
equation like
∫ f (x )dx = F (x ) + c,
where c is an arbitrary constant, is considered to be an alternative way of writing

F , (x ) = f (x ) .
b
Despite similarity in appearance, the symbols ∫ f ( x )dx and ∫ f (x )dx represent different
a

concepts. However, the two processes are related by the Fundamental Theorem of
Calculus.

Theorem:
If F (x) is the a primitive of f(x) then

b
x =b
∫ f(x) dx = [ F(x) ] x=a = F(b) - F(a).
a

Observation:
Very often the symbol ∫ f (x )dx is referred to as indefinite integral rather than as a primitive
b
or antiderivative. To distinguish the symbol ∫ f ( x )dx from ∫ f (x )dx , the latter is called a
a

definite integral.

73
Example:
2
∫ x 3 dx = [ x 4 / 4 ] 02 = F( 2 ) - F( 0 ) = ( 24 / 4 ) - ( 04 / 4 ) = 4
0

10

8
6

4
2

0
-3 -2 -1 0 1 2 3
-2

-4
-6

-8
-10

y 0=x ^3

4.1.2. Properties of definite integrals

b a a

1) ∫ f(x) dx = - ∫ f(x) dx 2) ∫ f(x) dx = 0

a b a

If f(x) is continuous in the domain [a, b], and there is point c between a and b where
a < c < b , then we can write

c b b

3) ∫ f(x) dx + ∫ f(x) dx = ∫ f(x) dx

a c a

b b

4) ∫ k f(x) dx = k ∫ f(x) dx
a a

b b b
5) ∫ [ f(x) ± g(x) ] dx = ∫ f(x) dx ± ∫ g(x) dx
a a a

What happens if f(x) has negative values in interval [a, b]

We assumed that f(x) was positive in interval [a, b]. This is because the area should always
be positive. Now if we find that at some intervals [a, c] (a<c<b) f(x) is negative, we need to
pre-multiply the area definite integral at interval [a, c] by –1 and add this to the area at
interval [c, b] where f(x) is positive.

74
Example:
Find the area between the curve and the x-axis for the function y=x for the interval [-1, 1].

1
1
⎡ x2 ⎤ ⎡ (1) 2 (−1) 2 ⎤
A = ∫ xdx = ⎢ ⎥ = ⎢ − ⎥=0
−1 ⎣ 2 ⎦ −1 ⎣ 2 2 ⎦

-1 1

It can be seen that if we take the finite integral, the result would be zero. In order to find the
area we need to use the above mentioned properties of definite integrals. Therefore we can
split the interval into two sub-intervals [-1, 0] and [0, 1].

0 1
0 1
⎡ x2 ⎤ ⎡ x2 ⎤ ⎡ (0) 2 (−1) 2 ⎤ ⎡ (1) 2 (0) 2 ⎤
A = ∫ xdx + ∫ xdx = ⎢ ⎥ + ⎢ ⎥ = − ⎢ − ⎥+⎢ − ⎥ =1
−1 0 ⎣ 2 ⎦ −1 ⎣ 2 ⎦ 0 ⎣ 2 2 ⎦ ⎣ 2 2 ⎦

4.1.3. Rules of Integration - Indefinite Integral

We saw that a set of rules need to be remembered to perform differentiation. Similarly, a set
of rules must be known to perform integration. Here are the most important ones.

Note that you need to check the result by differentiation of your answer.

1) The integral of a constant is a linear function:

∫ a dx = a x + c a, c ∈ R

Examples:

∫ −2 dx = -2 x + c Check: y = −2 x + c ⇒ y' = −2

∫ 10 dx = 10 x + c Check: y = 10 x + c ⇒ y' = 10

75
2) The integral of a power function, xn , where n≠-1, is :

1
∫ x n dx = x n +1 + c for n ≠ - 1
n+l
Examples:
1 1
a) ∫ x −2 dx = x - 2+1 + c = -x -1 + c = - + c
-2 + 1 x
Check: y = − x + c ⇒ y' = −( − 1 )x −1−1 = x −2
−1

1 5+1 10
b) ∫ 10 x 5 dx = 10* x + c = x6 + c
5 +1 6
10 10
Check: y = x 6 + c ⇒ y' = ( 6 x 5 ) = 10 x 5
6 6

3) The integral of a constant times a function is equal to the constant

times the integral of that function, therefore:

∫ k ⋅ f(x)dx = k ∫ f(x)dx

Example:
1
∫ 4 x dx = 4∫ x 2 dx = 4* x 3 + c
2
a)
3

4) The integral of a function raised into a power, is:

1
∫ (ax + b) n dx = (ax + b) n +1 + c
a(n + 1)

Example:
1
a) ∫ ( 2 x + 4 )3 dx = ( 2 x + 4 )3+1 + c
2( 3 + 1 )
1
b) ∫ (x + 4 )1/ 2 dx = (x + 4 )( 1 / 2 )+1 + c
1(( 1/ 2 ) + 1 )

5) The integral of an exponential function, is:

∫ f ' (x) e f(x) dx = e f(x) + c

where a special case is:

∫ e x dx = ex + c

76
Example:
∫ 2 x e x dx = ex + c
2 2
a)

∫ 3 x 2 e x +1 dx = e x +1 + c
3 3
b)

6) The integral of inverse of x is equal to the natural log of x plus a

constant;

1
∫ dx = lnx + c
x

Where a x>0.

7) The integral of the derivative of a function times the inverse of the

function is equal to the natural log of that function plus a constant:

f' (x)
∫ f(x) dx = ln(f(x)) + c

Where a f(x)>0.
Example:

( 2x +1 )
a) ∫ (x2
+ x)
dx = ln (x 2 + x) + c

( 3x 2 + 2 x + 4 )
b) ∫ (x 3 + x 2 + 4 x) dx = ln (x 3 + x 2 + 4 x) + c

8) The integral of sum or differences of two functions is equal to the sum

or differences of the integrals of those two functions.

∫ [f(x) ± g(x)] dx = ∫ f(x)dx ± ∫ g(x)dx

Example:
a)
∫ [(x + 1 ) + (x -4 )] dx = ∫ (x + 1 )dx + ∫ (x -4 )dx
2 2

x2 x3
=( + x) + ( − 4 x) + c
2 3

77
 9) Integral by parts

∫ f(x)g'(x)dx = f(x)g(x) - ∫ f' (x)g(x)dx

The equation expresses a relationship which can be used to determine
integrals where the integrand has the form f(x)g'(x). This is derived from
the product rule in differentiation.

Example:
a)
∫x
2
ln x dx

let us assume f(x)=ln(x) and g'(x) =x2

1 x3
Then we can write f'(x) = and g(x) = ∫ x 2 dx =
x 3

Substituting into the original integral yields

⎛ x3 ⎞ x3 1
∫ = ⎜ 3⎟ ∫ 3
⎜ ⎟ − ⋅ dx
2
x ln x d(x) ( ln x )
⎝ ⎠ x
x3 x2 x3 x3
= ln x − ∫ dx = ln x − + c
3 3 3 9

10) Integral by partial fractions

Often rational functions cannot be integrated directly. In such cases one

may be able to restate the rational function in an equivalent form
consisting of more elementary functions.

Example:
x+3
a) ∫x 2
+ 3x + 2
dx

the above integral can be written as

x+3 2 1
∫x 2
+ 3x + 2
dx = ∫
x +1
dx − ∫
x+2
dx

= 2 ln (x + 1 )- ln (x + 2 ) + c

78
 x3 − 2x
b) ∫ x − 1 dx
using division rules for mathematical expressions we can write

x3 − 2x ⎛ −1 ⎞
∫ x −1
dx = ∫ ⎜ x 2 + x − 1 +
⎝
⎟dx
x − 1⎠

( )
= ∫ x 2 + x − 1 dx − ∫
1
x −1
dx

x3 x 2
= + − x − ln (x − 1 ) + c
3 2
Example:

Figure 6.1 plots three different functions,

y0 = x 3 , y1 = x 3 + 2
6
namely; and
y 2 = x -2 . These functions are all obtained
3 4

∫ 3x dx
2
through, , however the value of c 2

varies (0, 2 and –2). 0

-4 -2 0 2 4

Therefore, we need more information to -2

obtain exactly the same primitive function

-4
through integration. The extra information is
usually given by a point, which satisfies the -6
equation.
y0=x^3 y1=x^3+2 y2=x^3-2

4.1.4. Auxiliary Conditions

An auxiliary condition is required to find the value of the constant in the primitive function.
If it is known that the solution passes through point (a,b) we can substitute the values of x and
y in the primitive function and solve for c. For instance, if we are also told in the above
example that when x=1, y=3, substituting in the above and solving for c would provide its
value. That is, substitution in y = x 4 + c yields 3 = 14 + c, ∴ c = 2.

4.2. Applications of Integrals

4.2.1. Deriving Totals (Revenue/Cost) from Marginals (Revenue/Cost)
MR is the derivative of the total revenue function (TR). Therefore, the anti-derivative of the
MR function gives the TR function.

Similarly, MC is the derivative of the total cost function (TC). Therefore, the anti-derivative
of the MC function gives the TC function.

79
Let MC = 100 + x
TC = ∫ MC dx = ∫ (100 + x) dx
= 100 x + (1/2) x 2 + c

More information is needed to determine c in the TC function.

Thus, if
TC = 40,000, at x = 100,

then 40,000 = 100 (100) + (1/2) 100 2 + c

∴ c = 40,000 - 10,000 - 5,000
= 25,000
Hence: TC = (1/2) x 2 + 100 x + 25,000

4.2.2. Present Value of Cashflows

We can also use integrals to discount a continuous stream of income, f(t), at a specified
interest rate, r, received during time interval [0,T].

∫ f (t )e
− rt
PV = dt
t =0

Example 1:
Find the PV of a continuous income stream flowing at a rate of £1000 per year over the next
10 years, assuming an interest rate of r=8%=0.08 annually, compounded continuously.
10
T 10
⎡ ⎛ e −0.08t ⎞⎤
∫ f (t )e dt = ∫ 1000e dt = ⎢1000⎜⎜ − ⎟⎟⎥
− rt − 0.08t
PV =
t =0 t =0 ⎣ ⎝ 0 . 08 ⎠⎦ 0
1000
= (1 − e −(10 )( 0.08) ) ≈ 6883.39
0.08

Example 2:
Find the PV of a perpetual income stream flowing at the uniform rate of a dollars per year,
when t→∞, assuming an interest rate, r, compounded continuously.

∞
∞
⎡ ⎛ e − rt ⎞⎤
∞
⎛⎡ a ⎤ ⎞
PV = ∫ ae dt = ⎢a⎜⎜ −
− rt
( )
⎡ a − rt ⎤ ⎤
⎟⎟⎥ = ⎢− e ⎥ = ⎜ ⎢− e − rt ⎥ ( )
⎡ a
− ⎢− e − rt ⎥ ⎟ ( )
t =0 ⎣ ⎝ r ⎠⎦ 0 ⎣ r ⎦ 0 ⎜⎝ ⎣ r ⎦ t →∞ ⎣ r ⎦ 0 ⎟⎠

⎛⎡ a ⎛ 1 ⎞⎤ ⎡ a⎛ 1 ⎞⎤ ⎞⎟ ⎡ a ⎛ 1 ⎞⎤ a
⎜ − ⎜ ⎟⎥ − ⎢− ⎜ rt ⎟⎥ = 0 − ⎢− ⎜ ⎟⎥ =
⎜ ⎢⎣ r ⎝ e rt ⎠ ⎦ t →∞ ⎣ r ⎝ e ⎠⎦ 0 ⎟⎠ ⎣ r ⎝ 1 ⎠⎦ r
⎝

80
4.2.3. Measuring Probabilities
Integrals are used in statistics when calculating probabilities from continuous distributions, as
the area under the density function curves. Thus,
b
P( a ≤ x ≤ b ) = ∫ f(x) dx
a

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-4 -2 0 2 4

normal dist

The area under the standardised normal distribution curve is equal to one, which represents
100% probability. The area under this curve between [–1.96 and 1.96] is 0.95, which
represent 95% probability.

4.3 Multiple Integration

4.3.1. Double Integral of a Function of Two Variables
Let f(x,y) be defined on a closed and bounded region R of the xy-plane. Set up a grid of
vertical and horizontal lines in the xy-plane to form an inner partition of R into n rectangular
sub-regions Rk of area ∆Ak, each of which lies entirely in R. (Ignore the rectangles that are not
entirely contained in R) Choose a point (xk*, yk*) in each sub-region Rk. The sum

n
S n = ∑ f ( xk* , y k* )∆Ak
k =1

This is called a Riemann Sum. In the limit, as we make our grid more and more dense, we
define the double integral of f(x,y) over R as

∫∫ f(x, y)dA = lim

max ∆AK →0
∑ f (x , y
k =1
*
k
*
k )∆Ak
R

Notes
• If this limit exists, we say that f is integrable over the region of integration R.
• If f(x,y) is continuous on R, then f(x,y) is integrable over R.

81
4.3.2 Geometric Interpretation of the Double Integral
n
Notice that as we increase the density of our grid, the sum ∑A
k =1
k of the individual rectangles

better and better approximates the area of region R. In the limit as ∆Ak → 0, we have

Area of R = ∫∫ dA
R

Suppose now that f(x,y) ≥ 0 on R. Then f(xk*,yk*)∆Ak is the volume of a rectangular

parallelepiped of height f(xk*,yk*) and base area ∆Ak. Adding up these volumes, we get an
approximation for the volume of the solid above R and below the surface z = f(x,y). Thus, in
the limit as ∆Ak → 0,

Volume of solid above R ⎫

⎪
and below the surface ⎬ = ∫∫ f(x,y)dA (for f(x,y) ≥ 0 on R)
z = f(x,y) ⎪ R
⎭

Note : The interpretation of the double integral as a volume still holds if f(x,y) takes on both
positive and negative values. In this case, we obtain the difference between the volume above
the xy-plane between z = f(x,y) and R and the volume below the xy-plane between z = f(x,y)
and R.

Example
Let's evaluate the double integral ∫∫ 6 xydA where R is the region bounded by y = 0, x = 2,
R
and y = x2.

2 x2

∫∫ 6 xydA = ∫ ∫ 6 xy dydx
R 0 0
2 2 2
2
1 1 1
= ∫ [ 3xy | ]dx = ∫ 3x dx = x 6
2 x 5
= ( 64 ) − ( 0 ) = 32
y =0 2 2 2
0 0 x =0

82
 CHAPTER FIVE

Ordinary Difference and Differential

Equations

83
5. Difference and Differential Equations
5.1. Basic Idea of a Difference Equation

A difference equation expresses the value of an endogenous variable in a given period as a

function of the same variable in past periods, together with any exogenous variables. For
example,
Yt = f (Yt −1 , Yt − 2 ,....., Yt − n , X ) (1)

This states the value of Y in period t depends on the values of Y in earlier periods
(Yt-1,....., Yt-n) and the exogenous variable X.

5.2. Linear Difference Equations

The most common type of difference equation encountered in economic models is the linear
difference equation. This often arises as the reduced form equation of a dynamic linear
economic model (as the examples below will show). In general a linear difference equation of
order n (with constant coefficients and constant term) is written as follows:

Yt = a1Yt −1 + a 2 Yt − 2 +.....+ a n Yt − n + b (2)

where a1, ... , an are given coefficients/parameters and b is a given constant. Thus a first-order
linear difference equation would be written in general as

Yt = a1Yt −1 + b (3)

and a second-order equation would be

Yt = a1Yt −1 + a 2 Yt − 2 + b (4)

• Note that if the constant, b, is zero then the equation is called homogeneous. If
b ≠ 0 the equation is non-homogeneous.

84
5.3. Numerical Example
Consider the following first-order equation:

Yt = 0.8Yt −1 + 30 (5)

This says that the value of Y in any period is equal to the value of Y in the previous period
plus 30. So clearly the value of Y changes over time such that the values in each successive
period are linked as shown by the difference equation. Given the value of Y in some
particular period (e.g. period 0) we can use the difference equation to successively find the
value of Y in each subsequent period.

Thus, suppose that Y is equal to 10 in period 0, i.e. Y0 = 10. Then,

Y1 = 0.8Y0 + 30 = 0.8(10) + 30 = 38
Y2 = 0.8Y1 + 30 = 0.8(38) + 30 = 60.4
Y3 = 0.8Y2 + 30 = 0.8(60.4) + 30 = 78.32
and so on.

• Clearly, the problem with using this method to find the value of Y in any given period is
that we have to calculate Y in all the periods prior to the one we are interested in. It would
be much better if we had a formula which told us the value of Y in any given period t. This
is the general solution to a difference equation which we discuss below.

5.4. Solution of a First-Order Linear Difference Equation

By the general solution to a difference equation we mean a function of time t which gives the
value of Y in any period. Before looking at this let’s determine the equilibrium value of Y.

5.4.1. Equilibrium Solution

Given the first-order, linear, non-homogeneous difference equation

Yt = aYt −1 + b (6)

the equilibrium solution is the value of Y that, once attained, will remain constant throughout
time. If we call this equilibrium value Y* then in equilibrium we have,

(7)
Yt = Yt −1 = Y ∗

85
Hence, by substitution into the first-order equation we get:
(8)
Y ∗ = aY ∗ + b

and solving for Y* gives

Y ∗ − aY ∗ = b
Y ∗ (1 − a ) = b
b
Y∗ = (9)
( a)
1 −

5.4.2. General Solution

The general solution to a first-order, linear, non-homogeneous difference equation can be
shown to be

Yt = Ka t + Y ∗ (10)

This gives the value of Y in any period t as a function of t. Thus, to find the value of Yt we
simply substitute into this general solution the value of t.

Note, however, that the general solution contains a constant K whose value we do not know.
To determine its value we need to specify the initial condition - i.e. the value of Y in period 0.

Assume that in period 0 the value of Y is Y0. This implies that,

Y0 = Ka 0 + Y ∗ = K + Y ∗ (11)

Hence,
K = Y0 − Y ∗ (11')

Substituting this expression for K into the general solution gives,

( )
(12)
Yt = a t Y0 − Y ∗ + Y ∗

This is the general solution we can use to solve any first-order, linear, non-homogeneous
difference equation.

86
Numerical Example
Continuing with our example equation
Yt = 0.8Yt −1 + 30 (13)

we know that the equilibrium value Y* = 150. Suppose that Y0 = 10, then the general solution
is given by
Yt = 0.8 t (10 − 150) + 150
or,
Yt = −140( 0.8) + 150
t

We can now easily find the value of Y in any period by substituting into this general solution
the appropriate value of t. So, for example, if t = 3 then

Y3 = −140(0.8) + 150
3

= −140(0.512) + 150
= 78.32

• Note that this confirms the value of Y3 we calculated earlier using the method of
calculating successive values of Y starting from Y0. The main advantage of using the
general solution is that we can immediately calculate the value of Yt we are interested in
without having to calculate all the prior ones

5.4.3. Stability Analysis

An equilibrium solution/value is stable if the value of Y converges onto the equilibrium value
as t gets larger (i.e. as t approaches infinity). Stability of the equilibrium depends on the value
of a. Specifically, there are four possibilities:

1. If a > 1 then the equilibrium is unstable. Y will grow continuously since at becomes larger as t → ∞
2. If 0 < a < 1 the equilibrium is stable with a smooth convergence to equilibrium
3. If -1 < a < 0 the equilibrium is stable but with a declining (‘damped’) cyclical convergence to equilibrium
4. If a < -1 the equilibrium is unstable with increasing (‘explosive’) cycles.

So, for stability a must be less than one in absolute value (i.e. ignoring the sign)
−1 < a < 1

87
Numerical Examples

In our example equation

Yt = 0.8Yt −1 + 30

the equilibrium value of 150 will be stable because a = 0.8. To confirm that the value of Y
will indeed converge on to 150 as t increases we can calculate Y for successive values of t
(assuming Y0 = 10) and plot the graph of Yt against t. The result is shown below:

160
150
140
130
120
110
100
90
80
Y

70
60
50
40
30
20
10
0
0 10 20 30 40 50
t

Note that since a is between zero and one the convergence to the equilibrium value is smooth.

Let’s consider an example now of damped cyclical convergence. As indicated above this
occurs if a is less than zero but larger than -1. Thus, suppose we have the following
difference equation:
Yt = −0.9Yt −1 + 114

Here a = - 0.9 and b = 114. Hence the equilibrium value is

b 114 114
Y∗ = = = = 60
(1 − a ) (1 − ( −0.9)) 19.

Assume that Y0 = 20, then the general solution is given by,

Yt = ( −0.9) (20 − 60) + 60

t

= −40( −0.9) + 60
t

The graph of this equation for values of t from 0 to 50 is shown below.

88
 100
90
80
70
60
Y 50
40
30
20
10
0
0 10 20 30 40 50
t

Here we see that Y is gradually converging on to the equilibrium value of 60 but in a cyclical
manner whereby the cycles around the equilibrium are gradually diminishing. Finally, as an
example of a unstable equilibrium consider the following equation:

Yt = −11
. Yt −1 + 42

In this case a = -1.1 which is less than - 1 so the time path of Y should exhibit explosive
cycles. The equilibrium value is

b 42 42
Y∗ = = = = 20
(1 − a ) (1 − ( −11. )) 2.1
Assuming the initial condition is Y0 = 12 the time path is shown in the following diagram.

120
100

80

60

40
Y

20

0
-2 0 0 5 10 15 20 25

-4 0
-6 0

Although an equilibrium value (of 20) exists, Y never attains this value but instead oscillates
around it in ever increasing cycles. The only way equilibrium would be reached is if Y started
off at the equilibrium value, i.e. if Y0 = 20.

89
5.5. Solution of a Second-Order Linear Difference Equation

Now, suppose the system had more lagged inputs, as in

y t = Ay t −1 + By t − 2 (14)

From looking at this for “most” values of A and B there is a general solution with 2 “roots”,
λ1 and λ2 of the form

(15)

Now, we want to know the values of λ1and λ2. These roots are found as the solution of the
“auxiliary equation”, also sometimes known as the characteristic equation.

(16)

Because we get tired of fussing over minus signs, relabel the coefficients as a1 = - A and
__

a2 = - B.

(17)

It is “easy” to see there is at least one “test solution” like

(18)

Insert that “test solution” into (17) to get

(19)

Which can be rearranged (by dividing everything by λt −2 ) as

(20)

This is the characteristic equation for the second order dynamic system. The possible
solutions are referred to as λ1 and λ2. If these two solutions are not the same, then the general
solution in (15) is valid. That is the case of “distinct roots”. If the sum of the roots is less than
one then the system is stable.

90
Note that for any two arbitrary constants k1 and k 2 the linear combination in (15) solves the
homogeneous equation.

5.6. Ordinary Differential Equations

5.6.1. A Simple Growth Model

A simple model for growth is introduced and the corresponding differential equation is
derived and solved.

Example 1: The number P(t ) of bacteria in a colony at time t is to be studied. The culture
contains an ample food supply and there are no predators for the bacteria in the culture. The
time frame under consideration is assumed to be short relative to the life expectancy of an
individual bacterium. Under these conditions the only way in which the population size
changes is by birth of new bacteria. One reasonable assumption is that the number of births is
proportional to the number of bacteria currently alive. By equating rates of change, this
assumption leads to the model

(21)

for all t > 0 where k is the proportionality constant. The constant k has the interpretation as
the birth rate for the colony. The equation derived above is called an ordinary differential
equation because the equation expresses a relationship between the unknown function
P(t ) and its derivative. (The adjective ‘ordinary’ means that only ordinary derivatives appear
in the equation; there are no partial derivatives appearing in the equation.) More completely,
an ordinary differential equation is an equation which expresses a relationship between the
derivatives of an unknown function, the independent variable, and the unknown function
itself. The equation above is a first order differential equation because only the first
derivative of the unknown function P(t ) appears in the equation. The equation has constant
coefficients because the unknown function P(t ) and its derivatives are multiplied only by
constants, not by functions of the independent variable t. The equation is linear because the
unknown function P(t ) and its derivatives appear only to the first power. The equation is

91
also homogeneous because the function P (t ) which is identically 0 for all t satisfies the
equation.

A solution of an ordinary differential equation is a function which satisfies the equation at all
points in the domain of the function.

Exercise 1: Show that the function P (t ) = e kt solves the differential equation above. (Note
that the domain of the function e kt is all real numbers t).

d kt
Solution: Here just substitute and check for equality. Since e = ke kt the function e kt is a
dt
solution.

The previous exercise points to a two step method for solving homogeneous first order linear
ordinary differential equations with constant coefficients.

(1) Try a solution of the form e mt and find the value of m that makes this function a solution.
(2) The general solution is then of the form Ce mt where C is an arbitrary constant.

This procedure shows that the solution of a homogeneous first order linear ordinary
differential equation with constant coefficients is an exponential function.

d
Example 2: In order to solve the equation A(t ) = 5 A(t ) try a solution of the form e mt .
dt
Substituting this trial solution into the equation leads to me mt = 5e mt , and this equation holds
for all t only if m = 5. The general solution of the equation is A(t ) = Ce 5t .

Example 3: In the bacteria problem suppose the initial population is 100 and the growth rate
is 5%. Then P (t ) = Ce 0.05t is the general solution to the differential equation. Since the
initial population is 100, P(0) = 100. Using this fact and the general solution shows that
C = 100. Hence P(t ) = 100e 0.05t .

92
In the case of the previous example the given information P(0) = 100 is called an initial
condition, for obvious reasons. The initial condition is used to find the appropriate value of
the arbitrary constant that appears in the general solution of the differential equation.

5.6.2. First-Order Differential Equations

First order differential equations can always be solved (in principle) by the separation of
variables technique (the equation in example 1 can also be solved using this method):

(1) Isolate the derivative of the unknown function on one side of the equation.
(2) Divide by the quantity on the other side of the equation.
(3) Integrate both sides of the resulting equation making use of the Fundamental
Theorem of Calculus and the initial condition.

d
Example 4: To illustrate the method the equation v(t ) = v(t ) − 1 with initial condition
dt
v(0) = 0 will be solved. Dividing both sides by v(t) − 1 gives

(22)

and both sides can now be integrated with respect to t. Since the initial condition is specified
at time t = 0, the integration is from t = 0 to an arbitrary point t = s. This gives

(23)

After integration, using the fact that v(0) = 0, this becomes ln |v(s) − 1| = s or |v(s) − 1| = e s .
Since v(0) = 0, v(s) − 1 is at least initially negative, so removing the absolute values finally
gives v(s) = 1 − e s for s 0 as the solution.

The success of the separation of variables technique depends on the ability to integrate the
resulting expression. This can at times be difficult or even impossible, so we may need to
employ computational techniques.

93
5.6.3. Second-Order Differential Equations
The general method of solving a homogeneous second order linear equation with constant
coefficients is presented.

Example 5: A spring has one end attached to a vertical wall and the other end attached to a 1
kilogram mass. The mass lies on a horizontal surface and x(t) denotes the displacement from
equilibrium at time t. At time 0, the displacement is 1 unit and the mass is released.
According to Hooke’s Law, the force on the mass exerted by the spring is proportional to the
displacement from equilibrium. The proportionality constant is called the spring constant
which measures the stiffness of the spring.

Assume the spring constant is 3. Assume the frictional force is zero and the air resistance is
equal in magnitude to four times the velocity. Using Newton’s Law then gives the equation

(24)

as the equation of motion for t > 0.

The equation derived in the example is a second order linear homogeneous equation with
constant coefficients. In order to solve the equation the technique used earlier in the first
order case is adapted, as follows. Try a solution of the form x(t ) = e mt , where m is to be
determined. Plugging this trial solution into the equation gives

(25)

and this equation will hold for all t > 0 only if m 2 = −4m − 3. The equation m must satisfy,
here m 2 + 4m + 3 = 0, is called the characteristic equation. The values of m that satisfy the
characteristic equation in this case are m = −3 and m = −1. The corresponding trial solutions
are e −3t and e − t The superposition principle then states that the general solution is
x(t) = C1e −3t + C 2 e − t . Here C1 and C 2 are two arbitrary constants which are determined
from the initial conditions.

94
Exercise 2: Verify that C1e −3t + C 2 e − t and solves the equation no matter what values C1 and
C 2 have.

Solution 2: In this case the initial displacement is 1 and the initial velocity may be assumed
d
to be 0. This means that x(0) = 1 and x(t ) = 0. Using these conditions and the general
dt t =0
form of the solution gives

C1 + C 2 = 1
− 3C1 − C 2 = 0

1 − 3t 3 −t
from which C1 = −1/2 and C 2 = 3/ 2. Hence x(t) = − e + e is the displacement at
2 2
time t.

The method for solving second order linear homogeneous equations with constant
coefficients is therefore as follows.

(1) Try a solution of the form e mt . This produces the characteristic equation (a
quadratic equation) to be solved for m.

(2) Solve the characteristic equation.

(3) The general solution of the differential equation is obtained from the roots
of the characteristic equation as follows.

The alternate form in the conjugate complex roots case is referred to as the
phase-amplitude form. This form is useful in certain cases.

95
5.7. Introduction to Partial Differential Equations
A partial differential equation is an equation which contains partial derivatives, such as the
equation
∂u ∂ 2 u
= 2 (26)
∂t ∂x
in which u is regarded as a function of x and t .Unlike the theory of ordinary differential
equations (which centers upon one key theorem, the fundamental existence and uniqueness
theorem), there is no real unified theory of partial differential equations. Instead, each type of
partial differential equations exhibits its own special idiosyncracies, which usually mirror the
physical phenomena which it was first designed to model.

Many of the foundational theories of physics and engineering are expressed by means of
systems of partial differential equations. The reader may have heard some of these equations
mentioned in physics. Fluid mechanics is often formulated by the Euler equations of motion,
electricity and magnetism by Maxwell equations, etc. It is therefore important to develop
techniques that can be used to solve a wide variety of partial differential equations.

We will give one important simple example of partial differential equations, the heat
equation, which governs propagation of heat in a bar of length L .We imagine that the bar is
located along the x -axis and we let

u ( x, t ) = temperature at point x at time t

Heat in a small segment of the bar is proportional to temperature, the constant of

proportionality being determined by the density and specific heat of the material making up
the bar. If σ(x )denotes the specific heat at the point x and ρ(x ) is the density of the bar at x
,then the heat within the region D x 1 , x 2 between x1 and x2 is given by the formula
x2

Heat within D x1 , x2 = ∫ ρ ( x)σ ( x)u ( x, t )dx (27)

x1

96
Assuming that no heat is being created or destroyed in D x 1 , x 2 , the rate at which heat leaves

D x 1 , x 2 is:

d ⎡2 ⎤ d ⎡2 ∂u ⎤
x x

− ⎢∫ ρ ( x )σ ( x )u ( x , t ) dx ⎥ = − ⎢ ∫ ρ ( x)σ ( x) ( x, t )dx ⎥ (28)

dt ⎣⎢ x1 ⎦⎥ dt ⎢⎣ x1 ∂t ⎦⎥
On the other hand, the rate of heat flow F ( x, t ) is proportional to the partial derivative of
temperature,

∂u
F ( x, t ) = − κ ( x ) ( x, t ) (29)
∂x

where κ (x) is the thermal conductivity of the bar at x . Thus we find that the rate at which
heat leaves the region D x 1 , x 2 is also given by the formula

∂F
x2

F ( x 2 , t ) − F ( x1 , t ) = ∫ ∂x ( x, t )dx
x1
(30)

Comparing the two formulae (28) and (30) we find that

∂F ∂u
x2 x2

∫x ∂x ( x, t )dx = − ∫ ρ ( x)σ ( x) ∂t ( x, t )dx

x1
(31)
1

This equation is true for all choices of x1 and x 2 , so the integrands on the two sides must be
equal:
∂F ∂u
= − ρ ( x) σ ( x) (32)
∂x ∂t

It follows from (29) that

∂ ⎛ ∂u ⎞ ∂u
⎜ − κ ( x) ⎟ = − ρ ( x) σ ( x) (33)
∂x ⎝ ∂x ⎠ ∂t

In this way we obtain the heat equation

∂u ∂⎛ ∂u ⎞
ρ ( x) σ ( x) = ⎜ κ ( x) ⎟ (34)
∂t ∂x ⎝ ∂x ⎠
In the special case where the bar is homogeneous, i.e. its properties are the same at every
point, ρ ( x), σ ( x), κ ( x) are constants, say σ and κ respectively, (33) becomes

97
 ∂u κ ∂ 2u
= (35)
∂t ρσ ∂x 2

This is our simplest example of a linear partial differential equation. Although its most basic
application concerns diffusion of heat, it arises in many other contexts as well. For example, a
slight modification of the heat equation was used by Black and Scholes to price derivatives in
financial markets.

98
References
1- "Fundamental Methods of Mathematical Economics", Chiang, Alpha. C.
2- "Calculus", Stewart, James, 2003. Thomson,
3- "Elementary Linear Algebra", Anton, Howard. John Wiley and Sons.
4- "Partial Differential Equations for Scientist and Engineers", Farlow, S. J. John Wiley and
Sons.
5- "Econometric Analysis" Greene, William, Prentice Hall.

99
 Section II

Further Advanced Mathematics:

Integration and Measure Theory
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