Topic 7: Application of differential
calculus on economic problems
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Topics
Revenue: TR, MR, AR
Cost: TFC, TVC, TC, AFC, AVC, ATC, MC
Production: TP, MP, AP
Profit maximization:
– Perfect competition
– Monopoly
– Monopolistic competition
– Oligopoly
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Prescribed chapters
– Basic Mathematics
Chapter 3
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Revenue
TR = PQ
AR = TR/Q
MR = TR’
(i.e., first derivative of total revenue equation)
Note: When TR is maximized, TR’ = MR = 0,
and TR’’ < 0
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Revenue
Example:
TR 3300Q 26Q 2
– Derive the marginal revenue equation.
– Derive the average revenue equation.
– What is marginal revenue when Q = 10?
– At which quantity is the total revenue maximized?
(Check second-order conditions)
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Revenue
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Q
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Cost
Focus is on short run
– Capital: Fixed input
– Labour: Variable input
– TFC + TVC = TC
– AFC = TFC/Q
– AVC = TVC/Q
– ATC = TC/Q [Note: ATC = AFC + AVC]
– MC = ∆TC/∆Q = TC’
(i.e., first derivative of total cost equation)
– When MC is minimized, MC’ = 0, MC’’ > 0
– When ATC is minimized, ATC’ = 0, ATC’’ > 0
– When AVC is minimized, AVC’ = 0, AVC’’ > 0
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Cost
Example:
TC f (Q) Q3 2Q 2 420Q 750
– Derive the total fixed cost equation.
– Derive the total variable cost equation.
– Derive the average fixed cost equation.
– Derive the average variable cost equation.
– Derive the average total cost equation.
– Derive the marginal cost equation.
– What is marginal cost when Q = 10?
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Cost
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Production
Focus is on short run
– Capital: Fixed input
– Labour: Variable input
– Total product: TP = f(L)
– Average product: AP = TP/L
– Marginal product: MP = ∆TP/∆L = TP’
(i.e., first derivative of total product function)
When MP is maximized, MP’ = 0, and MP’’ < 0
When AP is maximized, AP’ = 0, and AP’’ < 0
When TP is maximized, TP’ = 0, and TP’’ < 0
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Production
Example:
X TP 562.5L 15L
2 3
– Derive the marginal product of labour equation.
– Derive the average product of labour equation.
– What is marginal product of labour when L = 10?
– At what labour usage is total product maximized?
(Check the second-order conditions)
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Production
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Production
TP' ' 1125 90L
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Profit maximization
When MR = MC!
Example:
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Profit maximization
Another (slower) method to get the same
answer:
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Profit maximization
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Profit maximization
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Profit maximization
Apply the MR = MC principle to solve for the
profit-maximizing quantity in perfect
competition, monopoly, and monopolistic
competition.
Note: Sometimes if only the demand
equation is given, then one must first derive
the TR equation…Example on next slide.
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Profit maximization
Example:
Suppose the demand function for a
monopolist’s product is given by:
P = 100 – 2Q
The total cost function is given by:
TC = 10 + 2Q.
Determine the profit-maximizing price and
quantity and the maximum profits.
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Profit maximization
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Profit maximization
Note: Do you still remember the theories on
perfect competition, monopoly and
monopolistic competition???
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Profit maximization
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Profit maximization
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Summary
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