3 USES OF DERIVATIVES IN

ECONOMICS

INTENDED LEARNING OUTCOMES

By the end of the learning experience, students must be able to:

1. Evaluate a given function whether decreasing, increasing or monotonic.

2. Evaluate a given function whether it is concave or convex.
3. Determine if the function is relative maximum, minimum or inflection point.
4. Solve the marginal of a given function(s).
5. Analyze economic problems using derivatives.

Increasing and Decreasing Functions

A function 𝑓(𝑥) is said to be increasing (decreasing) at 𝑥 = 𝑎 if in the immediate vicinity of the

point [a, 𝑓(𝑎)] the graph of the function rises (falls) as it moves from left to right. Since the first
derivative measures the rate of change and slope of a function, a positive derivative at 𝑥 = 𝑎
indicates the function is increasing at x; a negative first derivative indicates it is decreasing as
shown in the Figure below.

𝑓′(𝑎) > 0, increasing function at 𝑥 = 𝑎

𝑓′(𝑎) < 0, decreasing function at 𝑥 = 𝑎

A function that increases (or decreases) over its entire domain is called a monotonic function. It
is said to increase (decrease) monotonically.

Example: Test to see whether the following function are increasing, decreasing or stationary at
𝑥 = 4.

a. 𝑦 = 3𝑥 2 − 14𝑥 + 5

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Solution:

1. Take the first derivative of the function.

𝑦 ′ = 6𝑥 − 14

2. Evaluate the first derivative at 𝑥 = 4.

𝑦′(4) = 6(4) − 14 = 10 > 0 Function is increasing.

b. 𝑦 = 𝑥 3 − 7𝑥 2 + 6𝑥 − 2

𝑦 ′ = 3𝑥 2 − 14𝑥 + 6

𝑦 ′ (4) = 3(4)2 − 14(4) + 6 = 48 − 56 + 6 = −2 < 0 Function is decreasing.

c. 𝑦 = 𝑥 4 − 6𝑥 3 + 4𝑥 2 − 13

𝑦′ = 4𝑥 3 − 18𝑥 2 + 8𝑥

𝑦 ′ (4) = 4(4)3 − 18(4)2 + 8(4) = 256 − 288 + 32 = 0 Function is stationary

CONCAVITY AND CONVEXITY

A function 𝑓(𝑥) is concave at 𝑥 = 𝑎 if in some small region close to the point [a, 𝑓(𝑎)] the
graph of the function lies completely below its tangent line. A function is convex at 𝑥 = 𝑎 if in
some small region close to the point [a, 𝑓(𝑎)] the graph of the function lies completely above its
tangent line. A positive second derivative at 𝑥 = 𝑎 denotes the function is convex at 𝑥 = 𝑎; a
negative second derivative at 𝑥 = 𝑎 denotes the function is concave at 𝑥 = 𝑎 as shown in the
figure below.

𝑓′′(𝑎) > 0, 𝑓(𝑥) is convex at 𝑥 = 𝑎

𝑓′′(𝑎) < 0, 𝑓(𝑥) is concave at 𝑥 = 𝑎

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Example: Test to see whether the following function are convex or concave at 𝑥 = 3.

a. 𝑦 = −2𝑥 3 + 4𝑥 2 + 9𝑥 − 15

Solution:

1. Take the first derivative of the function.

𝑦 ′ = −6𝑥 2 + 8𝑥

2. Take the second derivative of the function.

𝑦 ′′ = −12𝑥 + 8

3. Evaluate the second derivative at 𝑥 = 3.

𝑦 ′′ (3) = −12(3) + 8 = −36 + 8 = −28 < 0 concave

b. 𝑦 = (5𝑥 2 − 8)2

Solution:

𝑦 ′ = 2(5𝑥 2 − 8)(10𝑥) = 20𝑥(5𝑥 2 − 8) = 100𝑥 2 − 160𝑥

𝑦 ′′ = 200𝑥 − 160

𝑦 ′′ (3) = 200(3) − 160 = 600 − 160 = 440 > 0 convex

Relative Extrema

A relative extremum is a point at which a function is at a relative maximum or minimum.

To be at a relative maximum or minimum at a point 𝑎, the function must be at a relative plateau,
i.e., neither decreasing or increasing at 𝑎. If a function is neither increasing nor decreasing at 𝑎,
the first derivative of the function at a must be equal to zero or be undefined. A point in the
domain of a function where the derivative equals zero or is undefined is called a critical point
value.

To distinguish mathematically between a relative maximum and minimum, the second

derivative test is used. Assuming 𝑓 ′ (𝑎) = 0,

1. If 𝑓 ′ ′(𝑎) > 0, indicating that the function is convex and the graph of the function
lies completely above its tangent line at 𝑥 = 𝑎, the function is at a relative
minimum at 𝑥 = 𝑎.
2. If 𝑓′′ (𝑎) < 0, denoting that the function is concave and the graph of the function
lies completely below its tangent line at 𝑥 = 𝑎, the function is at relative
maximum at 𝑥 = 𝑎.
3. If 𝑓′′(𝑎) = 0, the test is inconclusive.

For functions which are differentiable at all values of x, called differentiable or smooth functions,
one need only consider cases where 𝑓 ′ (𝑎) = 0 in looking for critical points. To summarize,

𝑓 ′ (𝑎) = 0 𝑓 ′′ (𝑎) > 0: 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑎𝑡 𝑥 = 𝑎

𝑓 ′ (𝑎) = 0 𝑓 ′′ (𝑎) < 0: 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑎𝑡 𝑥 = 𝑎

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Inflection Points

An inflection point is a point on the graph where the function crosses its tangent line
and changes from concave to convex or vice versa. Inflection points occur only where the second
derivative equals zero or is undefined. The sign of the first derivative is immaterial. In sum, for an
inflection point at a,

1. 𝑓 ′ ′(𝑎) = 0 or is undefined.
2. 𝐶𝑜𝑛𝑐𝑎𝑣𝑖𝑡𝑦 𝑐ℎ𝑎𝑛𝑔𝑒𝑠 𝑎𝑡 𝑥 = 𝑎.
3. 𝐺𝑟𝑎𝑝ℎ crosses its tangent line at 𝑥 = 𝑎.

Optimization of Functions

Optimization is a process of finding the relative maximum or minimum of the function. Without
the aid of the graph, this is done with the technique below.

1. Take the first derivative, set it equal to zero, and solve for the critical point(s). This step
represents the necessary condition known as the first order condition. It identifies all the
points at which the function is neither increasing nor decreasing, but at a plateau. All
such points are candidates for a possible relative maximum and minimum.
2. Take the second derivative, evaluate it at the critical point(s), and check the sign(s). If at
a critical point a,-
𝑓 ′′ (𝑎) < 0, the function is concave at a, and hence at a relative maximum
𝑓′′(𝑎) > 0, the function is convex at a, and hence at a relative minimum
𝑓′′(𝑎) = 0, the test is inconclusive

Example: Optimize 𝑓(𝑥) = 2𝑥 3 − 30𝑥 2 + 126𝑥 + 59

a. Find the critical points by taking the first derivative, setting it equal to zero, and
solving for x.
𝑓 ′ (𝑥) = 6𝑥 2 − 60𝑥 + 126 = 0
6(𝑥 2 − 10𝑥 + 21) = 0
6(𝑥 − 7)(𝑥 − 3) = 0
𝑥 = 7 𝑥 = 3 Critical points)
b. Test for concavity by taking the second derivative, evaluating it at the critical
points, and checking the signs to distinguish between a relative maximum or
minimum.
c. 𝑓 ′′ (𝑥) = 12𝑥 − 60
𝑓 ′′ (3) = 12(3) − 60 = −24 < 0 concave, relative maximum
′′ (7)
𝑓 = 12(7) − 60 = 24 > 0 convex, relative minimum

The function is maximized at 𝑥 = 3 and minimized at 𝑥 =7

Marginal Concepts

Marginal cost in economics is defined as the change in total cost incurred from the
production of additional unit. Marginal revenue is defined as the change in the total revenue
brought about by the sale of an extra good. Since total cost (TC) and total revenue (TR) are both
functions of the level of output (Q). marginal cost (MC) and marginal revenue (MR) can be
expressed mathematically as derivatives of their respective total functions. Thus,
𝑑𝑇𝐶 𝑑𝑇𝑅
𝑀𝐶 = and 𝑀𝑅 = .
𝑑𝑄 𝑑𝑄

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Example:
𝑑𝑇𝑅
1. If 𝑇𝑅 = 75𝑄 − 4𝑄 2 , 𝑡ℎ𝑒𝑛 𝑀𝑅 = = 75 − 8𝑄
𝑑𝑄
𝑑𝑇𝐶
2. If 𝑇𝐶 = 𝑄 2 + 7𝑄 + 23, 𝑡ℎ𝑒𝑛 𝑀𝐶 = = 2𝑄 + 7
𝑑𝑄
3. Given the demand function 𝑃 = 30 − 2𝑄, the marginal revenue function can be found
by first finding the total revenue function and then taking the derivative of that function
𝑑𝑇𝑅
with respect to Q. Thus, 𝑇𝑅 = 𝑃𝑄 = (30 − 2𝑄)(𝑄) = 30𝑄 − 2𝑄 2 , then 𝑀𝑅 = =
𝑑𝑄
30 − 4𝑄.

Optimizing Economic Functions

The economist is frequently called upon to help a firm maximize profits and levels of physical
output and productivity, as well as to minimize costs, levels of pollution, and the use of scarce
resources.

Example:

a. Maximize the profits 𝜋 for a firm, given the total revenue 𝑅 = 4000𝑄 − 33𝑄 2 and the
total cost 𝐶 = 2𝑄 3 − 3𝑄 2 + 400𝑄 + 5000, assuming 𝑄 > 0.
Step 1. Set up the profit function: 𝜋 = 𝑅 − 𝐶
𝜋 = 4000𝑄 − 33𝑄 2 − (2𝑄 3 − 3𝑄 2 + 400𝑄 + 5000)
𝜋 = −2𝑄 3 − 30𝑄 2 + 3600𝑄 − 5000
2. Take the first derivative, set it equal to zero, and solve for Q to find the critical points.
𝜋′ = −6𝑄 2 − 60𝑄 + 3600 = 0
= −6(𝑄 2 + 10𝑄 − 600) = 0
= −6(𝑄 + 30)(𝑄 − 20) = 0
𝑄 = −30 𝑄 = 20 critical points

3. Take the second derivative, evaluate it at the positive critical point and ignore the
negative critical point, which has no economic significance.

𝜋 ′′ = −12𝑄 − 60
𝜋 ′′ (20) = −12(20) − 60 = −300 < 0 concave, relative maxim
Thus, profit is maximized at 𝑄 = 20 where
𝜋(20) = −2(20)3 − 30(20)2 + 3600(20) − 5000 = 39,000

REFERENCES:

Chiang, A.C. 1994. Fundamental Methods of Mathematical Economics, 3rd Edition. Mc-Graw-Hill.

Dowling, E.T. 2012. Introduction to Mathematical Economics, 3rd Edition. Mc-Graw-Hill.

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 Exercise No.3
USES OF DERIVATIVES IN ECONOMICS

Name: _________________________ Date: ____________________

Yr/Crs/Sec: _____________________ Score: ___________________

Instructions: Show your solutions clearly and systematically. Box your final answer. Write your
answers in the front page of a long bond paper.

1. For the following functions, (a) find the critical values. (b) test for concavity to determine
relative maxima or minima, (c) check for inflection points, and (d) evaluate the function
at the critical values and inflection points,
a. 𝑓(𝑥) = 𝑥 3 − 18𝑥 2 + 96𝑥 − 80
b. 𝑓(𝑥) = −𝑥 3 + 6𝑥 2 + 15𝑥 − 32
c. 𝑓(𝑥) = (2𝑥 − 7)3
d. 𝑓(𝑥) = (𝑥 + 2)4

2. Optimize the following function by finding the critical value(s) at which the function is
optimized and testing the second-order condition to distinguish between relative
maximum or minimum.
a. 𝑦 = 7𝑥 2 + 112𝑥 − 54
b. 𝑦 = −9𝑥 2 + 72𝑥 − 13
c. 𝑦 = 𝑥 3 − 6𝑥 2 − 135𝑥 + 4
d. 𝑦 = −2𝑥 3 + 15𝑥 2 + 84𝑥 − 25

3. Find the marginal functions for each of the following total functions.
a. 𝑇𝐶 = 3𝑄 2 + 7𝑄 + 12
b. 𝜋 = 𝑄 2 − 13𝑄 + 78
c. 𝑇𝑅 = 12𝑄 − 𝑄 2
d. Find the marginal cost given the supply equation 𝑃 = 𝑄 2 + 2𝑄 + 1.

4. Maximize the total revenue TR and total profit 𝜋 and calculate the maximum revenue
and profit.
a. 𝑇𝑅 = 32𝑄 − 𝑄 2
b. 𝜋 = −𝑄 2 + 11𝑄 − 24
1
c. 𝜋 = − 𝑄 3 − 5𝑄 2 − 2000𝑄 − 326
3
d. Maximize 𝜋 given: 𝑇𝑅 = 1400𝑄 − 6𝑄 2 and 𝑇𝐶 = 1500 + 80𝑄

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