Mathematics 1 for Economics and Finance
Session 3
Yuanyuan Li
ESSEC BBA Program - Fall 2024
Rules of differentiation
Chain rule
Let us consider u = u(x), we have that:
derivative of y w.r.t. u
(y (u(x)))′x = yu′ · ux′
derivative of y (u(x)) w.r.t. x derivative of u w.r.t. x
(ESSEC BBA) NNGO 4 SMS 2 / 17
Exercise
If y = 2u 2 − 3u − 2, and u = x 2 + 4, find yx′ .
1
If y = w 2 and w = 7 − t 3 , find yt′ .
If y = (x 3 − 1)7 , find yx′ .a
a
Hint: introduce the following function: u(x) = x 3 − 1.
(ESSEC BBA) NNGO 4 SMS 3 / 17
Derivative of common functions
Derivative of logarithms
1
(ln x)′ =
x
Chain rule: (ln(u(x)))′x = 1 ′
u(x) ux
(ESSEC BBA) NNGO 4 SMS 4 / 17
Exercise
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Derivative of common functions
Derivative of exponential functions
(ex )′ = ex
Chain rule: (eu(x) )′x = eu(x) ux′
(ax )′ = ax · ln a
(ESSEC BBA) NNGO 4 SMS 6 / 17
Exercise
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Applications to Economics
Total Cost (TC) function: TC = f (Q)
Marginal Cost is defined as the change in total cost resulting from a
unit increase in output (i.e., the derivative of TC w.r.t. Q):
∆TC ∆TC dTC
MC ≈ → lim =
∆Q ∆Q→0 ∆Q dQ
TC
Average (Total) Cost: AC =
Q
(ESSEC BBA) NNGO 4 SMS 8 / 17
Exercise
1) A manufacturer’s average-cost equation is:
5000
AC = Q 2 − 2Q + 5 + .
Q
Find the marginal cost function and compute the marginal cost when
50 units are produced.
2) Consider the following cost function:
TC = Q 3 − 12Q 2 + 60Q .
Plot the AC and MC curve on the same graph.
Compute the rate of change of AC with respect to Q and describe
relationship between the AC and MC curves.
(ESSEC BBA) NNGO 4 SMS 9 / 17
Applications to Economics
Elasticity of demand
Let us consider the quantity as function of the price: Q = f (P).
Price elasticity of demand = The variation in demand in response to a
variation in price. In another words it measures the ratio of the relative
change of quantity ∆Q ∆P
Q to the relative change of price P :
∆Q/Q ∆Q P ∆P→0 dQ P P
ϵd = = · −→ ϵd = · = QP′ ·
∆P/P ∆P Q dP Q Q
(ESSEC BBA) NNGO 4 SMS 10 / 17
Elasticity of demand
Elastic demand ϵd < −1
The demand is strongly responsive to changes in price; that is, the
percentage change in demand is greater than the percentage change
in the price (∆Q/Q > ∆P/P).
Unit elastic demand ϵd = −1
The percentage change in demand is equal to the percentage change
in the price.
Nonelastic demand −1 < ϵd < 0
The demand is weakly responsive to changes in price; that is, the
percentage change in demand is less than the percentage change in
the price (∆Q/Q < ∆P/P).
Some exceptions: luxury good can be an example of positive elasticity.
(ESSEC BBA) NNGO 4 SMS 11 / 17
Exercise
(ESSEC BBA) NNGO 4 SMS 12 / 17
Marginal Revenue
Let us consider the total revenue (TR):
TR = P(Q) · Q .
The Marginal Revenue (MR), is the derivative of the total revenue as a
function of Q:
dTR
MR = .
dQ
We have that
1
MR = P · (1 + ).
ϵd
Proof:
dTR d(P · Q) dP dQ dP Q ϵd = dQ
dP
P
Q 1
MR = = = Q+ P = P( + 1) = P · (1 + )
dQ dQ dQ dQ dQ P ϵd
(ESSEC BBA) NNGO 4 SMS 13 / 17
Exercise (cont’d)
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Higher order derivatives
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Example
f (x) = 6x 3 − 12x 2 + 6x − 2
f ′ (x) = 18x 2 − 24x + 6
f ′′ (x) = 36x − 24
f ′′′ (x) = 36
f (4) (x) = 0
(ESSEC BBA) NNGO 4 SMS 16 / 17
Exercise
1) If y = 16
x+4 , find f ′′ (x) when x = 0.
√
1) Find f ′′ (x) at x = 1, y = 2
3
if x 2 + 4y 2 = 4.
(ESSEC BBA) NNGO 4 SMS 17 / 17