Differentiation
Learning objectives
01 02 03
Calculate Derive marginal Optimize
elasticity functions economics
associated with functions.
revenue, cost,
and production
The derivative
of a function
6
Slope of a straight 𝑦 =𝑎𝑥 +𝑏
line 5
The slope or gradient of a line
is taken to be the change in 4
divided by the corresponding
change in as you move 3
between any two points on the
line
2
We denote change in by , and
the change in is written . 1
0
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Tangent
line
•Tangent line is a
straight line which
passes through a
point on a curve and
which just touches
the curve at this
point.
Slope of a 𝑦 𝑦 = 𝑓 (𝑥 )
curve at
Variable slope
𝑃 (or variable rate of change)
•The slope, or gradient of a
curve at is defined to be the
slope of tangent at
•In this graph, the slopes of the
tangent lines increase as we
move from left to right along
the curve, which suggests the
𝑥
curve becomes progressively
steeper further away.
Derivative
• The slope a curve varies as we move along it.
• In mathematics, to represent the slope of the graph of function
at , we use the symbol (read ‘f dashed of a’).
• The slope of the graph of a function is called the derivative of the
function.
Derived function
• Corresponding to each value of there is a uniquely defined
• The rule to ‘find the slope of the graph of at ’ is referred to as derived
function f’(x).
• An alternative notation for derived function is ,representing the
derivative of with respect to .
Derivative (cont.)
• The tangent line to the curve at 1 is
horizontal, so its slope at 1 is zero, and thus, . 10
• The graph drops on or the function is 9
2
𝑦 =𝑥 − 2 𝑥 +1
decreasing on this interval. 8
• The graph rises on or the function is
7
6
increasing on this interval.
5
• The point at which is called the turning point. 4
0
-3 -2 -1 0 1 2 3 4 5
Special note
ݕ
•Note that not all functions are
derivable. For example:
ݔ
• Function is not continuous at a point
then it is not derivable at that point,
ݕ
that is, the graph at this point is
broken into two pieces or has a hole.
ݔ
• Continuous functions that whose
graph has a sharp corner are also not
&ƵŶĐƟŽŶŶŽƚ
Ěŝī ĞƌĞŶƟĂďůĞĂƚ ݔൌ Ͳ
derivable
Second-order derivatives
• When a function is differentiated, the result is another function.
This implies the potential for a second differentiation.
• The second differentiation is denoted as:
• (read ‘ double dashed of ’).
• or (read ‘d two y by dx squared)
• The function is called the first-order derivative.
• The function is called the second-order derivative.
Second-order
derivatives (cont.)
• If , it signifies that the curve of is
downward-bending, and the function is
described as concave in that interval.
• When over a specific interval, it indicates
that the curve of is upward-bending on
that interval. The function is referred to as
convex in that interval.
•The point at which the function changes the
concavity is called the point of inflection.
Exercise
Given the function:
a. Evaluate
b. What is the point of
inflection?
Rules of differentiation
If both function and function are derivable, and c is constant then
Exercise
1. Find for the total revenue function:
2. Find for the average cost function:
3. Differentiate
4. Differentiate
5. Differentiate
Elasticity
Elasticity
• Demand is elastic if the demand is relatively sensitive to changes in price (e.g.,
clothing, electronics)
• In this case, changes in price are smaller than changes in quantity demanded
• Demand is inelastic if the demand is relatively insensitive to changes in price (e.g.,
food, prescription drugs, petrol, Apple products?)
• In this case, changes in price are larger than changes in quantity demanded
• Demand is unit elastic if the percentage changes in price and quantity are equal
(unchanged revenue)
Elasticity formula
• : Demand is elastic
• Demand is inelastic
• : Demand is unit elastic
Arc elasticity vs. Point elasticity
• Arc elasticity: Elasticity measured between two points on a curve.
• Point elasticity: Elasticity measured at a particular point on curve,
Exercises
1. If the supply equation is:
Calculate the price elasticity of supply
a. Averaged along an arc between and
b. At the point
2. Given the demand function:
Find the price elasticity of demand when Estimate the
percentage change in price needed to increase
quantity demanded by 10%
Review
• Demand is inelastic
• : Demand is unit elastic
• : Demand is elastic
• Arc elasticity: Elasticity measured between two points on a curve.
• Point elasticity: Elasticity measured at a particular point on curve.
Revenue, cost,
and production
Marginal revenue
• Marginal revenue is the extra revenue gained by selling 1 more unit of a good
(non-calculus definition).
• Marginal revenue is the derivative of total revenue with respect to quantity
demanded
Chord
• Chord is the straight line
joining two points on the
curve.
• The slope of the chord is equal
to the value MR obtained from
the definition
• The slope of the tangent is
approximately the same as that
of the chord joining A and B.
Exercises
1. Given the demand function:
a. Find an expression for Total revenue ( in terms of
b. Find a general expression for marginal revenue (MR) in terms of . Calculate
the value or at
c. Calculate the value of TR when and
2. Given the total revenue function:
d. Write down an expression for the marginal revenue function
e. If the current demand is 30, find the approximate change in value of TR due
to: (i) a 3 unit increases in Q and (ii) a 2 units decrease in Q
Monopolist
•The case of monopolist: A firm, or a group of
firms, the only supplier, has control over the
market price
•The marginal revenue curve slopes downhill
exactly twice as fast as the demand curve.
•P
Perfect competition
•Perfect competition: A large number of
firms all sell an identical product, and there
are no barriers to entry.
In this case, each tiny firm can sell any
number of goods at a predetermined price, it
has no control over price.
•If the fixed price is denoted by then the
demand function is:
Marginal cost
• Marginal cost is the cost of producing 1 more unit of output.
• Marginal cost is the derivative of total cost with respect to output
Exercise
Find the marginal cost given the
average cost function
Show that a 1 unit increase in Q
will always result in a 2 unit
increase in TC, irrespective of
the current level of output
Marginal product of labor and
Average of product of labor (labor productivity)
• Marginal product of labor is the extra output produced by 1 more
unit of labor:
• Average product of labor (labor productivity) is calculated by total
output divided by labor:
Optimization of
economic
functions
Optimization: The task of finding the maximum and
minimum values of a function.
Stationary
points
•Stationary points (critical points,
turning points, extrema): Points on the
graph at which the tangent is horizontal
•At a stationary point, the first-order
derivative is zero (zero slope)
•Point B, C, D, E, F and G are stationary
points
Maximum
(local) points
•Maximum (local) point: A point on a
curve that has the highest function value
in comparison with other values in its
neighborhood
•At a maximum local point, the first-
order derivative is zero, and the second-
order derivative is negative.
•Points B and E are the local maximum.
Minimum
(local) point
•Minimum (local point): A point on a
curve which has the lowest value in
comparison with other values in its
neighborhood
•At a minimum local point, the first-
order derivative is zero and the second
order derivative is positive
•Points C and G are the local minimum.
Stationary point
of inflection
•Stationary point of inflection: A
Stationary point that is neither a
maximum nor a minimum
•At the stationary point of inflection,
both the first and second derivatives are
zero.
•Points D and F are stationary points of
inflection
First-order Second order
Descriptions
derivative derivative
Stationary points (critical Points on the graph at which the
points, turning points, tangent is horizontal Zero N/A
extrema)
A point on a curve that has the
highest function value in
Maximum (local) points Zero Negative
comparison with other values in its
neighborhood
A point on a curve which has the
Minimum (local) points lowest value in comparison with Zero Positive
other values in its neighborhood
A Stationary point that is neither a
Stationary point of inflection maximum nor a minimum Zero Zero
Summary
Descriptions First-order Second-order
derivative derivative
Stationary points Points on the graph at
(critical points, which the tangent is
turning points, horizontal Zero Nothing to discuss
extrema)
Exercise A point on a curve that
has the highest function
value in comparison
Maximum (local) with other values in its
Find and classify the stationary points neighborhood
Zero Negative
points of the following functions:
A point on a curve
which has the lowest
Minimum (local) value in comparison
points with other values in its Zero Positive
neighborhood
A Stationary point that
Stationary point of is neither a maximum
inflection nor a minimum Zero Zero
Exercise
A monopolist’s demand function is:
The fixed costs of production are 7 and the variable
costs are per unit.
a. Show that and . Find the expressions for and
b. Sketch the graphs of and on the same diagram
and hence find the value of which maximizes
profit. Verify that, at this value of , .
Exercise
The total cost function of a good is given
by
Calculate the level of output that
minimizes average cost. Find and at this
value of . What do you observe?
Exercise
A firm’s short-run production is given by
Where , denotes the number of workers.
Find the size of the workforce that
maximizes the average product of labor
and verify that at this value of ,
Exercise
The supply and demand equations of a good are
respectively given by
The government decides to impose a tax, t, per unit.
Find the value of t that maximizes the government’s
total revenue assuming that equilibrium conditions
prevail in the market.
Exercise
A firm can charge different prices in its domestic and
foreign markets. The corresponding demand equations
are given by
The total cost function is
Where
Determine the prices that the firm should charge to
maximize profit
a. With price discrimination
b. Without price discrimination
• Average product of labor (productivity)
• Marginal product of labor
• Profit
Review • Marginal revenue
• Marginal cost
•: Average cost
is maximized
is maximized
AC is minimized
Student
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