3.

Calculus

Maths brushing up course for MIBEM

Nick Deschacht
 Overview of the course
1. Calculation techniques
2. Functions
3. Calculus
A. Derivatives
• What is the derivative?
• Finding derivative functions
• Applications
B. Optimization
• How to solve an optimization problem?
• Applications
• Constrained optimization
 Introduction
• Calculus is the “mathematical study of change”. It studies the rates at
which quantities change using “derivatives” of functions.
• In economics and business, calculus is mostly used for optimization:
– The aim of optimization is to find the values of

for which  reaches a minimum or a maximum.
– Examples of optimization problems:
• How much labor and capital should be used
in order to minimize costs?

• How much of each good should we buy in

order to maximize consumer utility?
• Which price should a monopolist company
set in order to maximize profits?

3
 A. The derivative
• The derivative of a function for a value
 is the slope
tangent line
of the tangent line to that function in
 . y f(x)  = + 

In the graph,
the derivative of the
function f(x) in
 is 
 x

• The derivative informs us about the rate of change of a function:

– The derivative is negative in
, so the function
is decreasing. The derivative is positive in

, y f(x)

so the function is increasing.

– If the derivative is large, then the function is
increasing fast (large rate of change).




x
The derivative is zero in
 , so the function is not
increasing or decreasing (horizontal tangent line).
4
 The derivative
• The derivate is the rate of the change of a function at a certain point.
It is an approximation for the change in  when
increases by 1 unit.
y f(x)

∆

∆


 x

• When
increases by a small amount ∆
, then  changes by ∆. The

average rate of change (or the change in  for every unit-change in
) is
∆
, which is the slope of the red line in the graph.
∆
• When ∆
gets smaller, the average rate of change (red line) approaches
the derivative (green tangent line). So the derivative can be defined as:
∆
derivative = when ∆
approaches zero
∆
5
 The derivative function
• The derivative "′(
) of a function "(
) is a new function that relates each
value of
to the derivative of "(
) in
.

&
The derivative function is denoted "′(
) or ′ or
&

• Example: graphs of a function and its derivative

– For
>
 : "(
) is increasing, so " (
> 0 y
"(
) "′(
)
– For
<
 : "(
) is decreasing, so " (
< 0
– In
 : "(
) is horizontal, so " (
= 0
 x

6
 Rules for finding derivative functions
1. If f x = C, then f ( x = 0
2. If f x = x 2 , then f ( x = nx 23 (and note that x ( = 1)
3. f + g ( = f ( + g′
4. C. f ( = C. f′

Examples:
• "
=

→ " ( (
) = 2
= 2

• "
= 1 + 2
→ " (
= 1 ( + 2
( =0+2
( = 2.1 = 2
• "
= 2
 −

+ 3
− 4 → " (
= 6

− 2
+ 3
;⁄ ;⁄ 3 >;⁄
• "
=:
=
< → "(
=
< =
< = . =



 ;?<
: 

• "
= → " (
=
3 ( = −1.
3
= −
 <
7
 Exercise
1. What is the derivative of the function "
=

+ 3 in
= 10?
2. Calculate the change in  when
increases from 10 to 11 and
compare the result with the previous question.

8
 Applications
Application 1: marginal costs (managerial economics)
• The marginal costs are the approximate increase in total costs, when
production increases by 1 unit.
• If total costs (@A) are a function of produced output (B), then marginal
costs are defined as the derivative of @A with respect to B. The marginal
cost is the instantaneous rate of change of the total cost function:
D@A
CA =
DB
• Examples:
– total costs are given by @A = 10 + 2B + B²
D@A
CA = = 10 + 2B + B
( = 2 + 2B
DB
– For a linear cost function @A = + B, the marginal cost is constant:
D@A (
CA = = + B =
DB
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 Applications
Application 2: marginal revenue (managerial economics)
• The marginal revenue is the approximate increase in total revenue, when
the number of products sold increases by 1 unit.
• Marginal revenue is defined as the derivative of @F with respect to B. So,
the marginal revenue is the instantaneous rate of change of the total
revenue function:
D@F
CF =
DB
• Example: find the marginal revenue function if demand is G = 50 − 3. B

Total revenue @F = G. B = 50 − 3B . B = 50B − 3B²
p, MR
&IJ

CF = = 50B − 3B
( = 50 − 6B 50
&K
LMN OD
• So, for a linear demand function the CF the
intercept is the same and the slope is double
CF
that of the demand function.
q
10
 Applications
Application 3: price elasticity of demand (managerial economics)
• The price elasticy of demand is the approximate percentage change in
demand when the price of a product increases by 1%.
∆S
?S
PQ ≈ ∆T (note that ∆K?K is the percent change in B)
?T
• The elasticity is defined for small price changes (∆G → 0), so we use the
derivative:
DB?
B DB G
PQ = = .
DG? DG B
G
• Example: what is the price elasticity of demand when G = 5 and demand
is B = 100 − 5. G?
US
?S &K V V 3W.V
PQ = UT = . = 100 − 5G ( . =
?T &V K 3WV 3WV
3W.W 3
W
PQ G = 5 = 3W.W = XW = −0.33. So when the price increases by 1%,
the demand decreases by approximately 0.33%. 11
 B. Optimization
• In optimization problems we are looking for the
largest value (maximum) or the smallest value
(minimum) that a function can take.
• A necessary condition for a function "
to take
a maximum or a minimum in
 is that the derivative " (
 = 0.
Said differently, a maximum or a minimum in
 requires the
function to be horizontal in
 . (Strictly speaking, this is not a
sufficient condition but checking those additional conditions is
usually not interesting in economics and business applications).
• So, in order to solve an optimization problem:
1. Write the function "(
) for which you are trying to find
a minimum or maximum.
2. Find the derivative of "(
).
3. Find the value of
for which the derivative is zero by
solving an equation.
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 Examples and exercises
Examples:
1. Find the maximum of the function  = −

+ 2
+ 5
D
( = = −

+ 2
+ 5 ( = −2
+ 2
D

′ = 0 ⟺ −2
+ 2 = 0 ⟺
= 1

2. Show that a quadratic function  =

+ 
+ Z (a parabola) has its
3[
maximum or minimum in
= (see lesson 2).


3[
 ( = 0 ⟺

+ 
+ Z (
= 2
+  = 0 ⟺
=



Exercise: Find the minimum of the function  =

− 20
+ 105
and verify that x-values in the neighborhood of this minimum
have larger function values than the minimum itself.
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 Applications
Application. Profit maximization:

• Example 1: Profits \ are a function of output sold given by the function

\ = 20. B − B². Which value of B maximizes profits?
\ ( = 20 − 2q ≞ 0 ⟺ B = 10

• Example 2: Profits are maximized when marginal costs equal marginal

benefits. Show this very general result in economics.
(
\ ( = @F B − @A B = CF − CA ≞ 0 ⟺ CF = CA

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 Constrained optimization
In many applications it is possible to solve optimization problems that involve
restrictions and more than 1 variable, by plugging in the restriction into the
function that needs to be optimized:
Example: You have 400 meters of barbwire with which you want to enclose a
rectangular area that is as large as possible. Determine the length and width
of the optimal rectangle.
Solution: Maximize _`M = a × c
under the restriction that the circumference equals 400 (2a + 2c = 400)
So the restriction is c = 200 − a.
Plug the restriction into the function that needs optimization:
_`M = a × 200 − a = 200a − a²
&def
&g
= 200 − 2a ≞ 0 ⟺ a = 100 and c = 200 − 100 = 100

So both the width and length must be 100 (the area is a square!).
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 Constrained optimization
Application: Find the optimal level of workers c and capital goods h to use in
order to minimize production costs given that you want to produce 100 units.
:
The production function is B = h. c and the cost function is @A = i. c +
`. h, where the wage rate i = 5 and the capital cost ` = 10.
:
Solution: Minimize @A = 5c + 10h under the restriction h. c = 100
 
So the restriction is c =
j

Plug the restriction into the function that needs to optimized:

W 
@A = + 10h
j
D@A 50 000 :
=− + 10 ≞ 0 ⟺ h = 5000 = 70.7
Dh h

10 000
c= = 141.4
70.7
So costs are minimized by employing 141 workers and 71 capital goods. 16