Topic 6: Differentiation

Jacques Text Book (edition 4 ):

Chapter 4
1.Rules of Differentiation
2.Applications

1
 Differentiation is all about measuring change!
Measuring change in a linear function:

y = a + bx
a = intercept
b = constant slope i.e. the impact of a unit
change in x on the level of y

b = y =
y2  y1
x x2  x1
2
 If the function is non-linear:
40
e.g. if y = x2
30
y=x2

20

10

0
0 1 2 3
X 4 5 6

y y 2  y1
x
= x2  x1
gives slope of the line
connecting 2 points (x1, y1) and (x2,y2) on a
curve
 (2,4) to (4,16): slope = (16-4)/(4-2) = 6
 (2,4) to (6,36): slope = (36-4)/(6-2) = 8 3
The slope of a curve is equal to the slope of
the line (or tangent) that touches the curve
at that point
Total Cost Curve

40

35

30

25
y=x2

20

15

10

0
1 2 3 4 5 6 7

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Example:A firms cost function is
Y = X2
X X Y Y
0 0
1 +1 1 +1
2 +1 4 +3
3 +1 9 +5
4 +1 16 +7
2
Y=X
Y+Y = (X+X) 2
Y+Y =X2+2X.X+X2
Y = X2+2X.X+X2 – Y
since Y = X2  Y = 2X.X+X2
Y
X
= 2X+X

The slope depends on X and X

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The slope of the graph of a function
is called the derivative of the
function

dy y
f ' ( x)   lim
dx x0 x
• The process of differentiation involves
letting the change in x become arbitrarily
small, i.e. letting  x  0
• e.g if = 2X+X and X 0
•  = 2X in the limit as X 0
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 the slope of the non-linear
function
Y = X2 is 2X
• the slope tells us the change in y that
results from a very small change in X
• We see the slope varies with X
e.g. the curve at X = 2 has a slope = 4
and the curve at X = 4 has a slope = 8
• In this example, the slope is steeper
at higher values of X 7
 Rules for Differentiation
(section 4.3)

1. The Constant Rule

If y = c where c is a constant,
dy
0
dx

dy
e.g. y = 10 then dx  0

8
2. The Linear Function Rule
If y = a + bx
dy
b
dx
dy
6
e.g. y = 10 + 6x then dx

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3. The Power Function Rule
If y = axn, where a and n are constants
dy
 n.a.x n1
dx

dy
i) y = 4x => dx  4 x 0
4

dy
ii) y = 4x 2
=> dx  8 x

dy 3
-2
iii) y = 4x => dx  8 x
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4. The Sum-Difference Rule
If y = f(x)  g(x)
dy d [ f ( x )] d [ g( x )]
 
dx dx dx

If y is the sum/difference of two or more

functions of x:
differentiate the 2 (or more) terms
separately, then add/subtract
dy
(i) y = 2x2 + 3x then  4x  3
dx
dy
(ii) y = 5x + 4 then dx  5 11
5. The Product Rule

If y = u.v where u and v are functions of x,

(u = f(x) and v = g(x) ) Then
dy dv du
 u v
dx dx dx

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 Examples

dy dv du
If y = u.v  u  v
dx dx dx

2
i) y = (x+2)(ax +bx)
dy
dx

  x  2 2 ax  b   ax 2  bx 
ii) y = (4x3-3x+2)(2x2+4x)
dy   4x3 3x  2 4x  4  2x2  4x 12x2 3
dx     
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6. The Quotient Rule
• If y = u/v where u and v are functions of x
(u = f(x) and v = g(x) ) Then

du dv
v u
dy dx dx
 2
dx v
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 du dv
v u
u dy dx dx
If y  then 
v dx v2

Example 1

y
 x  2
 x  4

dy

 x  4 1   x  2 1

2
dx  x  4 2
 x  42

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7. The Chain Rule
(Implicit Function Rule)

• If y is a function of v, and v is a function of

x, then y is a function of x and

dy dy dv
 .
dx dv dx

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 dy dy dv
 .
Examples dx dv dx
2 ½
i) y = (ax + bx)
let v = (ax2 + bx) , so y = v½
 
1
dy 1 
 ax  bx 2 .2ax  b 
2
dx 2

ii) y = (4x + 3x – 7 )
3 4

let v = (4x + 3x – 7 ), so y = v
3 4

dy
dx
 3 3

 4 4 x  3x  7 . 12 x  3
2

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 8. The Inverse Function Rule
dy 1

If x = f(y) then dx dx
dy
• Examples
i) x = 3y2 then
dx dy 1
dy
 6y so dx  6 y

ii) y = 4x3 then

dy dx 1
 12x 2 so dy  12 x 2
dx 18
 Differentiation in Economics
Application I

• Total Costs = TC = FC + VC
• Total Revenue = TR = P * Q
•  = Profit = TR – TC
• Break even:  = 0, or TR = TC
• Profit Maximisation: MR = MC

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Application I: Marginal Functions
(Revenue, Costs and Profit)
•
Calculating Marginal Functions

d TR 
MR 
dQ
d TC 
MC 
dQ
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 Example 1
• A firm faces the
Solution:
demand curve P=17-
3Q
TR = P.Q = 17Q – 3Q2
• (i) Find an
expression for TR in
terms of Q d TR 
MR   17  6Q
• (ii) Find an dQ
expression for MR in
terms of Q

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 Example 2
A firms total cost curve is given by

TC=Q3- 4Q2+12Q
(i) Find an expression for AC in terms of Q
(ii) Find an expression for MC in terms of Q
(iii) When does AC=MC?
(iv) When does the slope of AC=0?
(v) Plot MC and AC curves and comment on
the economic significance of their
relationship
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 Solution

(i) TC = Q3 – 4Q2 + 12Q

TC
Then, AC = / Q = Q – 4Q + 12
2

d TC 
(ii) MC = dQ  3Q  8Q  12
2

(iii) When does AC = MC?

Q2 – 4Q + 12 = 3Q2 – 8Q + 12
Q =2
Thus, AC = MC when Q = 2
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 Solution continued….

(iv) When does the slope of AC = 0?

d  AC 
 2Q  4 = 0
dQ
 Q = 2 when slope AC = 0
(v) Economic Significance?
MC cuts AC curve at minimum point…

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9. Differentiating Exponential Functions
x
If y = exp(x) = e where e = 2.71828….
dy
then dx  e
x

More generally,
rx
If y = Ae
dy
then dx  rAe  ry
rx

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 Examples

2x
dy 2x
1) y = e then dx = 2e

-7x
dy -7x
2) y = e then dx = -7e

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10. Differentiating Natural Logs
Recall if y = ex then x = loge y = ln y
dy
If y = e
x
then  ex = y
dx

From The Inverse Function Rule

dx 1
y = e  dy  y
x

Now, if y = ex this is equivalent to writing

x = ln y
dx 1
Thus, x = ln y  dy  y
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More generally,
dy 1
if y = ln x  dx  x

NOTE: the derivative of a natural log

function does not depend on the co-efficient
of x
Thus, if y = ln mx  dy 1

dx x
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 Proof

 if y = ln mx m>0
 Rules of Logs  y = ln m+ ln x
 Differentiating (Sum-Difference rule)
dy 1 1
0 
dx x x

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 Examples
dy 1
1) y = ln 5x (x>0)  
dx x
2
2) y = ln(x +2x+1)
2
let v = (x +2x+1) so y = ln v
dy dy dv
Chain Rule:  dx  dv . dx
dy 1
 2 .2 x  2
dx x  2 x  1
dy
 2
2 x  2
dx 
x  2x  1 
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3) y = x4lnx
Product Rule: 
dy 4 1
x  ln x.4 x3
dx x
= x 3
 4 x 3
ln x = x 3
1  4 ln x 
4) y = ln(x3(x+2)4)
Simplify first using rules of logs
 y = lnx3 + ln(x+2)4
 y = 3lnx + 4ln(x+2)
dy 3 4
 
dx x x  2
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 Applications II

• how does demand change with a change in

price……

• e d= proportional change in demand

proportional change in price

Q P Q P
= Q P = P . Q
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Point elasticity of demand

dQ P
.
ed = dP Q

ed is negative for a downward sloping demand

curve
–Inelastic demand if | ed |<1
–Unit elastic demand if | ed |=1
–Elastic demand if | ed |>1
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 Example 1
-b
Find ed of the function Q= aP
dQ P
ed = .
dP Q
b 1 P
ed =  baP . b
aP
 baP b P
= P . aP b  b
ed at all price levels is –b
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 Example 2
If the (inverse) Demand equation is
P = 200 – 40ln(Q+1)
Calculate the price elasticity of demand
when Q = 20
dQ P
 Price elasticity of demand: ed = .
dP Q
<0
 P is expressed in terms of Q,
dP 40

dQ Q 1
dQ Q 1
 Inverse rule  dP

40
Q 1 P
 Hence, ed =  . <0
40 Q
21 78.22
 Q is 20  ed =  40 . 20 = -2.05
(where P = 200 – 40ln(20+1) = 78.22) 35
Application III: Differentiation of Natural
Logs to find Proportional Changes
f’(x)
The derivative of log(f(x))  /f(x), or the
proportional change in the variable x

i.e. y = f(x), then the proportional  x

dy 1 d (ln y )
= dx . y = dx
Take logs and differentiate to find
proportional changes in variables
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 dy 1 
1) Show that if y = x , then dx . y  x


and this  derivative of ln(y) with respect to x.

Solution:
dy 1 1
.  .x  1
dx y y

1 x
= y . x

1 y
= y . . x


= x

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 Solution Continued…

Now ln y = ln x
Re-writing  ln y = lnx
d (ln y ) 1 
  . 
dx x x
Differentiating the ln y with respect to x gives
the proportional change in x.

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 Example 2: If Price level at time t is
P(t) = a+bt+ct2
Calculate the rate of inflation.
Solution: Alternatively,
The inflation rate at t is the proportional differentiating the log of P(t) wrt t directly
change in p 2
lnP(t) = ln(a+bt+ct )
1 dP( t ) b  2ct
.  where v = (a+bt+ct2) so lnP = ln v
P( t ) dt a  bt  ct 2
Using chain rule,
d ln P( t ) b  2ct

dt a  bt  ct 2

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