The University of Papua New Guinea

Quantitative Economics I, Semester 1 2019.

This version: November 29, 2019

Bao Nguyen1

Handout 4: Comparative Statics and the Concept of Derivative

1. The nature of comparative statics:
Comparative statics is concerned with the comparison of different equilibrium states.
We merely compare the initial (prechange) equilibrium state with the final (postchange)
equilibrium state. Comparative statics disregard the process of adjustment of the
variables.

2. Rate of change:
The average rate of change of a function over some interval is the ratio of the change
of the value of the dependent variable to the change in the value of the independent
variable over that interval. Suppose we have y = f (x), the average rate of change
of y over the closed interval [x0 , x1 ], or the change in y per unit of change in x can
be represented by the different quotient:
∆y f (x1 ) − f (x0 ) f (x0 + ∆x) − f (x0 )
= = . (1)
∆x x1 − x0 ∆x
Note that, if y is a linear function, such as y = a+bx, the average rate of change of y
is equal to the slope of the function, b. While the average rate of change of a linear
function is constant, the rate of change of a non-linear function is not constant,
depending upon the interval over which the rate of change defined. For example,
consider the function y = 13 x2 . The average rate of change of this function over the
closed interval [0, 3] is 1 but over the closed interval [0, 6] is 2.
Example: Given y = 3x2 − 4, we can write: f (x0 ) = 3(x0 )2 − 4 and f (x1 ) =
f (x0 + ∆x) = 3(x0 + ∆x)2 − 4. Therefore, the difference quotient is
3(x0 + ∆x)2 − 4 − (3x2 − 4) 6x0 ∆x + 3(∆x)2
= = 6x0 + 3∆x. (2)
x1 − x0 ∆x
3. The derivative:
Frequently, we are interested in the rate of change of y and ∆x is very small, such
as ∆x approached zero. When ∆x → 0, equation (1) can be expressed as:
∆y
lim . (3)
x→0 ∆x
1
[email protected]
1
 This is called the derivative of the function y = f (x). The word derivative really
means a derived function that derive from the original function y (or primitive
function). Derivative functions are commonly denoted in two ways: f 0 (x) (simply
f 0 ) or dy/dx. So, we may define the derivative of a given function y = f (x) as
follows:
dy ∆y
≡ f 0 (x) ≡ lim . (4)
dx x→0 ∆x

From (2), the differential is

dy = f 0 (x)dx

4. The derivative and the slope of a curve, or the difference between ∆y and dy
Note that, dy is an approximation found by moving along the tangency. ∆y is
the difference between two points on the actual function y = f (x). Given the
function y = x2 and suppose x0 = 2 and dx = ∆x = 0.1 (or x1 + 2.01). The
differential is dy = 2xdx = 2(2)(0.1) = 0.04, while the other change ∆ given by
∆y = (x + dx)2 − x2 = (2.01)2 − (2)2 = 0.0401

Note that, the line AC is the tangent line to the function y at point A. The slope
of AC (= BC/AB = 0.04/0.1 = 0.4 = dy/dx) also measures the slope of the
curve (the function y) at point A and presents the limit of ∆y/∆y as ∆x → 0.
Therefore, by definition, this value also corresponds to the particular derivative
value f 0 (x) = dy/dx, e.g f 0 (2) = 0.4.

2
 Five basic rules:

1. The constant rule: Given y = f (x) = c, where c is an arbitrary constant, then

dy
= y 0 (x) = 0 (5)
dx
Example: If y = 3, then y 0 = 0

2. Power Function Rule: Suppose y = f (x) = xn , then

dy
= y 0 (x) = nxn−1 (6)
dx
Example: If y = x−3 , then y 0 = −3x−4

3. Sum-difference Rule: If y is a function created by adding or subtracting multiple

functions such written as y = f (x)±g(x), then the derivative of the function y given
by
dy
= y 0 (x) = f 0 (x) ± g 0 (x) (7)
dx
Example: If y = x−3 + 2x2 , then y 0 = −3x−4 + 4x

4. Product Rule: Suppose y is a composite function created by multiplying two

functions together y = f (x)g(x), the derivative is given by

dy
= y 0 (x) = f 0 (x)g(x) + g 0 (x)f (x) (8)
dx
Example: If y = (x−3 + 1)x, then y 0 = (−3x−4 )x + (x−3 + 1)

5. Quotient Rule: Suppose y = f (x)/g(x), the derivative is given by

dy f 0 (x)g(x) − g 0 (x)f (x)

= y 0 (x) = (9)
dx (g(x))2

Example: If y = (x−3 + 1)/(x + 1), then y 0 = (−3x−4 )(x + 1) − (x−3 + 1)/x2

Natural Logarithm and the Exponential e

dy
1. If y = ex then dx
= y 0 (x) = ex
dy
2. If y = ef (x) then dx
= y 0 (x) = ef (x) f 0 (x)
(x−3 +1) −3 +1)
Example: If y = e , then y 0 = −3x−4 e(x
3
 dy
3. If y = lnx then dx
= y 0 (x) = 1/x
dy
4. If y = lnf (x) then dx
= y 0 (x) = f 0 (x)/f (x)
Example: If y = ln((x−3 + 1)), then y 0 = −3x−4 /(x−3 + 1)

Rules of natural log

1. If y = f (x)f (x), then log(y) = log(f (x)g(x)) = log(f (x)) + log(g(x)). Note
log(f (x) + g(x)) 6= log(f (x)) + log(g(x))

2. If y = f (x)/f (x), then log(y) = log(f (x)/g(x)) = log(f (x)) − log(g(x)). Note
log(f (x) − g(x)) 6= log(f (x)) − log(g(x))

3. If y = f (x)a , then log(y) = log(f (x)a ) = alog(f (x))

Examples:

y = ln(x2 − 2x),

then,
1
dy/dx = (2x − 2).
(x2 − 2x)

1
y = ln(x1/2 ) = lnx,
2
then,
11 1
dy/dx = = .
2x 2x