CHAPTER THREE

ELEMENTS OF CALCULUS IN ECONOMICS

1.1 Learning Objective

Use principles of calculus in solving economics problems.

1.2 Specific Leaning Outcomes

At the end of this topic the learners should be able to:
i) Use differentiation skills in solving economics problems.
ii) Use integration skills in solving economics problems.
iii) Apply calculus techniques in maximizing and minimizing functions in economics.
iv) Use calculus techniques in solving marginal cost, marginal revenue and marginal profit
problems.

1.3 Chapter Introduction

Calculus is a branch of mathematics that focuses on the study of rates of change and accumulation
of quantities. It provides a framework for understanding and analyzing how things change, and it
consists of two main branches namely; differentiation and integration. In calculus, differentiation
is a method of finding the derivative of a function. It is a process, in Mathematics, where we find
the instantaneous rate of change in function based on one of its variables.

Most applications of calculus to some life problems involve the determination of specific
relationships between measured quantities. Frequently, the obvious relations involve rates of
change of the quantities of interest, and not the quantities themselves. In mathematical terms, we
often can determine equations involving the derivatives of functions instead of the functions
themselves. We then need to use an inverse operation on the derivative to determine the desired
function. This operation is called integration and its field of mathematical study is called integral
calculus.

1.4 Differential Calculus

Differential Calculus is a field of mathematics which deals with the study of how functions change
when their inputs change. The rate of change of a function with respect to a chosen input value is
called derivative. The process of taking the derivative of a function is called differentiation. In
business differential calculus deals with the study of
a) Derivatives (rate of change of one quantity with respect to another)
b) Marginal concepts in economy
c) Curve sketching and finding Maximum and minimum values of functions.

1.4.1 The gradient of a curve

The gradient of the sloping straight line shown in the figure is defined as:

the vertical distance the line rises or falls between two points P and Q
=
the horizontal distance between

where, P is a point to the left of point Q on the straight line AB which slopes upwards from left to
right. The changes in the x- and y-values of the points P and Q are denoted by dx and dy
respectively. So the gradient of this line is given as:
dy
Gradient(m ) 
dx
We could have chosen any pair of points on the straight line for P and Q and would have worked
out to the same value because the gradient of a straight line is constant throughout its length.

Figure 3.1: Gradient of a straight line

Algebraic determination of the gradient of a curve

the gradient of a curve varies along its length, as anyone who climbs a hill experiences. Because
of this the gradient of a curve is not defined between two points as in the case of a straight line but
at a single point. The gradient of a curve at a given point is defined to be the gradient of the straight
line that touches the curve at that point, that is, the gradient of the tangent.
Mathematically, the gradient of the curve at a point P is equal to the gradient of the tangent to the
curve at P.
Consider the curve y  2 x 2  5 displayed in figure 3.2.2

Figure 3.2: Gradient of a curve at a point

Let P be a fixed point (x, y) on the curve y  2 x 2  5 , and Q be a neighbouring point, with

coordinates x  δx, y δy .

Figure 3.3: A tangent to the curve at a point

Notice that we use x and y to denote the respective differences in the x- and y-values of points
P and Q on the curve. We reserve the notation dx and dy for the differences in the x- and y-values
of two points on a straight line and particularly for a tangent. The quantities dx and dy are called
differentials.
At Q: y δy  2x  δx   5
2


 2 x 2  2 xδδ  δx   5
2

 2 x 2  4 xδδ  2δx   5
2

Subtracting y from both sides:

 
y δy y  2 x 2  4 xδδ  2δx   5  2 x 2  5
2

Therefore, δy  4 xδδ  2δx 
2

y is the vertical distance between point P and point Q and this has now been given in terms of x
and x where x is the horizontal distance between point P and point Q.
Now, if we divide both sides by y
δy
 4 x  2 δx
δx
This expression, giving the change in vertical distance per unit change in horizontal distance, is
the gradient of the straight line through P and Q.
If the line through P and Q now rotates clockwise about P, the point Q moves down the curve and
approaches P. Also, both δx and δy approach 0 ( δx  0 and δy  0 ). However, their ratio,
which is the gradient of PQ, approaches the gradient of the tangent at P:
δy dy
 the gradient of the tangent at P 
δx dx
As δx  0
δy
 4 x  2(0)  4 x
δx
Therefore,
dy
 4x
dx
We could have obtained this expression directly from the formula;
dy lim f(x  δx)  f(x)

dx δx  0 δx
Thus

dy

  
lim 2x  δx 2  5  2 x 2  5 
dx δx  0 δx

dy

   
lim 2 x 2  2 xδδ  (δδx2  5  2 x 2  5 
dx δx  0 δx

dy lim 2 x 2  4 xδδ  2(δ(δ 2  5  2 x 2  5


dx δx  0 δx
 dy lim 4 xδδ  2(δ(δ 2 ))

dx δx  0 δx
dy lim
 4 x  2 δx
dx δx  0
dy
Hence  4 x because, δx  0 4 x  2(0)  4 x
dx
dy
The expression is called the derivative or differential coefficient of y with respect to x
dx
because it is derived from the expression for y.

Symbols for Derivatives

If y  f(x), then the derivative of y with respect to x is denoted by using any of the following
dy d
symbols: y' , f' (x), , f(x), D y or Df(x)
dx dx

In general;
Suppose we want to find the gradient of the curve of y  f(x) at a general point x, f(x)  . We choose

another point close by x  h, f(x  h)  where h is small. Hence, the gradient of the curve is given
by
f(x  h)  f(x)
Gradient 
(x  h)  x
By taking h to be as small as possible, i.e. the limit as h tends to 0, the gradient of the curve will
be the same as the gradient of the tangent. This is written as
lim f(x  h)  f(x)
f' (x) 
h0 h
This is known as Differentiation from First Principles.

1.4.2 The General Rule of differentiation

From differentiation by first principles as explained in the previous section, a general rule for
differentiating y  ax emerges, where a and n are constants. The rule is
n

dy
if y  ax n then  anx n 1
dx
Example 3.1
Find the derivative of each of the following:

a) y  12x 3
12
y
b) x3

c) y  6x

d) y  6
Solution
a) y  12x 3
dy
 3(12) x 31
dx
dy
 36 x 2
dx

12
b) y  3
 12 x 3
x
dy  36
 4
dx x

c) y  6 x
dy
6
dx

d) y  6

y  6 x0

dy
0
dx

1.4.3 Rules of Differentiation

Determining the derivative of a function from first principles requires a long calculation and it is
easy to make mistakes. However, we can use this method of finding the derivative from first
principles to obtain rules which make finding the derivative of a function much simpler. In this
section we discuss some rules or derivative formulae used for differentiation of functions.
i) The derivative of Constant function
If f is a function such that f(x)  c , then
d
f(x)   0
dx
That is, the derivative of a constant is zero

Example 3.2
Find the derivative of the following constant functions.
a) f(x)  5 b) f(x)  100
Solution
d d
a) (5)  0 b) (100)  0
dx dx

ii) The derivative of x to a power

If “f” is a function such that f(x)  x n , then
d
f(x)   nx n 1 but n  0 .
dx
The derivative of x to a power n is the exponent times x to the next lower power

Example 3.3
Find the derivatives of the following functions.
1 1
a) y  x 5 b) y  c) y 
x5 x
Solution
dy
Using  f' (x)  nx n 1
dx

a)
dy d x 5

 
 5 x4
dx dx

b) 
1
dy d x 5

 
d x 5   5
 5 x 6  6
dx dx dx x
   12 

d 1  d x 
   3
1
c)
dy
  x     1 2
 x 
dx dx dx 2 2 x3
iii) Derivative of sum or difference
If f is a function such that f(x)  h(x)  g(x) , then

f' x   h' (x)  g' (x)

The derivative of the sum is the sum derivative.

Example 3.4
Find the derivative of the functions:
a) f(x)  4 x 5  3 x 2
1
b) y  x 3   5x
x5
Solution
dy
a)  20 x 4  6 x
dx
dy 5
b)  3x2  6  5
dx x

iv) Derivative of a Product

If f is a function such that f(x)  h(x)  g(x) , then
f' (x)  h' (x) g(x)  g' (x) h(x)
Therefore, the derivative of the product is the first factor times the derivative of the second
plus the second factor times the derivative of the first.
Example 3.5
Differentiate the functions:

  
a) f(x)  4 x 5 3 x 2  1
b) y  x 3  1  5 
x 
Solution
Using the product rule f' (x)  h' (x) g(x)  g' (x) h(x)

  
a) f(x)  4 x 5 3 x 2
 dy
dx
  
 20 x 4 3 x 2  6 x  4 x 5  

 1
b) y  x 3  1  5  
x 
dy 5
 2 x 3  6
dx x

v) Derivative of quotient
h(x)
If f is a function such that f(x)  , then
g(x)
g(x) h' (x)  h(x) g' (x)
f' (x) 
g(x) 2
The derivative of a quotient is the denominator times the derivative of the numerator minus
vi) the numerator times the derivative of the denominator, all divided by the denominator

squared.
Example 3.6
Differentiate the functions:
2 x3  5
a) f(x) 
x2
x 1
b) y 
x  4x  1
5

Solution
2 x3  5
a) From f(x) 
x2
  
dy x 2 6 x 2  2 x 3  5 2 x 


dx x2
2
 
10
 2 3
x
x 1
b) From y 
x  4x  1
5
 dy x 5  4 x  1(1)  x  15 x 4  4 

dx x 5  4 x  12
 4 x5  5 x4  3

x 5
 4 x  1
2

vii) Chain Rule

Chain rule is used to find the derivative of composite functions (function of function). If “f”
is a function such that f(x)  f g(x)  , then
dy dy dg
 
dx dg dx

Example 3.7
Differentiate the following:
a) y  4  3x 
5

b) y  3x 2  4 x  7

Solution
a) From, y  4  3x 
5

Let g  4  3x then y  g 
5

dg dy
 3 and  5 g4
dx dg
Using the chain rule
dy dy dg
 
dx dg dx

 3(5 g 4 )

dy
 15(4  3 x) 4
dx

b) y  3x 2  4 x  1  3x 2  4 x  12
1
 1
Let u  3 x 2  4 x  1 then y  u 2
1
du dy 1 2 1
then  6 x  4 and  u 
dx du 2 2 u
Using the chain rule,
dy dy du
 
dx du dx
 1 
 6 x  4 
2 u 
3 x 2

u
dy 3 x 2
Therefore, 
dx 3 x 2
 4 x 1 
viii) Derivative of Parametric Functions
If y  f(t) and x  f(t) where t is a parameter, such equations are parametric equations, and
the derivative of y with respect to x is given by
dy  dy  dt 
   
dx  dt  dx 

Example 3.8

Given x  t  1 and y  t 2  1 , find

2 dy
.
dx
Solution
From, x  t  1 ,
2

dx
 2(t  1)
dt
y  t 2  1,
dy
 2t
dt
dy  dy  dt 
but   
dx  dt  dx 
 dy  1  t
 (2 t)  
dx  2(t  1)  t  1

ix) Derivative of Exponential Function

dy
For exponential function y  e x , then  ex
dx
If y  a x , then lny  xlna
dy
 ylna  a x lna
dx

Example 3.9

Find the derivative of y  e 2 x

3

Solution
Let y  e u and u  2 x 3
dy du
 eu
dx dx
dy
 6 x 2e 2 x
3

dx

x) Derivative of Logarithm of function

If y  lnx , then
dy 1

dx x
More generally, it may be shown that:
d
lnf(x)   f' x 
dy f x 

Example 3.10
Find the derivative of each of the following functions:

a) y  ln x 2  4 x  3 
b) y  ln2 x  5
3
 Solution

Using the rule,

d
lnf(x)   f' x 
dy f x 

dy 2 x 4
a)  2
dx x  4 x  3

dy 3(2)(2 x  5) 2 6
b)  
dx (2 x  5) 3
2 x 5

xi) Differentiation of Implicit Functions

When an equation can be written in the form y  f x  , it is said to be an explicit function of

x. Examples of explicit functions include; y  2 x 3  3 x  4 and y  2 x ln x . In these examples

y may be differentiated with respect to x by using standard derivatives and the rules of
differentiation we have discussed. Sometimes with equations involving, say, y and x, it is
impossible to make y the subject of the formula.
The equation is then called an implicit function and examples of such functions include
y 3  2 x 2  y 2  x and 2 y 2  5 x 4  2  7 y 3  0 .

It is possible to differentiate an implicit function by using the function of a function (chain)

rule, which maybe stated as
du du dy
 
dx dy dx
For example, to differentiate y3 with respect to x;
du
We let u  y 3 which gives  3 y2
dy
du du dy
Use  
dx dy dx
du
dx
 
 3 y2 
dy
dx

Therefore,
 
d y3
 3 y2
dy
.
dx dx
A simple rule for differentiating an implicit function is summarized as:
 d
f(y)  d f(y) dy
dx dy dx

Example 3.11
Differentiate each of the following functions with respect to x:
a) f(x)  2 x 3 y 2

b) 2 y 2  5 x 4  2  7 y3  0
Solution

Using the rule

d
f(y)  d f(y) dy and the product rule;
dx dy dx

dy d(2x 3 ) d(y 2 )
a) f' (x)   y2  2x 3
dx dx dx
dy dy
 6x 2 y 2  4x 3 y
dx dx

b)
 
   

d 2 y 2 d 5 x 4 d2  d 7 y 3

d0  
dx dx dx dx dx

dy dy
4y  20 x 3  0  21 y 2 0
dx dx

dy dy
4y  21 y 2  20 x 3
dx dx

4 y 21 y  dx
dy
2
 20 x 3

dy 20 x 3


dx 4 y 21 y 2 
1.4.4 Successive Differentiation
dy
When a function y  f(x) is differentiated with respect to x the derivative is written as or f' (x)
dx
d2y
. If the expression is differentiated again, the second derivative is obtained and is written as
dx 2
(“pronounced dee two y by dee x squared”) or f' ' (x) (“pronounced f double-dash x”).
 d3y d4y
By successive differentiation further higher derivatives such as and may be obtained.
dx 3 dx 4
Thus if y  3 x 4
dy
 12 x 3
dx
d2y
2
 36 x 2
dx
d3y
 72 x
dx 3
d5 y
 0.
dx 5

Example 3.12
If f(x)  2 x 5  4 x 3  3 x  5 , find f' ' (x) .
Solution
From f(x)  2 x 5  4 x 3  3 x  5

f' (x)  10 x 4  12 x 2  3

1.4.5 Minimum and Maximum Values

In Fig. 3.4, the gradient (or rate of change) of the curve changes from positive between O and P to
negative between P and Q, and then positive again between Q and R. At point P, the gradient is
zero and, as x increases, the gradient of the curve changes from positive just before P to negative
just after. Such a point is called a maximum point and appears as the ‘crest of a wave’. At point Q,
the gradient is also zero and, as x increases, the gradient of the curve changes from negative just
before Q to positive just after. Such a point is called a minimum point, and appears as the ‘bottom
of a valley’. Points such as P and Q are given the general name of turning points.
 Fig. 3.4: The gradient of a curve at a point
It is possible to have a turning point, the gradient on either side of which is the same. Such a
point is given the special name of a point of inflexion, and examples are shown in Fig. 3.6.

Fig. 3.6: Stationary points in curves

Procedure for finding and distinguishing between stationary points

i) Given, y  f x  , determine
dy
.
dx
dy
ii) Let  0 and solve for the values of x.
dx
iii) Substitute the values of x into the original equation, y  f x  , to find the corresponding y-
ordinate values. This establishes the co-ordinates of the stationary points.
iv) To determine the nature of the stationary points, do either of the following:
d2y
a) Find and substitute into it the values of x found in (ii). If the result is:
dx 2
 Positive, the point is a minimum one
  Negative, the point is a maximum one
 Zero, the point is a point of inflexion.
b) Determine the sign of the gradient of the curve just before and just after the stationary
points. If the sign change for the gradient of the curve is:
 positive to negative, the point is a maximum one;
 negative to positive, the point is a minimum one;
 positive to positive or negative to negative, the point is a point of inflexion.

Example 3.13
Locate the turning point on the curve y  3 x 2  6 x and determine its nature by examining the
sign of the gradient on either side.
Solution
Following the above procedure:
dy
i. Since y  3 x 2  6 x ,  6x  6 .
dx
dy
ii. At a turning point,  0 . Hence 6 x  6  0 , from which, x  1 .
dx
iii. When x  1 , y  3(1) 2  61  3 .
Hence the co-ordinates of the turning point are (1, −3).
iv. Then, we determine the sign of the gradient of the curve just before and just after the
stationary point:
 If x is slightly less than 1, say, 0.9, then

dy
 6(0.9)  6  0.6 , that is, negative.
dx
 If x is slightly greater than 1, say, 1.1, then

dy
 6(1.1)  6  0.6 , that is, positive.
dx
Since the gradient of the curve is negative just before the turning point and positive just after (i.e.
−∨+), (1, −3) is a minimum point.

Example 3.14
Find the maximum and minimum values of the curve y  x 3  3 x  5 by determining the sign of
the second derivative.
Solution
dy
Since y  x 3  3 x  5 then  3x 2  3
dx
dy
For a maximum or minimum value 0.
dx
Hence 3x 2  3  0 , from which, 3x 2  3 and x  1
When x  1, y  (1)3  3(1)  5  3

When x  1, y  (1)3  3(1)  5  7

Hence (1, 3) and (−1, 7) are the co-ordinates of the turning points.

dy d2y
Since  3x 2  3 , then  6x
dx dx 2
d2y
When x =1,  6(1)  6 is positive, hence (1, 3) is a minimum point.
dx 2
d2y
When x = −1,  6(1)  6 is negative, hence (−1, 7) is a maximum point.
dx 2
Thus the maximum value is 7 and the minimum value is 3.
Note: It can be seen that the second differential method of determining the nature of the turning
points is, in this case, quicker than investigating the gradient.

1.5 Integral Calculus

1.5.1 The process of integration

The process of integration reverses the process of differentiation. In differentiation, if f x   2 x 2

then f' x   4 x . Thus the integral of 4 x is 2x2, i.e. integration is the process of moving from f' x 

to f (x). By similar reasoning, the integral of 2t is t2. Integration is a process of summation or

adding parts together and an elongated S, shown as  , is used to replace the words ‘the integral

of’. Hence, from above,  4 x  2 x 2 and  2t  t 2 .

 dy
In differentiation, the derivative indicates that a function of x is being differentiated with
dx
respect to x, the dx indicating that it is ‘with respect to x’. In integration the variable of integration
is shown by adding d (the variable) after the function to be integrated.
Thus  4 xdx means ‘the integral of 4x with respect to x’ and  2tdt means ‘the integral of 2t with

respect to t’.
As stated above, the derivative of 2x2 is 4x, hence  4 x dx  2 x 2 . However, thederivative of 2x2+7

 4 x dx is also equal to 2x +7. To allow for the possible presence of a constant,

2
is also 4x. Hence

whenever the process of integration is performed, a constant ‘c’ is added to the result.
Thus  4 x dx  2 x 2  C and  2 t dt  t 2  C , where C is called the arbitrary constant of integration.

1.5.2 The general solution of integrals of the form axn

The general solution of integrals of the form  ax n dx , where a and n are constants is given by:

ax n 1
 ax dx  C
n

n 1
This rule is true when n is fractional, zero, or a positive or negative integer, with the exception of
n  1. For example:

3x
4
a) dx

3 x 41
 3 x dx  C
4

4 1
3
3x dx  x 5  C
4

2
b) x 2
dx

2
x 2
dx   2 x 2 dx

2 x 21
 C
 2 1
 2 x 1
 c
1
2 2
x 2
dx 
x
C

c)  x dx
1

 x dx   x 2 dx
3
x2
 3
C
2

2 3
 x dx 
3
x C

1.5.3 Standard integrals

Since integration is the reverse process of differentiation, the standard integrals listed below
may be deduced and readily checked by differentiation.

List of standard integrals

x n 1
a)  x dx   C , provided n  1
n

n 1
1
b)  x dx  lnx  C
e dx  e x  C
x
c)

1
e dx  eax  C
ax
d)
a
ax
e)  a dx  C
x

lna

1.5.4 Properties of integrals

i) Integral of zero
If “f” is a function such that f x   0 , then
  0 dx  C
That is, the integral of zero is a constant.

ii) Integral of a constant

If “f” is a function such that f x   k , then

 k dx  kx  C
Example [Link]
Evaluate the following integrals:

a)  2dx
b)  ydx
Solution

a)  2dx  2 x  C

b)  ydx  yx  C
iii) Integral of coefficient of the function
If y is a function such that y  Kf(x) , then

 Kf(x) dx  K  f(x) dx
Example 3.15
Evaluate the following functions

a)  4 x dx
3

b)  px 4
dx

Solution

4x dx  4 x 3 dx  x 4  C
3
a)
3 3 7
4
b)  px dx  p  x dx  px 4  C
4 4
7

iv) Integral of sum and difference

If f is a function such that f x   h(x)  g(x) , then

 h(x)  g(x)  dx   h(x) dx   g(x) dx

When a sum of several terms is integrated the result is the sum of the integrals of the separate
terms.

Example 3.16
Evaluate the following integrals:


a)  x 5  2 x dx   3 x 
 2 x 2  3 x dx
3
b)

Solution

 x 
 2 x dx   x 5dx   2 xdx
5
a)

 x  1 6
5
 2 x dx  x  x2  C
6

 3 x 
 2 x 2  3 x dx   3 x 3   2 x 2 dx   3 xdx
3
b)

 3x  3 4 2 3 3 2
3
 2 x 2  3x dx  x  x  x C
4 3 2

1.5.5 Definite Integrals

Integrals containing an arbitrary constant C in their results are called indefinite integrals since their
precise value cannot be determined without further information. Definite integrals are those in

which limits are applied. If an expression is written as x a , called the upper limit and ‘a’ the lower
b

limit.
The operation of applying the limits is defined as

xab  (b)  (a)

For example, the increase in the value of the integral of x2 as x increases from 1 to 3 is written as
3

 x dx
2

Applying the limits gives:

3
3
 x3 
1  
2
x dx  C 
3 1
  33   13 
   C     C 
3  3 

1 
 9  C     C 
3 

3
2
 x dx  8 3
2

Note that the constant C always cancels out when limits are applied and it need not be shown
with definite integrals.

Example 3.17
Evaluate the following integrals:

 4  x dx
2 3
a)  3 x dx b) 2

1 2

Solution
2

a)  3 x dx   3 x 
2 2

1  2 1

3 2 
  2  
2 
2
1
 3 x dx  4 2
1

3
 x3 
 
3

b)  4  x dx  4 x  
2

2  3  2

 (3) 3 
 4(3)  
 3 

 4  x dx  8 3
3
2 1
2

1.5.6 Definite Integral as Area under the Graph of a Function

The definite integral can be introduced as a tool for calculation of the area of a given region. If the
region is bounded by the graph of a continuous function (𝑥) on the interval [𝑎, 𝑏], two vertical
lines 𝑥 = 𝑎 and 𝑥 = 𝑏, and 𝑥-axis, we can calculate the area A under the graph of the given function
by using the formula;
b
A   f x  dx
a

Example 3.18
Find the area bounded by the curve y = x2 + x + 4, the x-axis and the ordinates x = 1 and x = 3.
Solution
It is helpful to draw a sketch of the curve for the required range of x-values, in order to see how
many separate calculations will be needed.

Figure 3.7: Area under curve

The curve y = x2 − 4, showing the portion under the curve from x = −1 to x = 2.
The required area A is entirely above the x-axis and so we can simply evaluate the integral
between the required limits:
3
Area   y dx
1

 
3
  x 2  x  4 dx
1
3
 x3 x 2 
    4 x
3 2 1
 27 9  1 1 
    12     4
3 2  3 2 
1 5
 25  4
2 6
2
 20
3
2
Therefore, the area under the curve is 20 units of area.
3
1.6 Application of Calculus in Economics
In Economics, we come across many such variables where one variable is a function of the other.
For example, the quantity demanded can be said to be a function of price. Supply and price or cost
and quantity demanded are some other such variables. Calculus helps us in finding the rate at
which one such quantity changes with respect to the other. Marginal analysis in Economics is the
most direct application of differential calculus.

In this context, differential calculus also helps in solving problems of finding maximum profit or
minimum cost, etc., while integral calculus is used to find the cost function when the marginal cost
is given and to find total revenue when marginal revenue is given. Also, with integral calculus, it
is possible to find out consumer’s surplus and producer’s surplus from the demand and supply
function.

In this section, we shall study about the total, average or marginal functions and the optimisation
problems. The process of optimisation often requires us to determine the maximum or minimum
value of a function. Thus, an important optimisation problem facing a business manager is to
produce a level of output which maximises firm’s profits. Similarly, optimum use of resources
requires that cost be minimised for producing a given level of output.

1.7 Cost Functions

1.7.1 Total cost (C)
The total cost C of producing and marketing x units of a product depends upon the number of
units (x). So the function relating C and x is called Cost-function and is written as C = C (x).
The total cost of producing x units of the product consists of two parts namely; Fixed Cost and
Variable Cost
Total cost = Fixed cost +Variable cost

Fixed Cost: The fixed cost consists of all types of costs which do not change with the level of
production. For example, the rent of the premises, the insurance, taxes, etc.
Variable Cost: The variable cost is the sum of all costs that are dependent on the level of
production. For example, the cost of material, labour cost, cost of packaging, etc.

Example:
Give a total cost production function cx   4 x 5  3 x 2  50,000 . Identify the
a) Fixed cost b) variable cost
Solution
a) The fixed cost  50,000 b) The variable cost  4 x  3x
5 2

1.7.2 Marginal cost (MC)

Let C = C(x) be the total cost of producing x units of a product, then the marginal cost (MC), is
defined to be the rate of change of C (x) with respect to x. Thus
d(C)
Marginal Cost, MC 
dx
Marginal cost is interpreted as the approximate cost of one additional unit of output.

1.7.3 Average cost (AC)

Let C = C(x) be the total cost of producing and selling x units of a product, then the average cost
(AC) is defined as
Total cost C
AC  
Quantity X
Thus, the average cost represents per unit cost.

1.7.4 Marginal average Cost (MAC)

The marginal average cost (MAC) is defined as
d(AC)
MAC 
dx
Example:
Give a total cost production function c(x)  4 x 5  3 x 2  50,000. Identify the
a) fixed cost
b) variable cost
c) marginal cost
d) average cost
e) Marginal average cost

Solution
From the cost function c x   4 x 5  3 x 2  50,000

a) fixed  50,000

b) variable  4 x  3x
5 2

d(C)
c) marginal cost, MC 
dx
MC  20 x 4  6 x
d) Average Cost
Totalcost C
AC  
Quantity X

4 x 5  3 x 2  50,000
AC 
x
50,000
AC  4 x 4  3 x 
x
e) Marginal Average Cost
d(AC)
MAC 
dx
d(AC) 50,000
 16 x 3  3 
dx x2

1.8 Revenue Functions

1.8.1 Total Revenue Functions (R)
If x is the number of units of certain product sold at a rate of p (dollars) per unit, then the amount
derived from the sale of x units of a product is the total revenue. Thus, if R represents the total
revenue from x units of the product at the rate of p (dollars) per unit then
The Revenue function, R(x) =Price (P) × Quantity(X).

1.8.2 Marginal Revenue Function (MR)

The marginal revenue (MR) is defined as the rate of change of total revenue with respect to the
quantity demanded. That is,
d(R)
Marginal revenue, MR 
dx
The marginal revenue is interpreted as the approximate revenue received from producing and
selling one additional unit of the product.
1.8.3 Average Revenue Function (AR)
If R is the revenue obtained by selling x units of the product at a price 'p' per unit, then the term
average revenue means the revenue per unit, and is written as AR.
R
AR 
x

But R  p x

px
Thus, AR  p
x
Therefore, average revenue is the same as price per unit.

1.8.4 Marginal Average Revenue Function (MAR)

The marginal average Revenue (MAR) is defined as

d(AR)
MAR 
dx

Example: Given the total revenue function

R x  
1 3
x  3 x 2  45,000
2
Find the
i) Marginal Revenue Function.
ii) Average Revenue Function.
iii) Price when MR = 0
Solution
i) Marginal Revenue Function (MR)
d(R) 3 2
MR   x 6x
dx 2
ii) Average Revenue Function(AR)
R 0.5 x 3  3 x 2  45,000
AR  
x x
45,000
AR  0.5 x 2  3 x 
x
iii) Price when MR = 0
 3 2
MR  x 6x  0
2
x = 0 or x = 4
Since AR = p
45,000
p  0.5 x 2  3 x 
x
at x = 4,
45,000
p  0.5(4) 2  3(4)   11246
4
Hence, the price when MR = 0 is 11,246.

1.9 Profit Function

The profit is calculated by subtracting the total cost from the total revenue obtained by selling x
units of a product. Thus, if π(x) is the profit function, then
π(x) = R(x) - C(x)
The aim of any firm is to maximize profit. This involves finding value of which makes
dπ
0
dx
Differentiating π = R – C
dπ d(R) d(C)
 
dx dx dx
dπ
At maximum profit  0.
dx
Therefore, MR MC  0 hence MR  MC

Example 3.19
The total cost and revenue function for a certain commodity are R  50 x  x 2 and
C  0.01 x 2  20 x  100 respectively.
a) Derive the total profit function.
b) Find the profit break-even point.
c) Calculate the level and amount of demand that maximize profit.

Solution
 a) The total profit function is;
π  R C
π  1.01 x 2  30 x  100
π  1.01 x 2  30 x  100
b) The break - even points are levels of demand which makes   0 .
π  1.01 x 2  30 x  100
x  26 or 4
The break-even point is when the demand is 4 or 26 units of the commodity.

dπ d2π
c) Profit is maximized when  0 and 0.
dx dx 2
Since π  1.01 x 2  30 x  100
Then
dπ
 2.02 x  30
dx
dπ
at  0  2.02x  30  0
dx
x  14.85  15

d2π
But 2  2.02  0 , showing that the profit is maximum at this point
dx
Therefore, at x  15 then, π  1.01(15) 2  30(15)  100  122.75
Hence the maximum profit of 122.75 is raised when the demand is 15 units.

Chapter Summary
1. Differentiation is the process of taking the derivative of a function. In differentiation, we study
how functions change when their inputs change. The rate of change of a function with respect
to a chosen input value is called derivative or differential coefficient.
2. To find the gradient of the curve of y  f(x) at a general point x, f(x)  . We choose another

point close by x  h, f ( x  h)  where h is small. Hence, the gradient of the curve is given by
lim f(x  h)  f(x)
f' (x) 
h0 h
 This is known as Differentiation from First Principles.
dy
3. The general rule of differentiationis: if y  ax n then  anx n 1 .
dx
4. Basic rules of differentiation include:
a) The constant rule: Constants differentiate to zero.
b) The sum rule: If hx   f x   g x  then h' x   f ' x   g ' x  .

c) The difference rule: If h x   f x   gx  then h' x   f' x   g' x  .

dy dv du
d) The product rule: If y  uv then u v .
dx dx dx

dy v dx  u dx
du dv
u
e) The quotient rule: If y  then  .
v dx v2
f) The chain rule: If y is a function of u, which is itself a function of x, then
dy dy du
 
dx du dx
5. Minimum and Maximum Values: The Concept of derivative can be used to find the maximum
and minimum value (extreme or stationary points) of a function. At stationary points, the first
derivative of the function is zero. The concept is very useful in economics when we want to
maximize profit or minimizing loses or costs.
6. Integration is a process of finding a function when its derivative is known. It is the process
reverse to that of differentiation and hence, it is also known as Anti derivative.
7. The general solution of integrals of the form  ax n dx , where a and n are constants is given by:

ax n 1
 ax dx   C provided n  1
n

n 1
Integrals containing an arbitrary constant C in their results are called indefinite integrals.
8. The integral which has definite value is called Definite Integral and it is given as
b

 g(x) dx  f(x)  f(b)  f(a)

b
a
a

where ‘b’ is called the upper limit and ‘a’ the lower limit.
The definite integral can represent the area under a curve (specifically, the area between a
curve and the horizontal axis).
Exercise 3.1
1. Differentiate the following
a) f (x) = x − 7x 5 + 2x 3 − x 2 − 8
1 1
b) y  x 3  x
4 x
c) f (t) = (3 − 2t 3 )2
d) y  3 x 2  5
1
e) y 
1 x2
f) y  10 x 2 (5  x) 7
x 1
g) y 
3x 2  2
2. Find the second derivatives of,
a) y  x 5
1
b) y   3x 2  500 x
x4
3. Find the maximum and minimum of the function given by
a) y  x 3  3x 2  9 x  9
b) y  2 x 3  3x 2  12 x  12
c) y  2 x 3  x 4

4. Integrate each of the following functions with respect to x:

a) 𝑓(𝑥) = 𝑥 9
b) 𝑓(𝑥) = 4𝑥 −3
1
c) 𝑦 = 𝑥 4

d) 𝑓(𝑥) = √𝑥

5. For a new product, a manufacturer spends TSH. 100,000 on the infrastructure and the variable
cost is estimated as TSH 150 per unit of the product. The sale price per unit was fixed at
TSH.200. Find
a) Cost function
b) average cost function
c) Revenue function
d) Profit function
e) The break-even point.
6. The demand function of a monopolist is given by p= 1500  2 x  x 2 find
a) The revenue function
b) The marginal revenue function
c) The MR when x=20
7. A television manufacturer produces x sets per week so the total cost of production is given by
relation C ( x )  x 3  195 x 2  66000 x  15000 find how many television sets must be
manufacturer per week to minimize the total cost.

8. The total revenue received from the sale of 𝑥 units of a product is given by 𝑅(𝑥) = 12𝑥 +
2𝑥 2 + 6. Find
a) the average revenue
b) the marginal revenue
c) marginal revenue at x = 50
9. The marginal cost function of manufacturing x units of a product is 5 + 16𝑥 − 3𝑥 2 . Find
the total cost function
10. The total profit function of selling x units of a product is given by the equation 𝜋(𝑥) =
100 + 12𝑥 − 𝑥 2 . Find the number of units to be sold so that the profit is maximum; and
hence find the maximum profit.
11. The marginal cost of production of a certain product is found to be MC  1000  x 2 , the
fixed cost of production is shs.9000/=.
a) Find the cost function
b) Manufacturer fixes the price of a certain product at shillings 3400/= per unity find
i) The revenue function.
ii) The profit function.
iii) The production level that gives maximum profit.
iv) The maximum profit.
12. The variable cost associated with a certain process is $0.65 per item. The fixed cost per day
have been calculated as $ 250 with special costs estimated to as 0.002 x 2 , where x is the size
of production run (i.e. number of items produced).
a) Derive the total cost function
b) Find cost per item function for a day production
c) Calculate the size of a daily run that minimize cost per item
 d) Find the cost of a daily production for a run that minimize cost per item
13. The revenue function is R ( x )  100 x  0.01x 2 , while the total cost function is
C ( x)  50 x  10000 . Determine how many units must be produced in order to maximize the
profit and the total profit for this level of production.