Preface

Dear learners, in Economics there are two types of reasoning; mathematical and theoretical
reasoning. The ultimate objective of mathematical and literary reasoning is to come up with
somehow valid generalizations about cause effect relationship that prevails among economic
variables. The difference, hence, lies in the ways they undertake. In mathematical reasoning,
economists make use of mathematical symbols in the statement of the problem and draw upon
known mathematical theorems to aid in reasoning. In mathematical economics, the assumptions
and conclusions are stated in mathematical symbols than words and in equations rather than in
sentences. But, in theoretical or literary reasoning the assumptions and the conclusions are stated
in words or statements rather than in symbols or formulas.

This module, therefore, tries to introduce Economics students with the various mathematical
tools or techniques which help them to develop explicit economic models to analyze economic
issues. These models are usually expressed as sets of relationships that take a mathematical
form. Thus, an important part of learning calculus for economists is acquiring a command of the
mathematical tools and techniques used in constructing and solving economic models.

The first chapter of this module deals with introduction to calculus and in this chapter, students
can able to understand the advantage of mathematical reasoning over literary Economics. The
second chapter is about the concept of Limit and Continuity. This chapter lays down a
foundation stone for Differential Calculus, chapter three. That means, Differential Calculus has
its roots in Limit and Continuity. Differential calculus mainly deals with the rate of change of
functions. The fourth chapter introduces students with the application of differential calculus on
some economic functions. Chapter five presents Integral Calculus which has also paramount
application in economics. Finally, chapter six, the last chapter introduces students with the
concept of dynamic optimization in economics.

Lastly, we hope that students and other interested readers will find this material worth reading.
And perhaps, if any editorial or technical errors are committed, they are all ours.

i
Contents
CHAPTER ONE ...................................................................................................................... 1
1.1. INTRODUCTION ............................................................................................................ 2
1.2. THE CONCEPT AND IMPORTANCE OF MATHEMATICAL ECONOMICS ................................. 3
1.3. MATHEMATICAL VERSUS NON-MATHEMATICAL ECONOMICS ....................................... 4
1.4. ECONOMIC MODEL AND ECONOMIC ANALYSIS ............................................................. 6
1.5. THE CONCEPT AND TYPE OF FUNCTIONS ...................................................................... 7
1.5.1. Notations for Functions ........................................................................................... 9
1.5.2. Constants and Variables ........................................................................................ 10
1.5.3. Algebra of Functions ............................................................................................ 11
1.5.4. . Types of Functions.............................................................................................. 12
1.5.5. Monotonic functions ............................................................................................. 18
1.5.6. Even and odd function .......................................................................................... 18
1.5.7. Composite function ............................................................................................... 19
1.5.8. Functions Related to Business and Economics. ..................................................... 19
1.6. BREAK EVEN ANALYSIS ............................................................................................ 24
1.7. REVIEW PROBLEMS FOR SELF –ASSESSMENT.............................................................. 29
CHAPTER TWO ................................................................................................................... 33
2. THE CONCEPT OF LIMIT AND CONTINUITY....................................................... 33
2.1. THE CONCEPT OF LIMIT ............................................................................................. 34
2.2. THE RIGHT SIDE AND THE LEFT SIDE LIMIT ................................................................ 38
2.3. THE CONDITIONS FOR LIMITS TO EXIST ...................................................................... 38
2.4. THE LIMIT THEOREM ................................................................................................. 40
2.4.1. Theorems Involving a Single Function .................................................................. 40
2.4.2. Theorems Involving Two Functions ...................................................................... 41
2.5. THE CONTINUITY OF FUNCTION ................................................................................. 43
2.6. PROPERTIES OF CONTINUOUS FUNCTIONS................................................................... 46
2.7. CHAPTER SUMMARY.................................................................................................. 47
2.8. REVIEW PROBLEMS FOR SELF- ASSESSMENT .............................................................. 49
CHAPTER THREE ............................................................................................................... 52
3. DIFFERENTIAL CALCULUS...................................................................................... 52
3.1. INTRODUCTION .......................................................................................................... 53
3.2. FUNCTIONS AND THE RATE OF CHANGES .................................................................... 54
3.3. THE CONCEPT OF DERIVATIVES / DIFFERENCE QUOTIENT ........................................... 55
3.4. RULES OR THEOREMS OF DIFFERENTIATION ............................................................... 57
3.5. DERIVATIVES OF LOGARITHMIC AND EXPONENTIAL FUNCTION ................................... 61
3.6. DERIVATIVES OF IMPLICIT FUNCTION ......................................................................... 63
3.7. DERIVATIVES OF INVERSE FUNCTIONS ....................................................................... 66
3.8. SUCCESSIVE DIFFERENTIATION .................................................................................. 67
3.9. PARTIAL DERIVATIVES .............................................................................................. 69
3.9.1. First Order Partial Derivatives .............................................................................. 69
3.9.2. The First Order Partial Derivative of Functions with Two Variables ..................... 69
3.9.3. First Order Partial Derivative of a Function with Several Variables....................... 71

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 3.9.4. Higher Order Partial Derivatives ........................................................................... 73
3.9.5. Some Application of Partial Derivatives ............................................................... 75
3.10. DIFFERENTIALS AND TOTAL DERIVATIVES ................................................................. 76
3.10.1. Differentials ...................................................................................................... 77
3.10.2. Total Differentials ............................................................................................. 79
3.10.3. Rules of Differentials ........................................................................................ 81
3.10.4. 3Total Derivatives............................................................................................. 83
CHAPTER FOUR .................................................................................................................. 87
4. ECONOMIC APPLICATION OF DIFFERENTIAL CALCULUS ............................ 87
4.1. INTRODUCTION .......................................................................................................... 88
4.2. INCREASING AND DECREASING FUNCTION .................................................................. 89
4.3. CONVEX AND CONCAVE FUNCTION ............................................................................ 91
4.4. DERIVATIVES OF SOME ECONOMIC FUNCTIONS .......................................................... 94
4.4.1. Average and Marginal Cost................................................................................... 94
4.4.2. Relationship between Average and Marginal Cost ................................................ 95
4.4.3. Average and Marginal Revenue ............................................................................ 97
4.5. THE PROFIT EQUATION .............................................................................................. 98
4.6. PRICE AND INCOME ELASTICITY ............................................................................... 102
4.6.1. Elasticity of Demand .......................................................................................... 103
4.6.2. Elasticity of supply ............................................................................................. 104
4.6.3. Elasticity of Income ............................................................................................ 104
4.7. RELATIONSHIP BETWEEN AR, MR AND POINT ELASTICITY ....................................... 105
4.8. OPTIMIZATIONS OF ECONOMIC FUNCTIONS .............................................................. 108
4.8.1. Free (unconstrained) optimization ....................................................................... 108
4.8.2. The concept of optimum (extreme) value ............................................................ 108
4.8.3. First and Second Order Conditions for a Function with Two Explanatory Variables
118
4.8.4. Constrained Optimization ................................................................................... 123
4.9. Revision Exercises .............................................................................................. 134
CHAPTER FIVE ................................................................................................................. 137
5. INTEGRAL CALCULUS ............................................................................................ 137
5.1. INTRODUCTION ........................................................................................................ 138
5.2. THE INDEFINITE INTEGRAL OR ANTI-DERIVAIVES ..................................................... 139
5.3. RULES OF INTEGRATION........................................................................................... 140
5.4. THE DEFINITE INTEGRAL AND IMPROPER INTEGRALS ................................................ 149
5.4.1. The Definite Integral........................................................................................... 149
5.4.2. The Definite Integral as an Area under a Curve ................................................... 152
5.4.3. Continuous Money Streams ................................................................................ 154
5.4.4. Continuous Money Streams within a Period ........................................................ 155
5.4.5. Properties of Definite Integrals ........................................................................... 156
5.4.6. Improper Integrals .............................................................................................. 158
5.5. ECONOMIC APPLICATIONS OF INTEGRAL CALCULUS ................................................. 161
CHAPTER SIX .................................................................................................................... 168
6. INTRODUCTION TO DYNAMIC OPTIMIZATION ............................................... 168
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6.1. INTRODUCTION ........................................................................................................ 169
6.2. THE CONCEPT OF DIFFERENCE EQUATIONS .............................................................. 170
6.3. INTRODUCTION TO FIRST –ORDER DIFFERENCE EQUATIONS ..................................... 170
6.4. THE CONCEPT OF MONOTONIC AND OSCILLATORY DYNAMICS ................................. 172
6.5. THE CONCEPT OF STEADY STATE VALUE IN DYNAMIC ANALYSIS ............................. 173
6.6. THE GENERAL AND PARTICULAR SOLUTIONS TO DIFFERENCE EQUATIONS ................ 176
6.7. THE CONCEPT OF DIFFERENTIAL EQUATIONS ........................................................... 177
6.8. SINGLE DIFFERENTIAL EQUATIONS/ FIRST ORDER DIFFERENTIAL EQUATIONS........... 177
6.9. SOLUTIONS OF HOMOGENOUS AND NON HOMOGENOUS DIFFERENTIAL EQUATIONS ..... 178

iv
I
 CHAPTER ONE
1. INTRODUCTION TO CALCULUS

An economist usually faces the problem of measuring relationships among various economic
variables. It is quite normal that there exist highly interlinked and complicated relationships,
associations and interdependencies among many economic variables which are so fundamental
and crucial in economic policy formulations and decision making. The presentation of these
various relationships between economic variables requires a set of mathematical tools and
techniques.

What are the sources of long run growth and prosperity in an economy? How does your level of
education affect your life time income? Does birr devaluation improve the trade balance of
Ethiopia? Does economic development lead to increased environmental degradation? What is
the cost of inflation in Ethiopia? What determines the price of foreign currency?

The answers to these and similar economic questions have important consequences. Economists
are trained in the use of explicit economic models to analyze economic issues. These models are
usually expressed as sets of relationships that take a mathematical form. Thus, an important part
of an economist’s training is acquiring a command of the mathematical tools and techniques
used in constructing and solving economic models.
Calculus teaches the core of these mathematical tools and techniques. The mathematics
presented in here provides access to a wide range of economic analysis and research. Yet a
presentation of the mathematics a lone is often insufficient for students who want to understand
the use of these tools in economics because the link between mathematical theory and economic
application is not always apparent. Therefore, calculus places the mathematical tools in the
context of economic applications. These applications provide an important bridge between
mathematical tools and economic analysis and also show the range of uses of mathematics in
economics.

Chapter Objectives
Dear learners, upon the completion of this chapter, the students should be able to:
1
  Identify or define the relationships that exist among various economic variables
 Explain the concept and importance of mathematical Economics
 Distinguish between mathematical and non mathematical economics
 Distinguish between various types of functions
 Identify various types of functional relationships
 Use graph to depict functional relationships
 Appreciate applicability and use of functional relationships in diverse fields.
 Overview some of the algebraic and graphical characteristics of logarithmic and
exponential functions
 Explain break –even point concept.
Chapter Contents
This chapter is organized as follows:
 Introduction
 The concept and importance of mathematical Economics
 Mathematical VS non Mathematical Economics
 The Concept of Functions
 Notations for Functions
 Types of Functions
 Algebra of Functions
 Functions Related to Business and Economics
 Break- Even Analysis
 Review Questions

1.1. Introduction

For decision problems which use mathematical tools, the first requirement is to identify or
formally define all significant interactions or relationships among primary factors (also called
variables) relevant to the problem. This relationships usually are stated in the form of an
equation (or set of equations) or in equations. Such types of simplified mathematical
relationships help the decision-maker in understanding (any) complex management problems.
2
For example, the decision-maker knows that demand of an item is not only related to price of
that item but also to the price of the substitutes. Thus if he can defined specific mathematical
relationship (also called model) that exists, then the demand of the item in the near future can be
forecasted. The main objective of this chapter is to study mathematical relationships (or
functions) in the context of managerial problems.

1.2. The concept and importance of mathematical economics

Before directly swimming in to the discussion of the theme and role of mathematical economics,
let me cite the speech of Nobel Prize winner economist Robert Luca, in some length from his
professional memoir.

“Like so many others in my cohort, I internalized its [Samuelson’s Foundations of Economic

Analyses] view that if I couldn’t formulate a problem in economic theory mathematically, I
didn’t know what I was doing. I came to the position that mathematical analysis is not one of
many ways of doing economic theory, it is the only way. Economic theory is mathematical
analysis. Everything else is Just pictures and talk…”

As you might have recognized from Lucas’s remark, mathematical economics is of paramount
importance for economic analyses. Indeed, it is essential to know what mathematical economics
is before saying about its role in solving problems in theoretical and applied economics.
Mathematical economics is not a distinct specialization of economics; rather, it is an approach to
economic reasoning. The ultimate objective of mathematical and literary economics is to come
up with somehow valid generalizations about cause effect relationship that prevails among
economic variables. The difference, hence, lies in the ways they undertake. In mathematical
economics, economists make use of mathematical symbols in the statement of the problem and
draw upon known mathematical theorems to aid in reasoning. In mathematical economics, the
assumptions and conclusions are stated in mathematical symbols than words and in equations
rather than in sentences. Moreover, mathematical economics draws upon mathematical logics
unlike the literary logic, which is drawn by literary economics.

3
Mathematics evolved through the use of abstraction and logical reasoning, from counting,
calculation, measurement, and the systematic study of positions, shapes and motions of physical
objects. Mathematicians explore such concepts, aiming to formulate new conjectures and
establish their truth by rigorous deduction from appropriately chosen axioms and definitions.

Dear student, this chapter is an introduction to mathematical economics. So what is

mathematical economics? Use the following space to define the term & compare your answer
with the following one.
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
___
Good! Mathematical economics is not a distinct branch of economics in the sense that
macroeconomics, development economics, international economics is. Rather, it is an approach
to economic analysis in which the economists make use of mathematical symbols in the
statement of the problem and also draw upon known mathematical theorems to aid in reasoning.
Thus, it is the subject used to describe case employing mathematical techniques beyond simple
algebra and geometry. In mathematical economics the assumptions and conclusions are stated in
mathematical symbols and equations rather than words and sentences which are commonly used
in most theoretical branches of economics. Mathematical economics is an applied course
designed to acquaint students of economics with the basic principles of mathematics and its
application in the area of analytical and applied economics. So it requires that the student be
acquainted with the basic principles of economics such as the theory of price determination
[demand and supply], the theory of consumer’s behavior [total, and marginal utility, indifference
curves, marginal rate of substitution, etc], the supply side of the economy [such as the theory of
production and costs at least in the short run, profit maximizing firm under different market
structures], basics of macro economics such as national income accounting. Thus, mathematical
economics tries to tie the basics of mathematics to the economic theories that economists use in
micro and macroeconomic studies.
1.3. Mathematical Versus Non-mathematical Economics

4
Since mathematical economics is merely an approach to economic analysis, it should not and
does not differ from the nonmathematical approach to economic analysis in any fundamental
way. The purpose of any theoretical analysis, regardless of the approach, is always to derive a
set of conclusions or theorems from a given set of assumptions or postulates via a process of
reasoning.
The major difference between these two approaches is that in the former, the assumptions and
conclusions are stated in mathematical symbols rather than words and in equations rather than
sentences. Symbols are more convenient to use in deductive reasoning, and certainly are more
conducive to conciseness and preciseness of statement. The choice between literary logic and
mathematical logic, is a matter of little important, but mathematics has the advantage of forcing
analysts to make their assumptions explicit at every stage of reasoning.
Moreover, mathematical economics draws upon mathematical logics unlike the literary logic,
which is drawn by literary economics. At this juncture, you may ask yourself “If the two
approaches’ ends are the same-establish valid hypotheses, then why do economists choose
mathematical approaches with which many literary people are in phobia?”

In fact, it is amazing to see people in horror with mathematics for mathematics is making things
simpler and our life less costly. The choice between literary approach and mathematics
approach to economic reasoning is like the choice between horse cart and plane for travel from
Arba Minch to Addis. The time and cost savings associated with plane or cars has driven out the
horse cart from the market of travel from Arba Minch to Addis. An economist without the tools
of mathematics is like a blind person swimming in the middle of an ocean. Till this person gives
up, he will continue to struggle till he reaches an island; but, his blindness has left him as
incapable to identify whether swimming to the north, south, east or west is the shortest distance
to an island.

But an economist equipped with the tools of mathematics is like a normal person with
motorboat or ship depending upon his personal inclination to each. As a result, most economic
researchers are extensively using the tools of mathematics to economic reasoning.
The term mathematical economics is also different from econometrics in that the former is
concerned with the application of mathematics to the purely theoretical aspects of economic
5
analysis, with little or no concern about statistical problems as the error of measurement of the
variables under study, while the later focuses on the measurements and analysis of economic
data; hence it deals with the study of empirical observations using statistical methods of
estimation and hypothesis testing. Mathematical economics is of paramount importance for
economic analyses.
Specifically the approach has the following advantages:

a) The language used is more precise and concise;

b) There are wealth of mathematical assumptions that make things simple and life less
costly ;hence the analysis is more rigorous;
c) By forcing us to state explicitly all our assumptions as a prerequisite to the use of
mathematical theorems, it keeps us from the pitfall of an unintentional adoption of
unwanted implicit assumptions
d) It helps us to understand relationships among two or more economic variables simply
and neatly with which the geometric and literary approaches are at high probability of
risk of committing mistakes.
e) it allows us to treat the general n-variable case.

1.4. Economic Model and Economic Analysis

As you have covered in the course introduction to economics, an economic theory is necessarily
generalization or abstraction from the real world. The complexity of the real economy does not
make it possible for us to understand all the interrelationships at once; nor, for that matter, are all
these interrelationships of equal importance for the understanding of the particular economic
phenomenon under study. The wise procedure is, hence, to pick out what appeal to our reason to
be the primary factors and relationships relevant to our problem and to focus our attention on
these alone. Such a deliberately simplified analytical framework is called an economic model
since it is only a skeletal and rough representation of the actual economy.

If our model is mathematical, it will usually consist of a set of equations designed to describe the
structure of the model. By relating a number of variables to one another in certain ways, these

6
equations give mathematical form to the set of analytical assumptions adopted. Then, through
the application of relevant mathematical operations to these equations, we may seek to derive a
set of conclusions which logically follow from these assumptions. Hence, the ingredients to any
mathematical model are variables, constants, parameters, equations, and identities.

The main aim behind building economic models is to describe how the economy works and to
obtain somehow valid predictions about economic variables. Different models are built for
different purposes. Some of the models are designed to investigate the equilibrium value of the
variable as an ultimate end while some to investigate the movement of a variable (s) over time.
Thus, in economics, we have three types of analyses; static (equilibrium) analysis, comparative
static analysis and dynamic analysis.

As the name implies, static/equilibrium analysis is the study about equilibrium. That is, it studies
the determination of equilibrium values. Equilibrium is a constellation of selected interrelated
variables so adjusted to one another that no inherent tendency to change in the model which they
constitute. The mathematics of statics will be handled in linear algebra for economists.
On the other hand, comparative static studies on the comparison of two or more equilibrium
values. This may involve rate of changes and growth rates. Almost all of the differential calculus
is related with the comparative static.
The third form of economic analyses is dynamic analysis. It involves the time path of different
relevant economic variables. The whole of integral calculus deals with the mathematics of
dynamic analyses. In this course, you will be introduced with the mathematics of comparative
static and dynamics, and the mathematics for static is left for the next mathematical economics
course.

1.5. The Concept and Type of Functions

A function is a technical term used to symbolize relationship between variables when two
variables are also related, that for any arbitrarily assigned value to one of them, there
corresponds a definite value (or a set of definite values) for the other, the second variable is said
to be the function of the first.

7
For example, the distance covered is a function of time and speed. The rail way freight charged
is a function of weight or volume, the quantity demanded or supplied is a function of price, etc.
the area of a circle depends up on the length of its radius and so the area is said to be the function
of radius.

Thus, a function explains the nature of correspondence between variables indicated by some
formula, graph or mathematical equation. We can say that a function is some sort of a mould
which gives some unique shape to the material poured in to it. It should be remembered that it is
not the degree of variation but the way the variables move in a given function which is of
significance. However, a functional relationship should be not confused with any casual (cause
and effect) relationship. It is purely a mathematical relationship.
The idea of function is sometime expressed as:
The relationship between two real variables say x and y which are so related that
corresponding to every value ‘a’ of x defined as the domain, we get a finite value ‘b’ of y
defined as the range, then y is said to be the function of x.

The fact that y is a function of a variable x is expressed symbolically by questions:

Y=f(x), y=F(x)

The set of the value x belonging to the domain of a function generate another set which consists
of value of y {or f (x)}. This generated set is called the range of the function f(x). If c is any
particular value of x, the value of function f(x) for x=c is denoted by f(c). If the relation between
x and y is such that the value of y is fixed as soon as a definite value is assigned to x then the
variable y is said to be dependent variable and x is the independent variable. The independent
variable is sometimes called the argument of the function.
We shall now clarify the above concept of function by the following examples:
a. If y is always equal to x2, then y is a function of x and we write
y=x2 [Here f(x) =x2]
Similarly ex, log x, (x+a)n, etc,arefunctions of x.
b. If y is defined by saying that
8
 y = x − 1, when x < 2
y = x , when x > 2
Here y is defined as a function of x but two formulae have been used to define the function, one
holds for one part of the domain and the other for the remaining part of the domain

c. Consider the two number x and y with their relationship defined by the equation
y=x2, when x<0
y= x, when 0<x<1
y= , when x>1

The domain of definition of this function which is expressed by three formulas is the whole set
of real numbers. The first formula is used for the domain of all real numbers less than 0. The
second formula is used foe the domain of all real numbers laying between 0and 1 and the third
formula is used for the domain of all those real numbers which are greater than 1
d. Let, y= x!
Here y is function of x defined for aggregate of plosive integers only.

1.5.1. Notations for Functions

The mere fact that a quantity is a function of a single variable, say, is indicated by wringer the
function in one of the forms f (x) ,(x) ,g (x) . . . f1(x) , f2 (x) , . . . if one of these occurs alone, it
is read “a function of x; or ; some function of x’ , if some of these are together , they are read”
the f- function of x” ‘ the f- function of x’ the phi- function of x’ ‘ . . . the letter y is often used
to denote a function of x .

The fact that a quantity is a function of several variables ‘x, y, z . . . is indicated by means of
several symbols, f (x, y) (X, Y) ,f (x, y, z) , (x, y, z, u,. . . ) These are read as ‘the f- function
of x and y ‘, ‘the phi- function of x and y’,
Sometimes the exact relation between the function and the dependent variable (or variables) is
stated ‘as for example:
F(X) = x2+3x-7 ‘ or y= x2 +3x -7, f (x, y) =2ex +7ey +xy-1

9
In such cases the f-function of any other numbers is obtained by substituting that numbers for x
in f (x) and the f- function of any two numbers is obtained by substitution those for x and y
respectively in f (x, y) thus.

f(z) = z2 + 3z-7, f(4)= 42 +3X4-7=21

f(t,z) =2et +7ez +tz -1, f(2,3) =3e2 +7e3 +5

1.5.2. Constants and Variables

A. Constant
The symbols which retain the same value throughout a set of mathematical operations are called
constants. It has become customary to use initial alphabets a, b, c… as symbols for constants.
These are of two types:
i. Absolute constants. Those which have the same value in all operations and discussions.
For example, 2, are absolute constants.
ii. Arbitrary constants. Those which may have any assigned value throughout a set of
mathematical operation.
For example, the radios of a circle or the sides of a right-angled triangle in formatting the
trigonometric ratios are the arbitrary constants.
B. Variables
If a symbol x denotes any element of a given set of numbers, then x is said to be a variable. The
last few alphabets x, y, z or u, v, w are generally used to denote variables. The variables which
can take an arbitrarily assigned value are usually termed as independent variables. The other
variables whose values must be determined in order that they may correspond to these assigned
values are usually termed as dependent variables. It will be seen later that a “function” and
“dependent variable” are synonymous terms.
a. A continuous real variable. If x assumes successively very numerical value of an
aggregate of all real numbers from a given number ‘a’ to another given number ‘b’, then
x is called a continuous real variable.
b. An interval. If variable x which can take only those numerical values which lie between
two given numbers a and b then all the numerical values between a and b taken
collectively is called domain or interval of the variable x and is usually denoted by (a, b)

10
If the set of values say x is such that a x  b then the interval [a, b] is called closed interval. In
this case the number a and b are also included in the interval. If the set of values of x is such that
a <x<b then it is called an open interval which is denoted by (a, b) to distinguish it from [a, b],
here the numbers a and b belong to the interval.

We may also have semi-closed intervals like [a, b) or a x < b; (a, b], or a <x  b. The first
interval is closed on the left and the second is closed on the right. We may have domains of
variation extending without bound in one or the other direction, which we write,
(-, b) or x  b; (a,) or x  a; (-,) or any x

1.5.3. Algebra of Functions

If f and g are two functions, then

a. The sum of f and g, denoted by f+g, is the function given by:

(f+g)(x)=f(x) + g(x),
b. The difference of f and g, denoted by f-g, is the function given by:
(f-g)(x)=f(x)-g(x),
c. The product of f and g, denoted by fg is the function given by:
(fg)(x)=f(x)g(x),
d. The quotient of f and g, denoted by (f/g) (x), is the function given by:
(f/g)(x)=f(x)

In each of the above operations, x is assumed to lie in the domains of both f and g.
However, in the quotient, any value of x for which g(x) =0 is excluded.

11
Example 1.1

If f(x) = 2x + 7 and g(x) = x2 + 3x, find the following:

(a) (f+g) (x) (b) (f-g) (x) (c) (fg) (x) (d) (f/g) (x)

(a) (f+g) (x) = f(x) + g(x) = (2x+7) + (x2 +2x) = x2 + 5x + 7.

(b) (f-g) (x) = f(x) – g(x) = (2x + 7) – (x2 + 3x) = -x2 – (x-7).
(c) (fg) (x) = f(x) g(x) = (2x + 7) (x2 + 3x) = 2x3 + 13x2 + 21x.
Functions(d)
can(f/g)
be represented graphically
(x) = f(x) = 2x + 7. in a coordinate plane. The graph of a function y=f(x)
simply consists of all points (x, y) or (x, f(x)) in the planes as x varies over the domain of f.

1.5.4. . Types of Functions

We shall now introduce some different types of functions which are particularly useful in
calculus.
1. One valued function
When a function has only one value corresponding to each value of the independent variable, the
function is called a one value function. If it has two values corresponding to each value, it is
called a two valued function. In case a function has several values corresponding to each value
of the independent variable, it is called a multiple valued function, or a many valued function,
e.g.,
(i) If y = x2, y is a single valued function of x.
(ii) If y2 = x, y is a two valued function of x (+x and - x).
2. Explicit and Implicit functions
A function expressed directly in terms of the dependent variable is said to be an explicit
function, e.g., y = x2+ 2x – 5.
In it one of the variables dependent on the other and the relationship is not mutual so that the
other could be expressed as a dependent variable.
The function which is not expressed directly in terms of the dependent variable, there is a mutual
relationship between two variables and either variable determines the other, is said to be an
implicit function, e.g.,

12
 (i) 2x – 3y = 0 then x = y and y = x.
3. Algebraic and Transcendental Functions
(ii) x2 + y2 = 16 so that x + 16-y2 and y = +16 – x2
(ii) x2y2 – 6x +8y -7 = 0 so that y = + (x-3) + 4 and x = + (y-4)
+3.
3. Algebraic and Non-algebraic Functions

Functions may also be classified according to the operations involved in the relation connecting
a function and its dependent variable (or variables). When the relation which involves only a
finite number of terms and the variables are affected only by the operations of addition,
subtractions, multiplication, division, powers and roots, the function is said to be an algebraic
function. Thus 2x3 + 3x2 -9, x – are algebraic functions of x. All the functions of x which are

not algebraic are called transcendental functions. Some of the transcendental functions are;

i. Exponential functions
ii. Logarithmic functions
iii. Trigonometric functions.

Whereas, Algebraic functions include;

i. Polynomial Functions
ii. Rational Functions
iii. Square Roots

1.5.4.1. Polynomial Functions

A function of the form:

Y = f(x) = an xn + an -1 xn-1 + … + a0x0

Where a’s are real number (i = 0, 1, 2 . . . n) an≠ 0 and n, a positive integer is called a polynomial
of degree n.

13
 A. Linear Functions

If n = 1 then the polynomial function is of degree 1 and is called a linear function, i.e., for n = 1
function is written as:
y= a1 x1 +a0x0, (a1≠0). The graph of a linear function is always a straight line.

Example 1.2
A firm invested$ 10 million in a new factory that has net return of $500, 000 per year. An
investment of $ 20 million would yield net income of $ 2 million per year. What is the linear
relationship between investment and annual income? What would be the annual return on an
investment of $15 Million?
Solution

Let $X million be the usual income (net return). Let the linear relationship between Y
and X is:
Y = a + bX……………………………………………. ……………………………… (*)
When X = $ 10 million, Y = $ 500,000 = $ ½ million,
And When X = $ 20 million, Y = $ 2 million.
Substituting these values in (*), we obtain
½ = a + 10b and 2 = a + 20b
On solving these equations, we get a = -1 and b = 3/20.
The required linear relation between investment and annual income is given by:
Y = -1 + (3/20) x
When x = $ 15 million;
Y = -1 + (3/20) x 15 = $ 1.25 million.

B. Quadratic Functions

If n = 2, then the polynomial function is degree 2 and is called a quadratic function, i.e., for n =
2, the function can be written as:

14
Y = a2x2 + a1x1 + a0x0, (a20)

Usually written as: Y = ax2 + bx + c, where a, b, c are constants. The graph of the quadratic
function y = f(x) = ax2+bx + c is a parabola that opens upward or downward according as a > 0
or a < 0. Each parabola has a vertical axis of symmetry and a turning point called a vertex. It can
be shown that the x-coordinate of the vertex of a parabola opining upward or downward is given

by–b/2a. TheY-coordinate of the vertex is then a < 0 is at the point. x =

y= .

Also
a. The vertex is the minimum point when a > 0 (in this case the graph opens upwards),
b. The vertex a maximum point when a < 0 (in this case the graph opens downward).
C. Step -Wise Function
For different values of an independent variable x in an interval, the dependent variable y = f(x)
takes a constant value, but takes different values in different intervals. In such cases the given
function y = f(x) is called a step function.

, if 0 < < 500

y = f(x) = , if 501 < < 1,000
y , if 1,001 < x < 1,500

D. Rational functions

A rational function is a function which is the ratio of two polynomial functions. That is,

( )
( )=
( )
For instance, the famous rectangular hyperbola function is a rational function with constant
numerator and variable denominator. Example of such a function is = . Expressions in

solving x which consist of a finite numbers of terms of the from ax in which a is constant and n a
positive integer, e.g.
4x4 +3x3 -2x2 +9x-7 is called a rational integral function of x
15
If an expression in x, in which x has positive integral exponent only and a finite numbers of
terms including the division by a rational integer function of x, it is called a rational function of
x,

Example, ,( )(
and the like.
)

E. Square root of polynomial function.

The other types of Algebraic function are a function which is the square root of polynomial
function. That means,
( )= ( )
Therefore, an algebraic function is a function which is either polynomial, rational, or the square
root of polynomial function.

1.5.4.2. Exponential function

A function having a variable base and a constant exponent, viz., y = x, xx,x9, etc., is called a
power function while a function having a constant base and variable exponent is known as an
exponential function. For Example, y = ax, (a > 0) is an exponential function, where ‘a’ is the
base and x is a real number exponent.
Some characteristics of exponential function:
a. An exponential function y = ax defined for only the positive values of a (i.e., for a >0)
and ax is always positive.
b. If x> z and a > 1, ax> az. in other words, for a > 1 the function y = ax is an
increasing function of x.
c. If 0 < a < 1and x > z, we get ax< az. in other words, for 0 < a < 1, y = ax is a
decreasing function of x.
d. If a > 0 and a  1, we find that y = ax is a continuous function with domain being
real and range (0,).
e. If a = 1, ax = 1. Thus, for a = 1, the function y = axbecomes a constant function.
f. The graphs of ax and = a-x are the reflections of each other about the y-axis.

16
 1.5.4.3. Logarithmic Function

A logarithmic function is expressed as y = logax, where a  1 and x > 0 is the base. It is read as
‘y’ is the logarithmic to the base a of x. This can also be written as x = ay. Thus from an
exponential function y = ax, we may construct the logarithmic function x = ay by inter changing
the variables. This shows that the inverse of an exponential function is a logarithmic function.
The two most widely used bases for logarithms are 10 and e (=2.7182).
a. Common logarithm. It is the logarithm to the base 10 of a number x and is written
as log10x. If y = log10x, then x = 10y.
b. Natural logarithm. It is the logarithm to the base e of a number x and is usually
written as log xor ln x.

Remark: When no base is mentioned, it will be understood that the base is 10.

Some important properties of the logarithmic function y = x are as follows:

(i) log 1 = 0 (ii) log e = 1 (iii) log (xy) = log x + log y

(iv) log (x/y) = log x – log y (v) log (xn) = n log x (vi) loge 10 =

(vii) loge a = (loge10) (log10a) = log10a

log10e
(viii) Logarithm of zero and negative number is not defined.

Some characteristics of logarithmic functions:

1. A logarithmic function y = logax is defined only for the positive values of x.
2. It is continuous function being the inverse of a continuous function.
3. The domain and range of y = logax are [0,] and R respectively, R being a set of all Real
numbers

17
4. If a >1, the logarithmic function y = loga x increases slowly.
5. If 0 < a <1, logarithmic function y = logax (x > 0) decreases slowly.
6. loga (ax) =x, for every real value of x.
7. The base a of the log a x is always taken as a ion – zero positive number
8. Logarithm of zero or a negative numbers is not defined foe any base
9. logaa =1 i.e. logarithm of a numbers with respect to its own base is always unity.
10. The curve representing y= log a lies entirely in the first and fourth quadrant
11. The curve of y= logx, (a≠1, a>0) is asymptotic to the y- axis and has x intercept (1, 0)
12. Theparameter’ a ‘determines the curvature if the function y= log x

1.5.5. Monotonic functions

When the dependent variable increases witch an increase in the independent variable the
function is called a monotonically increasing function foe example the function is a
monotonically depression function of price because the quantity demanded decreases wish
increase in price. A function y= f(x) is called a monotone increasing function in an interval if a
large value of x gives large value of y similarly a function is called a monotone decreasing
function in an interval if an increase in the value x always brings out a decrease in the value of
the function in that interval.

Thus if X1 and X2are only two numbers in the interval such that x2 >x1, then

a. f (x) is monotonically increasing if f(x2) > f(x1) and

b. f (x) is monotonically decreasing if f (x2) < f (x1)

1.5.6. Even and odd function

if a function f(x) is such that f (-x) =f(x) then it is said to be an even function of x, e.g.x4, 5x2 etc
are all even function of x. Now if a function f(x) is such that f (-x) =-f(x)then it is said to be an
odd function of x, e.g.,x3, 5x+6x3, etc are all odd function of x.

18
 1.5.7. Composite function

If y= g (u) and u= f(x) then y= g {f(x)} is called a function of a function or a composite function
for example the volume of a cylindrical water tank is the function of area and depth, while area
itself is a function of the radius (A=r2), so the function of volume is the function of the area
which itself is the function of radius.

1.5.8. Functions Related to Business and Economics.

1. Demand and supply function

Thedemand function specifies the amount of particular commodity that buyers are willing to
purchase at various prices. The supply function in economics is used to specify the amount of a
particular commodity that sellers have made available for offer in the market at various prices.
(It is well known that an increase in price usually causes an increase in the supply, but a decrease
in demand ,on the other hand, a decrease in price bring about a decrease in supply but it causes
an increase in demand. the market price is defined as the price at which supply and demand are
equal)
If p is the price per unit of a certain product and x is the number of unit of the product which
consumers demand during a certain time period, at that price we can write the demand function
as:
X= f(p) showing dependence of x on p Or
P= g (x) showing dependence of p on x
These are the explicit forms of the implicit demand function, F(x, p) =0.
The graph of a demand function is called a demeaned curve and it is usually a straight line
whose slope is negative i.e. demand function is a decreasing function also since negative
quantities are meaningless, p>0 and x>0
Further if p denotes the price per unit and x denotes the corresponding quaintly supplied of a
certain product than we can write the supply function as:
X= (p), showing the dependence of p on x or
P=  (x) showing the dependence of x on p. The graph of a supply function is called a supply
curve which is usually a staring line wish positive slope, i.e. supply function is an increasing
function and both p and x are non negative
19
1 Cost Functions
Let C be the total cost incurred in the production of x units of a commodity .Then, a function
relatingC and x is called a cost function and it is generally written as : C= C
(x). Its graph is called cost curve. The cost function consists of two parts.

a. Fixed cost denoted by F (x) which is the sum of all cost that is independent of the level of
production namely rent insurance depreciation and other overhead expenses, interest on loans
and upkeep of the establishment which exist even while there is no production
b. Variable cost denoted by V (x) which is the sum of all costs that are dependent on the level
of production namely cost of material,labour, cost of publicity, fuel etc. it depends up on the
number of units (x) produced. Thus total cost function is given by: C(x) = V(x) + F(x)
Remark- Cost curves are generally increasing curves (i.e., they rise from the left to the right as
the cost of production usually increases with the output (x). Average cost of production or cost
per unit is obtained by dividing total cost by the quantity produced, i.e., A(x) = C/X
2 Total Revenue Function
Revenue is the amount of money derived from the sale of a particular commodity and depends
up on the price of the commodity and the quantity of the commodity that is actually sold. If x is
the demand for the output of a firm at price p, then the total revenue (R) collected by the firm is
given by:
R(x) = p.x  p = R(x)/x
Thus the price p is also average revenue of the firm.
3 Profit Function
The revenue and cost functions lead to the profit function of a firm, as profit is the excess of
revenue over the cost of production. The profit function of the firm takes the form: P(x) = R(X)
– C(x), where R(x) is the total revenue (income) received by selling x unitsand C(x) is the total
cost incurred in the production of x units of a product.
4 Overall Consumption Function
If C is the total consumption of the community dependent on income Y and propensity to
consume c, the aggregate consumption function is indicate by C = a + cY. But since Y = C + S,
S = Y – (a + cY) is the savings function of the community.

Example 1.3
20
(A). Suppose there is demand of 60 units of a product when its price is $ 18 per unit and 40 units
when its price is $ 28 each. Find the demand function, assuming that it is linear.

(B).When the unit price of an item is $ 5, the daily supply will be 100. When the price is
increased to $ 10, the daily supply is found to be 200. Find the supply function, assuming that it
is linear.

Solution

(A) Let the demand function be p = a + bx, ……………….. (*)

Where p, in $ is the price per unit and x is the number of units of the product demand.
When x = 60, p = 18 and when x = 4, p = 28.
Substituting these values of x and p in (*), we get 18 = a + 60b, 28 = a + 40b.
Solving these questions, we obtain a = -1/2 and b = 48.
 The required demand function is: p = 48 - x.

(B) Let the supply function be: p = c + dx………………… (*)

Where x is the number of items available and p is the corresponding price.
When p = 5, x = 100 and when p = 10, x = 200.
Substituting these values in (*), we get 5 = c + 100d, 10 = c + 200d
Solving these equation, we obtain c = 0, d = x.

 The required supply function is: p = x.

Example 1.4
A company manufactures chocolate powder tins and the cost of manufacture of each tin is $ 15
plus a fixed daily overhead cost of $ 900. It sells each tin at $ 20. Determine the profit function.
What is the profit if 1,000 tins are manufactured and sold a day? How do you interpret the
situation if the company manufactures and sells 200 tins a day?
Solution
Let x tins be manufactured and sold each day. Now
Total cost = Fixed cost + variable cost  C(x) = 900 + 15x

21
 Revenue function is given by:
R(x) = Sale price per tin x number of units sold 20x.
Profit function is given by:
P(x) = R(x) - C(x) =20x-(15x + 900) = 5x-900 ………………… (*)

Substituting x = 200 in (*), we get P (200) = 5 (200) – 900 = 100.

The company earns a profit of $ 100 per day by producing and selling 200 tins.

Examples 1.5
A man producing very fine earthware lampstands found that he could sells on an average of 4
stands per day at a price of $ 18 each. When he increased his output to an average of 4.5 per day
he could only obtain $ 17.5 each, if he were to sell all his output to an average of 4.5 per day he
could only obtain $ 17.5 each if he were to sell all his out put. Assume that he maintains no
inventories , so that he sells all he produces , and that the appropriated demand function is liner
and is of the form:x =a+bp, where a and b are constants , x is the average number sold per day
and p is the price.An accurate survey in to his total production cost produces the relationship;
C(x) = X2- X+54 between the total production cost, C, and the average daily production, x,

(i) Determine the demand function giving the averagenumbers sold per day, x in terms of the price
p
(ii) Find an expression foe the gross profit per day in term of the average number of the price ,p
(iii) Find the profit when 6 stands are produced and sold

22
 Solution (I) demand function: x=a + bp
Whenprice, p =$ 18, demand, x =4 per day on average, 4= a + 18b ………….. (*)
Whenprice p = $ 17.5, demand = 4.5 per day on an average, 4.5= a +17.5b ……. (**)
Solving (*) and (**), we obtain a=22, b=-1

The demand function is: x = 22-p and revenue function, R (x) = (22-x) x
(ii) Profit function: P(x) =x (22-x) - (1/2 x2 – 1/2x + 54) = - 1.5 x2 + 22.5 x- 54.
(iii) Gross profit when 6 stands are produced and sold
= - 1.5 (6) 2 + 22.5 (6) – 54 = $ 27

Example 1.6
Assume that for a closed economy, E= C + I +G, where E is total expenditure, C is expenditure
on consumption good I is expenditure on investment goods, and G is government spending. For
equilibrium, we must have E=Y where Y is total income received. For a certain economy, it is
given that C= 15 + 0.9 Y, I = 20 + 0. 05Y, and G=25 find the equilibrium values of Y, C and I.
How will these change if there is no government spending

Solution here we are given that E=C+ I+G………….. (*)

And for equilibrium E = Y……………….. (**)
From (*) and (**) we get Y = C+ I + G………… (***)
Substitution the given values of C, I and G in (***), we obtain
Y = (15+ 0.9 Y) + (20 + 0. 05Y) +25 = 60 + 0.95 Y
 Y (1- 0.95) = 60 or Y= 60/0.05= 1,200……………………. (****)
Now C= 15 + 0. 9 Y = 15 + 0.9 (1, 200) = 1, 095………………….. (*****)
And I = 20 0.05Y = 20 + 0.05 (1,200) = 80 ……………………….. (******)

The required equilibrium values are given by (****), (*****) and (******).

If there is no government spending then G= 0 and the equilibrium equation takes the form
Y= C+I = (15+ 0.9 Y) + (20 + 0.05Y 0 = 35 + 0. 95 Y ………….. ………………. (7)
 Y (1- 0. 95) = 35 or Y = 35/0.05 = 700……………………………………. (8)

23
Now C = 15 + 0.9 Y = 15 + 0.9 (700) = 645……………………………………..(9)
And I = 20 0.05Y = 20 + 0.05 (700) = 55……………………………………. (10)
The changed values of Y, C and I if there is no government spending is respectively
given by (8), (9) and (10)

Example 1.7
The manager of a real estate firm faces the problem of determining the monthly rental for each
of the 60 newly built apartment unite. At a rental of $ 800 per month all apartment units will be
occupied but one apartment unite is likely to remained vacant for each $ 20 increase in rent. Also
an occupied apartment requires $ 80 more per month than a vacant one for serves and
maintenance

Find the function which expresses the relationship between gross profit and number of
unoccupied apartment unites

Solution
Let x represent the number of vacant apartment units. Then the rental per occupied apartment is
(800 + 20x), number of occupied apartments are (60-x), and the extra operational cost for all the
occupied apartment unites is 80 (60-x)
Since rental times the occupied apartment minus operational cost equals gross profit the gross
profit function p (x) is
P (x) = (800 + 20x) (60- x) = -20x2 + 480x + 43, 200.

1.6. Break Even Analysis

Recall that the profit function, P(x), from producing, marketing and selling x units of a product
is the revenue function, R(x), minus the cost function, C(x), i.e.,
P(x) = R(x) – C(x).
There are three distinct possibilities in business:
a. Revenue earned by a business firm is more than the total cost incurred, i.e., when R(X) >
C(x). In this case, P(x) = R(x) – C(x) > 0 and the business firm is earning Profit.

24
 b. Revenue earned by the firm is less than the total cost incurred, i.e., when R(x) < C(x). In this
case, P(x) = R(x) – C(x) < 0 and the firm is running at a loss.
c. Revenue earned by the firm is equal to the total cost incurred, i.e., when R(x) = C(x). In this
case P(x) = R(x) – C(x) = 0.Thus the firm is neither earning profit nor loss.

Sales revenue
Y

Total cost
Break even point
Cost and Revenue

Variable cost

Fixed cost
X

Sales volume at break even

This is a special case of interest in business and economics. Such a situation is called business
break-even. The value of x (i.e., volume of production or the number of units produced) when
P(x) = 0, i.e., when R(x) = C(x) is called the break-even point.
Example 1.8
A company decides to set up a small production plant for manufacturing electronic clocks. The
total cost for initial set-up (fixed cost) is $900,000. The additional cost (i.e., variable cost) for
producing each clock is $ 300. Each clock is sold at $ 750. During the first month, 1,500 clocks
are produced and sold:
(i) Determine the cost function C(x) for the total cost of producing x clocks.
(ii) Determine the revenue function R(x) for the total revenue from the sale of x clock.
(iii) Determine the profit function P(x) for the profit from the sale of clicks.
(iv) What profit or loss the company incurs during the first month when all the 1,500 clocks are
sold?
(v) Determine the break-even point
25
Solution
(i) We know that cost function includes fixed cost and variable cost. From the given data,
fixed cost = $ 900,000 and variable cost = $ 300 per clock. Let C(x) denote the cost function
to manufacture x clocks, then
C(x) = fixed cost + variable cost to produce x clocks = 900,000 + 300x
(ii) Revenue function is calculated from the sale price. From the data, we observe that each
clock is sold for $ 750. Hence if R(x) denotes the revenue from the sale of x clocks, then
R(x) = 750 (X) = 750x

(iii) Profit function = R(x) –C(x)

= 750x – (900,000 + 300x) = 450x – 900,000.
(iv) When 1,500 clocks are sold, profit is given by:
P (1,500) = 450 x 1,500 – 900,000 = -$ 225,000
This shows that there is a loss of $ 225,000 when only 1,500 clocks are sold.
(v) At the break-even point, R(x) = C(x), i.e.
9 00,000 + 300x = 750x  450x = 9, 00,000
 x = 2,000
Hence to achieve break-even point, 2,000 clocks have to be sold.

Example 3.8

An automobile spare part manufacturing company introduces production bones to the employees
that increase the cost of the spare part. The daily cost of production C for x number of spare part
is C(x) = 2.05x + If each spare part is sold for $ 3, determine the minimum number that must be
produced and sold daily to ensure no loss.
If the selling price is increased by 30% per piece, what would be the break-even point?
If it is known that at least 500 parts can be sold daily, what price the company should
charge per piece of spare part to guarantee no loss?

26
 Solution
(i) The total revenue from sales is given by: R(x) = $ 3x
For the break-even point, we have C(x) = R(x)

3x = 2.05x + 550  (3-2.05) x = 550 or x= = 578.95

.

Thus at least 579 parts must be produced daily to ensure no loss.

(ii) In this case, the total revenue from sales is given by: R(x) = $ 3.30x
For the break-even point, we have
3.30x = 2.05x + 550  (3.30 – 2.05) x = 550 or x= = 440
.

With the increased selling price, the break-even point is 440 units.
(iii) If at least 500 spare parts can be sold daily, the price p per unit of spare part needed to
ensure no loss is given by
500p = 2.05 x 500 + 550 = 1575  p= = $ 3.15.

500

Example 1.9
XYZ Company is ready for the production of steam presses. During the first year, the costs for
setting up the new production line are $ 300,000. These are fixed costs. The additional cost of
producing a steam press is $ 70. This cost is directly related to production, and is variable cost.
The company expects the revenue from the sales of thesteam presses to be $ 270 per press.
Assuming all the produced steam presses may be sold, find the member x, of steam presses for
which:
i. The company will break even;
ii. The company will make a profit,
iii. The company will suffer a loss, and
iv. Profit function.

Solution
The total revenue from sales of x steam presses is: R(x) = 270x

27
 The fixed and the variable cost are given by F(x) = 300,000 and V(x) = 70x, and the cost
function is given by: C(x) = F(x) + V(x) = 300,000 + 70x
(I) For the break-even point: C(x) = R(x), i.e.
,
300,000 + 70x = 270x  (270 – 70) x = 300,000 x= = 1,500.

(i) To make profit, x must be more than 1,500, i.e., x> 1,500.
(ii) Obviously, the company would suffer a loss if x is less than 1,500, i.e., x < 1,500.
(iv) The profit function is given by:
P(x) = R(x) – C(x) = 270x – (300,000 + 70x) =200x – 300,000.

28
 1.7. Review Problems for Self –Assessment
1. A shoe manufacture is planning production of a new variety of shoes. For the first year the
fixed cost for setting up the new production line is$ 1.25. Variable cost for producing each pair
of shoes is $ 35.The sales department projects that 1,500 pairs can be sold in the first year at the
rate of $ 160 per pair.
a. Determine the cost function C(x) for the total cost of producing x pairs of shoes.
b. Determine the revenue function p(x) for the total revenue from the sale of x pairs can be sold
of shoes.
c. Determine the profit function P(x) for the profit from the sale of x pairs of shoes.
d. If 1,500 pairs are actually sold, what profit or loss the company incur?
e. Determine the break-even point.

2. A text book publisher finds that the production costs directly attributable to each book are $
20 and that the fixed costs are $ 10,000. If each book can be sold for $ 30, determine the cost
function, revenue function, and the break-even point.
3. A company sells its product for $ 4 per unit. Fixed cost for the company is$ 2,800 and
variable costs are estimated to run 30% of total revenue. Determine
(i) The total revenue function,
(ii) The total cost function,
(iii)The break-even point,
(iv) The quantity the company must sell to cover its fixed cost.
4. The cost of producing x items is given by C(x) = 2.80x + 600 and each item sells for $4.
(i) Find the break-even point.
(ii) If it is known that at least 450 units will be sold, what should be the price charged for
each item to guarantee no loss?
5. Find the equilibrium prices and quantities for the two commodity market models:
Xd1 = -2 – p + q,Xs1 = -2 -q, Xd2 = -3 – p + q, Xs2 = -9 + p – q
Where p is price and q is quantity.

6. Explain: (i) Demand function and supply function,

(ii) Market equilibrium.

29
7. Explain what you understand by demand and supply function and market equilibrium. The
demand law of commodity is p = m √x + n. If the price is one unit, the demand is 100 units and
if the demand is units, the total revenue is 144 units. Find the constants m and n. If p = 2 units,
what is the total revenue.

8. A company software manufacture wants to start the production of floppy disks. He observes
that he will have to spend $ 200,000 for the technical know-how. The cost of setting up the
machine is $ 88,000 and the cost of producing each unit is $ 30. He can sell each floppy at $ 45.
Determine (I) the total cost function for producing x floppies, and (ii) the break-even point.

9. A company is ready for the production of an electronic medical instrument. The fixed cost for
setting up the machinery is$ 1,000,000.Every instrument requires an additional cost of $ 250
which is called the variable cost. The company proposes to market the instrument at an attractive
price of $ 500. Before going to the market, the product should go through the quality test in
which the producer expects a 90% success. Find number of products for which the company will
(I) break even and (ii) make profit.

10. A company is ready for production of medical instrument. The fixed cost of setting up the
machinery is $ 100,000. Every instrument requires an additional cost of $ 250 to produce. The
company proposes to market the instrument at an attractive price of $ 500.Before going to the
market, the product should go through the quality test in which the producers expect a 90 percent
success rate. Find
(I) The number of products for which the company will-break,
(ii) The number of products for which company will make a profit of $ 10,000.

11. The market research department of a company recommended to management of company ‘x’
that the company manufactures and market a promising new product. After extensive surveys,
the research department backed up the recommendation with the demand function:

Dx = f(p) = 6000 – 30 Px ………………………………………………………………(1)

Where Dx is quantity demanded at price Px during a month. Financial department has brought
30
the cost function and is given by
C(x) = 72,000 + 60x ………………………………………………………………….. (2)

Then, find:
a. Break even prices and outputs
b. Price and output that will maximize profit

12. Suppose that the demand function for a particular commodity is given as X = 9000 – 30P and
the cost equation to C = 90,000 + 30x
a. Express cost as a function of price
b. Express revenue as a function of price
c. Find beak even prices and outputs
d. Find the price that will maximize profit

31
HHints and Answers.
1.
i. 125,000 + 35x,
ii. 160x,
iii. 125x – 125,000,
iv. profit of $ 62,500,
v. 1,000

2. (I) C(x) = 10,000 +20x, (ii) R(x) = 30x, (iii) 1,000.

3. (I) R(x) = 4x, (ii) C(x) = 2,800 + 1.2x, (iii) x = 1,000, (IV) x = 700.

4. (I) 500, (ii) $ 4.13

5. P= 6, q = 3.

7. m = 4, n = 43, total revenue = 171.13 units when p = 2 units.

8. C(x) = 288,000 + 30x; 19,200.

9. Hint. (i) C(x) = F(x) + V(x). It is given that F(x) = 1,000,000; V(x) = 250x and
R(x) = 0.9x (500). Hence solving for x from C(x) = R(x), we get x = 5,000.
Hence when 5,000 products are produced, the break-even point is achieved.
(ii) To make profit, more than 5,000 units of the product should be produced.

32
 CHAPTER TWO
2. THE CONCEPT OF LIMIT AND CONTINUITY

Dear students, the knowledge of the concepts of limits and continuity serves as a foundation
stone in the application and use of calculus. Students with a good background of these concepts
will find it relatively easy to understand the concept of derivatives and other related issues.

It is always necessary in economics to evaluate a function as its argument approaches some

value. In dynamic analysis, we solve for the long run level of an economic variable. For
instance, economic growth depends on physical capital, as predicted by the Solow growth
model. Therefore, Economists may be interested in evaluating the level of economic growth as
capital approaches very large number (infinitive). There is a correspondence between this
mathematical techniques and economic concept of evaluating the effect at the margin. Thus, this
chapter deals with how to evaluate a function as its argument approaches a certain value by
introducing the concept of limit.
Chapter Objectives
Dear learners, upon successful completion of your study on this Unit, you will be able to:
 Explain the concept of limits
 Discuss the conditions for a limit to exist
 Apply the limit theorems to find the limit of a function
 Define continuity of function graphically and using the limit concept
 Describe properties of continuous functions
Chapter Contents
This chapter is organized as follows:
 The Concept of Limit
 The Right Side and the Left Side Limits
 Conditions for the existence of Limit
 The Concept of Continuity
 Properties of Continuous Functions
 The Limit Theorems
 Chapter Summary

33
  Review Questions

2.1. The Concept of Limit

Dear learners! In light of the introduction given above please try to define what a limit means?
Provide your answer on the space provided below.
_____________________________________________________________________________
_____________________________________________________________________________
___________________________________________________________________________

Yes! As you might say and as its name indicates, a limit a function as its argument approaches
some number a is simply the number that the function’s value approaches as the argument
approaches a, either from smaller values of a, giving the left hand limit, or from the larger
values of a, giving the right hand limit.

Numbers can be ordered according to their magnitudes following the rules stated below.
1. Increasing sequence:- this can be shown using illustrative examples:
a) 1, 2, 3, 4, ..., ∞. Such a series increases without a limit. It increases to infinity.
b) ½, 2/3, ¾, 4/5, ... 1. Such a series increases with a limit. And 1 is called the limiting number.
2. Decreasing sequence:- this can also be shown using illustrative examples:
a) 1, 0, -1, -2, ..., -∞. Such a series decreases without a limit. It decreases to infinity.
b) 2, 3/2, 4/3, 5/4, 6/5, ..., 1. Such a series decreases with a limit. And 1 is called the limiting
number.
3. Oscillating Sequences:- these take either a converging pattern or a diverging pattern.
a) ½, 3/2, ¾, 5/4, 5/6, 7/6, ..., 1. Such a series gradually approaches to 1. It oscillates and tends to a
particular number (the limit is 1)
b) 1, 3/2, 3, 5/4, 5, 7/6, ..... this is also an oscillatory series, but does not converge to a specific
number. The series tends to infinity.
The concept of a limit is concerned with what values a function (for instance f (x ) ) assumes as
its variable x approaches a particular value. Consider the following illustration.
Given the function f ( x )  x  3 , you can study what values the function assumes as x is close to
2 but not equal to 2. By evaluating the function on both sides of and close to x  2 , you can
34
study to what values the function approaches. Below is the inspection of the values of the
function to the left and the right of x  2 .
From the right
x 4 3 2.5 2.1 2.001
x3 7 6 5.5 5.1 5.001

From the left

x -1 0 1.5 1.9 1.999
x3 2 3 4.5 4.9 4.999

You can see that as the value of x approaches 2 from both sides, the value of the function
approaches 5. This can be written as
lim + 3
→

Figure 2.1 presents the graph of x  3 . As you can see, the value of the function approaches 5 as
x tends to 2.
In general, if a function f (x ) approaches some finite number L as x approaches a, then this can
be written as
Limf ( x)  L Where L is a finite number
xa

Lim - is the limit of

x  a - x is closer and closer but not equal to a

Y f ( x)  x  3

(2, 5)

X
2

35
Figure 2.1 the graph of f ( x)  x  3

Therefore, you can read Limf ( x)  L as ‘the limit of the function f (x ) as x approaches a is L
xa

’.
Suppose a function f (x ) is defined for all x near a , but not necessarily at x = a . Then, you say
f (x ) has the number L as its limit as x tends to a , if f (x ) tends to L as x tends to (but not
equal to) a . This is written as

Limf(x)  L or f (x )  L as x  a
xa

Example 2.1
a) Given the function f (x ) = 3 x  2 , find the limit as x tends to 3 i.e., find Lim 3x  2 .
x 3

Solution
The tables below show the value f (x ) = 3 x  2 assumes as x tends to 3 from the left and the
right.
As x tends to 3 from the left

x 2 2.9 2.95 2.99 2.999

3x  2 4 6.7 6.85 6.97 6.997

As x tends to 3 from the right

x 4 3.1 3.05 3.01 3.001

3x  2 10 7.3 7.15 7.03 7.003

It appears that 3 x  2 tends to 7 as x  3 . Therefore, Lim 3x  2 =7.

x 3

Example 2.2

h 1 1 h 1 1
Given the function f (x ) = , find Lim .
h h 0 h
36
Solution
The tables below show the value of the function as h approaches zero from the left and the right
sides.

As x tends to 3 from the left

h -1 -0.5 -0.2 -0.1 -0.01

h 1 1
h 1 0.586 0.528 0.513 0.501

As x tends to 3 from the right

h 1 0.5 0.2 0.1 0.01

h 1 1
h 0.414 0.449 0.477 0.488 0.499

h  1 1
The tables show that Lim =0.5
h0 h

Exercise One
Answer the following questions. Use the space below each question to write your answer.
Find the limits of the following functions.
a) f ( x )  x  7 as x tends to 2

b) f ( x)  x 2  2 x  4 as x tends to 1

x2  3
c) f ( x)  as x tends to 2
x2

1
d) f ( x)  as x tends to 4
x6
37
 2.2. The Right Side and the Left Side Limit

You have studied the limit of the function f (x ) as x  a . When x  a , x can approach the
number a either from values greater than a or from values less than a (i.e., either from the
right side of a or from the left side of a ). If f (x ) approaches a finite number L as x tends to a
from right-side (from values above a ), L is called the right-side limit of f (x ) . On the other
hand, if f (x ) approaches a finite number L as x tends to a from left-side (from values below a ),
L is called the left-side limit of f (x ) . The right-side limit can be written as Limf ( x) (the plus
x a 

sign signifies the values above a ), and the left-side limit can be expressed as Limf ( x) (the
x a 

negative sign signifies values below a ).

2.3. The Conditions for Limits to Exist

Having discussed the concept of right-side and left-side limit, let us now consider the conditions
for limits to exist. The limit for a function f (x ) is said to exist if and only if the following two
conditions are satisfied:
i) The limit L must be a finite number.
ii)The limit as x approaches a from right-side( Limf ( x) ) must equal the limit as x
x a 

approaches a from left-side ( Limf ( x) ). In other words, the right-side ( Limf ( x) ) and the left-
x a  x a 

side ( Limf ( x) ) limits must be equal.

x a 

That is Limf ( x) = Limf ( x) .

x a  x a 

Example 2.3

Given f ( x)  x 2  2 , evaluate the limit of f (x ) as x  3 .

38
Solution: The right-side and the left-side limits of f (x ) are respectively Limf ( x) =11 and
x 3

Limf ( x) =11. This implies that both the above conditions are satisfied and hence, the limit of
x 3

f (x ) exists, that is Limf ( x) = 11.

x3

Example 2.4
1
Given f ( x)  , find the limit of f (x ) as x  2 .
x2
Solution: The value f (x ) assumes increases without bound as x approaches 2 from either the
1
right or the left. That is Limf ( x )   . Figure 2.2 shows the graph of f ( x)  .
x 2 x2
Y

1
f ( x) 
x2
X
2

1
Figure 2.2 The graph of f ( x) 
x2
Because f (x ) does not tend to finite number (that is violation of condition 1), the limit of the
function does not exist.

Example 2.5
If f (x ) is a function whose graph is shown in figure 1.3, find Limf ( x) .
x a

39
 Y

A y  f (x )

X
a

Figure 2.3 The graph of Limf ( x)

x a

Solution: As you can see from the graph, the limit of the function as it approaches a from the
left is B (the left side limit). On the other hand, the limit of the function as it approaches a from
the right is A . As a result, the function fails to have a limit as x  a .

You should note the limit of a function as x approaches a is independent of the value of the
function at x = a . Even if Limf ( x)  L exists, the value of the function may be undefined or
xa

defined but different from the limit L .

Exercise Two
Answer the following questions. Use the space below each question to write your answer.
Compute the following limits.
 x2  1
a) Lim 
 x2 
x2

b) Lim( x 2  2 x  5
x 1

2.4. The Limit Theorem

2.4.1. Theorems Involving a Single Function

Given a single function y  f (x ) , the following theorems are applicable.

40
Theorem 1
If y  ax  b , then Limf ( x)  an  b (where a and b )
x n

Example 2.6
Given f ( x )  3x  2 , then Limf ( x )  3(2)  2  8
x2

Theorem 2
If y  f ( x)  b , then Limf ( x)  b . This theorem simply says that the limit of a constant function
xn

is the constant itself and it is a special case of theorem 1 where a  0

Example 2.7
If f ( x )  10 , then the limit of f (x ) as x approaches, for instance, 2 is Limf ( x )  10
x 2

Theorem 3
r
Lim f ( x)   Limf ( x )  Lr (where r is any real number)
r

x a  xa 
Example 2.8
2
 
Given f ( x )  3x  2 , find the limit of  f (x) as x approaches 2 . Lim f ( x)  Limf( x) 
2 2

x 2  x2 
8 2  64

2.4.2. Theorems Involving Two Functions

Suppose that you have two functions: f (x ) and g (x) . Both functions have limits as the value of
x approaches a (but not necessarily equal to a ) which are given as Limf ( x)  A and
xa

Limg ( x)  B . Then, you have the following rules for limits.

x a

Theorem 1: Sum-difference Rule

The limit of a sum of two functions is the sum of their respective limits.
Lim( f ( x)  g ( x))  A  B
x a

The limit of a difference two functions is the difference of their respective limits.
Lim( f ( x)  g ( x))  A  B
x a

41
Example 2.9
Let f ( x)  2 x 2  3 and g ( x )  4 x , then limit of each function as they approach 1 is Limf ( x)  5
x 1

and Limg ( x)  4 .
x 1

Therefore,
Lim( f ( x) g ( x ))  5  4  9
x 1

Lim ( f ( x ) g ( x ))  5  4  1
x 1

Theorem 2: Product Rule

The limit of the product of two functions is the product of their respective limits.
Lim ( f ( x ) g ( x))  AB
x a

Example 2.10
Let f (x ) and g (x) be given as in the example above. Then,

Lim ( f ( x ) g ( x ))  (5)(4)  20
x 1

Theorem 3: Quotient Rule

The limit of a quotient of two functions is the quotient of their limits. In this case, the limit of
denominator function is restricted to be non zero; otherwise the quotient is undefined.
f ( x) A
Lim  ( B  0)
g ( x) B
xa

Example 2.11
f ( x) 5
Using the functions given in the example above, Lim   1.25
g ( x) 4
x 1

Exercise Three

Answer the following questions. Use the space below each question to write your answer.

Determine the following limits.

a) Lim( x 2  3 x )
x 2

42
 2x2 1
b) Lim
x 1 x2

c) Lim 4x 3
x 2

d) Lim x
x 3

2.5. The Continuity of Function

Dear Student! In this sub section, you will be introduced to the concept of continuity of a
function which is an important property of functions. We will make use of the concept of limits
to examine continuity of functions and the conditions necessary for functions to be continuous.

Do you have any idea about continuity of a function? You can use the space below to write your
answer.
_____________________________________________________________________________
___________________________________________________________________

Good! The word continuous is common in everyday language and it is used to characterize
changes that are gradual rather than sudden. This usage is closely related to continuity of
functions. More formally, a function is said to be continuous if small changes in the independent
variable produce small changes in the values of the function.

Geometrically, a function is continuous if its graph is connected; that is if it has no breaks.

Often, a function is said to be continuous if its graph can be drawn without lifting one’s pencil
off the paper. If the graph makes one or more jumps, that function is regarded as discontinuous.
Consider the graphs given below. The functions whose graphs shown in figure 2.4(a) and (b) are
both continuous since their graphs involve no jumps. In contrast, the function whose graph is
given by figure 2.4(c) is discontinuous at x = a but continuous at all other points of the interval
that constitutes its domain.

43
 Y Y

X X
a a

(a) (b)

X
a

(c)

Figure1.4 Graphs illustrating continuity of functions

In the previous section, we dealt with the concept of limit and this concept is now used to define
the concept of continuity of a function. When a function f (x ) possesses a limit L as x
approaches a in the domain, and when this limit equals to f (a ) - that is it equals to the value of
the function at x = a - then the function is said to be continuous. In other words, the term
continuity of a function involves three conditions:
i) The point x = a must be in the domain i.e., the function f (x ) must be defined at
x=a .
ii) The function f (x ) must have a limit as x approaches a i.e.,
Limf ( x)  L must exist.
xa

iii) The value function f (x ) at x = a must be equal to the limit of the function f (x )
i.e., f (a ) = Limf ( x)  L .
xa
44
 Unless all the three conditions are satisfied, the function f (x ) cannot be said continuous at x = a
.

Example 2.12
a) Check if y  f (x ) in Figure 2.5 whether continuous or not at points a and b .

f (a ) y  f (x )

f (b)
A

a b

Figure 2.5 continuity of a function

At both points, the function is discontinuous. At x = a , the function is discontinuous because

f (x ) has no limit as x approaches a . That is, condition (ii) is not satisfied. Similarly, the
function is discontinuous at x = b . In this particular case, the function has a limit at x = b but the
limit is different from the value of the function at that particular point. That is f (b)  Limf ( x)
x b

which simply means that condition (iii) is not satisfied.

Example 2.13
x
Given f ( x )  , check the continuity at x  1 .
1 x
Solution
Limf ( x) exists but f (x ) violates the 1st condition; i.e., f (1) is not defined. Therefore, the
x 1

function f (x ) is discontinuous at x  1 .
Example 2.14
Show that f ( x)  x 2  2 x is continuous at x  2
Solution

45
 f ( 2) is defined. f (x ) has a limit as x approaches 2 ; that is Limf ( x)  8 . The function also
x2

satisfies the 3rd condition; that is f ( 2) = Limf ( x) . As a result, f (x ) is continuous at x  2 .

x 2

Exercise Four
Answer the following questions. Use the space below each question to write your answer.

Decide whether the following functions are continuous at the given value of x .
x
a) f ( x )  ; at x  1
x 1
b) f ( x)  3x 2  4 x  1 ; at x  2
1
c) f ( x ) 
x2

2.6. Properties of Continuous Functions

Functions have continuity properties similar to that of properties of limits. Below are the
properties of continuous functions.

a) If f (x ) is a polynomial function, then it is continuous for all values of x .

Example 2.15
f ( x)  x 2  2 x  4 is a polynomial and thus is continuous for all values of x .

b) The sum, difference, product and quotient of two continuous functions are continuous. That is,
if f (x ) and g (x) are continuous at x = a , then
i) f (x ) + g (x) and f (x ) - g (x) are also continuous at a ;
ii) f (x ) . g (x) is also continuous at a ;
iii) f (x ) / g (x) is also continuous at a if g (a )  0.

Example 2.16
If f ( x)  x 2  1 and g ( x)  2 x  1 are continuous for all values of x , then ( x 2  1)  (2 x  1) ,

( x 2  1)  (2 x  1) and ( x 2  1)(2 x  1) are all continuous at x .

46
 x2 1
Similarly, is continuous for all values of except at x = 1 where the function is
2x  1 2
undefined.
c) If f ( x )  k where k is a constant (that is f (x ) is a constant function), f (x ) is always
continuous.
f ( x )  5 is continuous for all x .
d) Composites of continuous functions are continuous. If g (x) is continuous at x = a , and if
f (x ) is continuous at g (a ) , then f ( g ( x )) is continuous at x = a .

e) If n is an odd integer greater than 1, then n f ( x) is continuous wherever f (x ) is continuous.

f) If n is an even integer greater than 1, then n f ( x) is continuous wherever f (x ) is continuous

and positive.

Exercise Five
Answer the following questions. Use the space below each question to write your answer.
Using the above properties of continuous functions, determine at which values of x the
functions given below are continuous.
a) f ( x)  4 x 2  2 x  5

b) f ( x)  3 x 3  4
2x  6
c) f ( x ) 
x3
d) f ( x)  2 x  2

2.7. Chapter Summary

Dear Student! So far, in this chapter, we have studied the concept of limits and continuity of a
function. In particular, the following points have been clearly discussed.

47
 Given a function f (x ) is defined for all x near a , but not necessarily at x = a , f (x ) is said to
have the number L as its limit as x tends to a if f (x ) tends to L as x tends to (but not equal to)
a.

 The limit of a function f (x ) as x tends to a is denoted by Limf ( x)  L or alternatively f (x )

xa

 L as x  a
 If f (x ) approaches a finite number L as x tends to a from right-side (from values above a ), L is
called the right-side limit of f (x ) denoted by Limf ( x) .
x a 

 If f (x ) approaches a finite number L as x tends to a from left-side (from values below a ), L is

ax,
called the left-side limit of f (x ) denoted by  .
30 / x
 For the limit of the function f (x ) as x approaches a to exit, the limit L must be a finite number,
and the right-side and the left-side must be equal to each other. That is Limf ( x) = Limf ( x) .
x a  x a 

 A function is said to be continuous at particular point if that point is in the domain, if the limit
exists at that point, and if the value of the function equals the value of the limit at that point.

48
 2.8. Review Problems for Self- Assessment

The following questions are arranged to revise on the concept of limit and continuity. Solve all
the questions accordingly.
1. Find the limit of the function h = 7 – 9g + g2:
a) As g 0;

b) As g  3;

c) As g  -1.

2. Find the limits of y = (3x + 5) / (x +2):

a) As x  0;

b) As x  5; and

c) x  -1
3. Evaluate each of the following.
a) lim → ((3x + 5) / (2x − 3))

b) lim → 2 + 5 − 10

c) lim → ( √( )

d) lim → xlog

4. A function y = f(x) is discontinuous at x = x0 when any of the three requirements for continuity
is violated at x = x0. Construct three graphs to illustrate the violation of each of those
requirements.
5. Taking the set of all finite real numbers as the domain of the function
y = f(x) = x2 – 5x – 2:
49
a) Find the limit of f(x) as x tends to N (a finite real number).

b) Check whether this limit is equal to f(N).

c) Check whether the function is continuous at N and continuous in its domain.

6. Given the function h = f(v) = (v + 2) / (v2 + 2):

a) Use the limit theorems to find lim. h, as v approaches N (N being a finite real number.)
b) Check whether this limit is equal to f(N);
c) Check the continuity of the function f(v) at N and its domain (- ∞, ∞).

7. Determine the point of discontinuity of the function f(x) = (2x + 3) / (x – 1).

8. A firm faces the following total revenue function:

ax, whenx  2
TR = 
30 / x, whenx  2
a. Find the value of a so that TR becomes a continuous function;
b. Plot this function of a graph.
9. The ECC is embarking on an extensive advertising campaign to market its new detergent. In
the past, advertising has been very successful in increasing public awareness and sales of ECC’s
products. A senior advertising executive has estimated that, for the new product, profit ( )is
related to advertising expenditure (x) according to the formula:
16 + 10
( )=
+3
Where x and ( ) are measured in units of $100,000. Find the maximum profit that the firm can
obtain using advertising.

10. Suppose that for a certain corporation the monthly profit (in thousands of dollars) at time t
(in months) is estimated by:
2 −4
( )=
+1

50
Predict the long-range profit as →∞.

11. XYZ company is spending Birr “y” (in millions, and yielding sales of Br. S(x) (in millions)
represented by the function:

( )= for x≥ 1

Determine the absolute ceiling for their sales

12. ABC company manufactures tractor bodies and spending Br. X (in thousands) on advertising
the income from sales S(x), measured in thousands is given by:

( )= for x≥ 5

Determine the absolute ceiling for sales.

51
 CHAPTER THREE
3. DIFFERENTIAL CALCULUS

Economic models provide a framework for understanding the responsiveness of endogenous

variable to a change in an exogenous variable. Models allow economists to pose questions such
as: What is the effect of an increase in money supply of $1 billion on economic growth? How
many fewer teenagers will begin smoking each year if an additional tax of $o.25 is imposed on
each pack of cigarettes? What tariff revenue will be received when a 10% duty is charged on all
imported cars?

The answers to these types of questions involve a comparative static analysis, which compares
the response of endogenous variables to changes in exogenous variables. But, important sets of
tools for conducting comparative static analysis, as well as other types of economic analysis, are
provided by differential calculus. Differential calculus shows how the value of a function varies
with respect to changes in one or more of its arguments. Differential calculus thus provides a
method for analyzing economic functions and understanding how changes in exogenous
variables affect endogenous variables in economic models.

Chapter Objectives:
Up on compilation of this chapter, you should be able to:

 Explain the meaning of the term ‘differential calculus’

 Provide an understanding of the concept of derivative (or differential coefficient), its meaning,
computation and interpretation.
 Present selected rules for finding derivatives and illustrate their use.
 Explain a frame work for obtaining derivatives of power function, logarithmic and exponential
functions.
 Discuss logarithmic differentiation and derivatives of implicit functions.
 Introduce the nature of higher-order derivates and their interpretation where appropriate.
 Reinforce understanding of the nature of concavity.
52
 Provide a methodology for determining optimization conditions for mathematical function.
 Explain a wide variety of applications of optimization procedures.
 Demonstrate the concept of maxima and minima of functions.
Chapter Contents
The main contents of this chapter can be organized as follow:
 Introduction
 Functions and Rate of changes
 The Difference Quotient
 Derivatives and Differentials
 Rules of Differentiation
 The Chain Rule and Composite Function
 The Second Order Derivatives
 Partial Derivatives
 Total Differential and Implicit Differentiation
 Derivative of an Inverse of a Function
 Successive Differentiation
 Increasing and Decreasing Functions
 Convex and Concave Function

3.1. Introduction
In this chapter, the concept of limit is applied to introduce the idea of derivative which is useful
in constructing various mathematical models that can be translated in to some meaningful
applications. The process of finding derivatives, differentiation, is a mathematical technique
which has various applications in economics. It is one of the two central concepts in the branch
of mathematics called calculus and has a variety of applications, including curve sketching,
analysis of rates of change and the optimization of functions.

We shall study calculus in the same manner as algebra, i.e., we shall gain an understanding of
the basic operations and concepts before considering the application. For this reason, this chapter
is concerned with the concepts and operations of differential calculus and the next chapter is
concerned with their applications to practical problems.
53
 3.2. Functions and the Rate of Changes
Predictions of the effect changing economic policies are often based upon simple extrapolation.
For instance, the prediction of the revenue effects of change in the tax rate on a certain economic
activity may simply assume that the change in the tax rate does not affect the level of that
activity. Economic theory suggests how people respond to changing conditions. Thus, tax
revenues are affected both directly by a change in the tax rate and indirectly through changes in
the tax base.
We can illustrate this point with the following simple example. Consider the revenues collected
from sales tax on widgets. The amount of tax revenues, R , equals the product of the tax rate, t
,and the amount of widget sold, Q. That is
=
If the amount of widgets sold does not depend up on the sales tax rate, then tax revenues are a
simple linear function of the sales tax rate. This relationship is presented by the straight line OL
in figure 3.1. We may expect, however, that an increase in the sales tax on the widgets sales,
thereby reducing the tax base on which revenues is raised. The tax revenue schedule OC in
figure 3.1 captures this effect. Comparing OC with OL shows that the revenues are lower when
sales are affected by the tax rate than when sales are invariant to the tax rate.

Figure 3.1 reveals that the response of tax revenues to a change in the tax rate depends on
whether sales are affected by the tax rate. The ratio of the change in the tax revenues to the
change in the tax rate is represented by the quotient.
∆ 2− 1
=
∆ 2− 1
Where the Greek letter, capital delta (∆) represents the change in a variable, ∆R, represents the
change in revenues. The above expression measures the rate of change of the revenue function to
a small change in the tax rate.

54
Tax Revenue

E C
R2

R1
Tax Rate
t1 t2

Figure 3.1: The Tax Revenue and Tax Rate

The tax rate is exogenous variable which is set by the government whereas tax revenue is an
endogenous variable which is determined within the model. Therefore, the rate of change of a
function is the slope of that particular function.

3.3. The Concept of Derivatives / Difference Quotient

Let y = f(x) be any function of x. Let x be any increment in the value of x (the independent
variable) and y be the corresponding increment in the value of y (the dependent variable). Then
y/x is called the average rate of change or just the rate of change of y with respect to x. the
limiting value y/x as x0, if it exists finitely, is called the derivative (or the differential

quotient or instantaneous rate of change) of y with respect to x and is denoted by . Therefore,

y ( + x) − f(x)
= =
 → x  → x

We usually write the limit on the right as f’(x). The method of obtaining

[or f’(x)] with the help of the above definition is called the differentiation from first principles.

55
The derivative of a function from the first principles can be obtained by using the following five
steps:
Step I. Put the given function f(x) equal to y, i.e., y = f(x)………………………………..(1)
Step II. Give a small increment x in x and let the corresponding increment in the
value of y be y so that y + y = f(x + x)…………………………………... …...(2)
Step III. Subtracting (1) from(2) and find out the increment y = f(x + x) – f(x)..............3
 (  ) ( )
Step IV. Dividing both sides of equation (3) by x so that = =


Step V. Proceed to take the limits of each side of equation (4) as  0, i.e.

 (  ) ( )
 →  =  → = ………………………………………………………4


Equation (4) is the general expression for the derivative of the function f. The derivative is an
expression which represents the instantaneous rate of change in the dependent variable given a

change in the independent variable. The nation is used to present the instaneous rate of

change in y w.r.t. a change in x. The nation is distinguished from y / x which represent the
average rate of change. The derivative is a general expression for the slope of graph of a function
at any point x in the domain of the function.

Remarks:

1. It should be noted that does not mean the product of with y. In fact dx is not a real

number, so the nation stands as a symbol to denote the operation of differentiation.

2. Geometrical interpretation of the derivative. Let y = f(x) be a function on an open interval

containing, a. Let p = {a, f(a)} and Q = {a + h, f(a + h)} be two neighboring points on the graph
( ) ( )
of y = f(x). The slope of PQ = , (h  0)

56
 ( ) ( )
As h  0, Q  P and lim (slope of PQ) = lim → = ( )

Y=f(x)

f (a+h)

Q {a+h, f (a+h)}
f (a)

P {a.f (a)}

a a+h

Figure 3.2
Now, in the limit as Q  P, the secant line PQ through P, ultimately becomes the tangent to the
graph y = f(x) at P. Since f’ (a) is the slope of the tangent to the curve y = f(x) at the point {a, f’
(a)}. The equation, y – f (a) = f’ (a) (x - a) gives the tangent line to the curve at the point {a,
f(a)}.

3. Continuity and differentiability. A function y = f(x) is said to be differentiable at a point x = a,

( ) ( )
in its domain, if lim → = ( )exists.

Thus, continuity is only a necessary but not sufficient condition for the differentiability of a
function.

4. Differentials if y = f(x) defines a differentiable function, then

(i) The differentiable dx of the independent variable x is an arbitrary real
number.
(ii) The differentiable dy of the dependent variable y is defined as the product of
f’(x) and dx, i.e., [ = ( ) ]

3.4. Rules or Theorems of Differentiation

57
The process of finding the derivative of an function from definition (i.e., from first principles) is
tedious and many times difficult and time consuming and hence of no practical use when the
derivative is immediately required for applying it elsewhere. We therefore, now prove some
general theorems and establish some working rules to enable us to find the derivatives at least of
some standard types of functions.

1. Constant Rule: (c) = 0 , c is any constant, i.e., the derivative of a constant

function is zero

2 Simple Power Rule: (x ) = nx X  0 and n is any real number, i.e., the

derivative of a constant power of x is the exponent times x raised to a power one less than
the given power.

3. The Sum or Difference Rule: { ( ) ± ( )} = ( )± ( ) = ′( ) ± ′

( )

i.e., the derivative of the sum (or difference) of two functions is the sum (or difference) of
their derivatives.

4. Product Rule: { ( ). ( )} = ( ) ( )+ ( ) ( ) = ( ) ′( ) + ( ) ′( )

i.e., the derivative of the product of two functions is equal to the first function times the
Remark If f is a differentiable function and k is a constant, then
derivative of the second plus the second function times the derivative of the first.

58
 { ( )} = . { ( )

i.e., the derivative of constant times a function is the constant times the derivative of the
function.
Exemple 3.1

Détermine the dérivative of ( − + )( − + )

= (2x3 5x +7) (4x4 – 2x2 +9) + (4x4 – 2x2 + 9) (2x3 – 5x + 7)

= (2x3 – 5x + 7) (16x3 – 4x) + (4x4 – 2x2 + 9) (6x2 -5)

= 56x6 – 120x4 + 112x3 + 44x2 – 28x -45 (on simplification)

5. Quotient Rule: If f and g are differentiable functions and g(x)  0,

( ) ( ) ( ) ( ) ( ) ( ) ′( ) ( ) ′( )
= Or
( ) [ ( )] [ ( )]

i.e., the derivative of the quotient of two functions is the dominator times the
derivative of the numerator, minus the square of the denominator.

Example 3.2

Determine the derivative of

D 4x + 7 x (4x + 7) − (4x + 7) (x ) x (4) − (4x + 7)(2x)

= =
dx x x x
59
 =

2. = ( )

(3x + 7x − 9)(4x − 5) − (2x − 5x + 7)(6x + 7) 29x − 78x − 4

= =
(3x + 7x − 9) (3x + 7x − 9)
If f and g are functions defined by y = f (u) and u = g (x), then a function defined by y = f [g(x)]
is called a composite function or function of a function. We now state a theorem for finding the
derivative of a composite function.

6. Chain Rule: If y = f (u) is a differentiable function of u and u = g(x) is a

differentiable function of x, then y = f [g(x)] is a differentiable function of x and

= ×

NB : If y is a differentiable function of u and u is a differentiable function of x, then the

derivative of y with respect to x is equal to the derivative of y with respect to u times the
derivative of u with respect to x.

The following examples illustrate application of chain rule to find derivatives.

Example 3.3

If y = (3x3 – 7x2 + 9x +17)18, find

The function y can be written as: y = u18, where u = 3x3 – 7x2 + 9x + 17.

By the chain rule: = × = (18u17) (9x2 – 14x + 9)

= 18 (3x3 – 7x2 + 9x + 17)17 (9x2 – 14x + 9).

Example 3.4
Differentiate (ax + b) n with respect to x
Let y =(ax + b) , which can be written as: y = un, where u = (ax + b) n

By the chain rule: = × = n (ax + b) n – 1. A

Example 3.5

60
Differentiate ( ) with respect to x

Let y =( ) which can be written as: y = u7, where u =

( )( ) ( )( ) ( )
By the chain rule: = × = 7u6 [ ]= (
( ) )

Example 3.6

If y = w and w = 8 + 4 t3, find Here y is a function of w and w is a function of t., i.e.,

we can view y as a function of t.

By the chain rule: = × = √w . (8 + 4t ) = w (12t ) = (12t ) =

√ √

3.5. Derivatives of Logarithmic and Exponential Function

Derivative of logax: Let f(x) = log then,

d 1
(log x) = log x
dx x

In particular, replacing a by e, we obtain [log x] = log e =

Derivative of ax, a > 0: Let f(x) = ax, then applying the definition of the derivative, we get

d
(a ) = a log a
dx

In particular, replacing a by e, we get (e ) = e log e = e

Example 3.7
Differentiate log (ax + bx + c)
Let y =log , where (ax + bx + c)u =

 = × = (2ax + b) = (
. (2ax + b)
)

61
Example 3.8

Differentiate e with respect to x

Let y = e , where u = ax2 + bx + c
u

 = × = eu. (2ax + b) = e (2ax + b).

Example 3.9
Differentiate the functionlog [ + √( + )]
Solution Let u=[ + √( + ), so that y=log u.Now

= × = (log ) ( + √( + )

= x+ √( + ) = 1 + . √(
√( ) )

= 1 + √( = √(
√( ) ) )

Check your self – I

1. Find the derivatives of the following functions:
(I) (x + 3) (x – 5) (ii) (x2 + 5x – 7) (3x2 + 4x + 9) (iii) x3 log x
(iv) x4e5x (v) x6e3xlog x (vi) x log x +3x
2. Differentiate w.r.t x each of the following functions

(I) (ii) (iii) (IV) (v) log ( )

(vi) e3x

3. Use the chain rule to find of each of the following functions

(I) y =3u2 + 5u and u = 2x-x3 (ii) y = u2 and u =

(iii) y = 2u2-7u + 9 and u = log x (iv) y = eu and u = x3 + x − 1

4. Differentiate w.r.t.x each of the following functions:
(i) 3(x3 + 7x2 – 5x)12 (ii) log (3x + 7x – 11) (iii) log (x e )

5. If y = x + 1 + x – 1, prove that (x2 – 1) = y

62
 3.6. Derivatives of Implicit Function

A relation of the form F (x, y) = 0 can sometimes be solved for y in terms of x so that the
relation F (x, y) = 0, defined as a function of x, say y = f(x). Then substituting for y in the
relation we get an identity: F[x, f(x)] = 0.

Even when it is not possible or convenient to express in terms of x the given relation does
determine a value of y for each value of x. thus in all cases, we may assume that the relation F
(x, y) =0 defines y implicitly as a function of x, say y = f(x), such that f [x,f(x)] = 0.

To determine or f’(x), we differentiate each side of the identity and obtain from the resulting

equation, an expression for or f’(x).

Steps involved in finding by implicit differentiation:

1. Differentiate each term of the equation w.r.to x, treating y as a function of x.

2. Move all terms involving to the left side of the equation and move the other

terms to the right side.

3. Factor out on the left side of the equation.

4. Divide both sides of the equation by the factor that multiplies

Example 3.10

Use implicit differentiation to calculate when y is related to x by the equation x2 y + xy3 – 5x =

9.
Differentiate the equation term by term, taking care to differentiate x2 y and xy3 by the product
rule, we obtain
d d d d
x (y) + y (x ) + x (y ) + (y ) (x) − 5 = 0
dx dx dx dx
63
 dy
x + y. 2x + x 3y + (y ) − 5 = 0
dx
dy
x + 3x y = 5 − y − 2xy
dx
(x + 3x y ) = 5 − y − 2xy

dy 5 − y − 2xy
=
dx x + 3x y
The technique is best illustrated with the help of examples given below:

Example 3.11
Differentiate the following functions with respect to x
(a) x2 + y2 = a2, (b) x3 + y3 = 3axy,
Solution Differentiating each term w.r.t.x, we have

(a) 2x + 2y =0  =−

–
(b) 3x2 + 3y2 = 3a (x + y. 1)  = –

Example 3.12

Find if x3 – xy2 + 3y2 + 2 = 0.

Solution
Differentiating each term w.r.t x, we obtain

3x2 - (x. 2y + y2) + 6y =0  3x2 – 2xy – y2 + 6y =0

–
 (6y – 2xy) = y2 – 3x2. Hence, = .
( – )

Check yourself -II

If x 1 + y + y√1 + x = 0, prove that = −( )

Example 3.13

64
 dy
Find for the implicit function 2 y  2 x 3 .
dx
dy F dF dF
Solution   x Since Fx   6x 2 and Fy  2
dx Fy dx dy

dy (6 x 2 )
It follows that   3x 2
dx 2
In this case, you can also convert the implicit function into an explicit function and determine its
dy
derivative. That is, you have y  x 3 , and  3x 2 . This is exactly the same as the result you
dx
have found using the implicit differentiation.

Example 3.14
dy
Find for the implicit function y  2 x 2  3 .
dx
Solution
dy F dF dF
  x Since Fx   4 x and Fy  1
dx Fy dx dy

dy (4 x )
Hence,   4 x
dx 1
Exercise Eight

Answer the following questions. Use the space below each question to write your answer.
dy
1. Find for the following implicit functions:
dx
a) x 2  2 y  4  0

b) 2 x 2  2 xy  y 2  1  0

c) x 2  y 2  0

2. Given x 2  3xy  2 yz  y 2  z 2  11  0 , is an implicit function z  f ( x, y ) defined around the

point (x = 1, y = 2, z = 0)?
If so, find z / x and z / y by the implicit function rule, and evaluate them at that point.

65
 3.7. Derivatives of Inverse Functions

We hope that students are familiar with the term inverse functions! Let you try to define it in a
few words:
_____________________________________________________________________________
___________________________________________________________________
Good! If the function y  f ( x) represents a one to one mapping (i.e. if f(x) is such that each
value of y is associated with a unique value of x), the function f will have an inverse function x
=f-1 (y).
The existence of an inverse function implies that not only will a given value of x yield a unique
value of y but also a given value of y will yield a unique value of x.
To synthesize the idea we may have a real world example: in a monogamous society there is a
one to one mapping from the set of wives to the set of husbands and vice versa. Each wife has a
unique husband and each husband has a unique wife too.
For inverse functions the rule of differentiation is

dx 1

dy dx
dy

This means that the derivative of the inverse function is the reciprocal of the derivative of the
original function; as such dx/dy must take the same sign as dy/dx, so that if f is strictly
increasing/ decreasing, then so must be f-.1

Example 3.15
Given y = 5x +25, find dx/dy
Solution:
dy/dx = 5. To derive the inverse function, we need to solve the function in terms of x. This
yields
x = 5 + y/5, and dx/dy = 1/5.

Example 3.16

Given y = 5x4 + x; find dx/dy.

66
 Solution:
First of all, we have dy/dx = 5x4 + 1.
To solve the given equation for x is not such an easy task, however the derivative of the inverse
function can nevertheless be given quickly using the inverse – function rule:
dx 1 = 1/ (5x4 + 1)

dy dx
dy

N.B:- the inverse function rule is, strictly speaking, applicable only when the function involved
is a one- to- one mapping.

3.8. Successive Differentiation

As observed in many of the preceding examples, the derivation of a function of x is in general ,

also a function of x. This derivative, which may be called first derived function or the first
derivative (of the function), may itself be differentiated and the result is accordingly called the
second derivative of the original .If the second derivative is differentiated, the result is called the
third derivative of a function. The process of finding higher order derivative of a function is called
successive ( or repeated ) differentiation .

Definition If the derivative f (X) of a function y = f (x) be again differentiable then

the derivative of f (x) is called the second derivative of f (x) , and denoted by

f ’’ (x) or y or y2 or or [f(x)]

For any positive integer n, if f (n-1)(x) be differentiable, then the derivative of f (n-1)(x)
is called the nth derivative of f (x) and is denoted by

fn (x) or y (n) or ynor

Remarks:
67
1. Geometrical meaning of it has been explained earlier that dy/ dx denotes the rate of

change of y, the ordinate of the curve compared with the rate of change of the abscissa x,

this may simply be denoted as the x- rate of change of the ordinate. Similarly is the rate

of change of the slope dy of a curve compared with the rate of change of the abscissa x, or
simply, the x- rate of change of the slope. Mathematically, the first derivative gives the rate
of change of function ,second derivative gives the rate of change of the rate. The first
derivative gives the slope of the function whereas second derivative gives the slope of the
slope.

2. please note that if first derivative gives the dimension in which values of the function
changes and second derivation gives rate at which it is changing in that direction e. g , if dy/
dx > 0 d2 y / dx2 > 0, .it means function is increasing at increasing rate if dy / dx> 0 and d2 y
/dx2 = 0 it means function is increasing at constant rate , if dy/ dx <0 and d2 y / dx2> 0 it
means function is decreasing at increasing rate and likewise

Example 3.17

If =5 −4 + 7 − 9 , find derivatives of all the possible orders

Differentiating with respect to x = 15 −8 +7

Differentiating again = 30 − 8

Similarly = 30 =0

Example 3.18

If = , show that =

Solution

dy d log x x − 1(log x) 1 − log x

= = =
dx dx x x x
Differentiating with respect to x we get

68
 d 1 − log x x − − (1 − log x). 2x 2 log − 3
= = =
dx x x

3.9. Partial Derivatives

Dear students! So far, you have been studying the derivative of a function with a single explanatory
variable. In this section, we will be discussing on the derivative of a function involving several
independent variables.

3.9.1. First Order Partial Derivatives

The first partial derivative of a given function measures the instantaneous rate of change of the
dependent variable y with respect to one of the independent variable (say for example x1), when
the other independent variables are held constant.

3.9.2. The First Order Partial Derivative of Functions with Two Variables

Let us consider the function z  f ( x, y ) which is a function with two explanatory variables x and
y . Also assume that x and y are independent of each other so that one can vary without affecting
the other. Suppose you want to know how the value of the function changes with respect to the
independent variable x while the other variable y remaining fixed. Thus, you can have the
following difference quotient
z f ( x  x, y)  f ( x, y)
 .
x x
Using the difference quotient, you have the following definition.
z z
Definition: - If you take the limit of as x  0 i.e., Lim , that limit will constitute a
x x 0 x
derivative and it is called the partial derivative of z with respect to x .
z
Distinct symbols are assigned for partial derivatives. You can use or f x which is read as the
x
partial derivative of z with respect to x .
N.B: The process of taking partial derivatives is called partial differentiation. Partial
differentiation differs from the previous discussion of differentiation in the sense that one must
hold all independent variables constant while allowing a given variable to vary. Hence, in partial
differentiation, the variables that are held constant are treated as a constant.

69
Example 3.19
z z
Given the function z  3x 2  5xy  2 y 2 , find the partial derivatives ( and ).
x y
Solution
z
Let us start with . In this case, y is treated as a constant. As a result, it will drop out if it is an
x
additive constant ( 2y 2 in our case) and will be retained if it is a multiplicative constant (as in 5 xy
).
z
Therefore,  f x  6x  5y
x
z
Similarly, you need to treat x as a constant in finding and hence, it will drop out if it is an
y
additive constant (as in 3x 2 ) and will be retained if it is a multiplicative constant (as in 5 xy ).
z
Therefore,  f y  5x  4 y
y
You should note that both partial derivatives are themselves functions of the variables x and y
just like the primitive function is. Thus, they can be written as
f x  f x ( x, y) and f y  f y ( x, y)

Example 3.20
Find the partial derivatives of the function z  ( x  2)(3 x  3 y ) , and f x (2,3) and f y (2,3) .

Solution
In solving the partial derivatives, you need to use the product rule discussed in the previous Unit.
By treating y as a constant, you have
z
 f x  ( x  2)(3)  1(3x  3 y)  6 x  3 y  6
x
By holding x constant, you get
z
 f y  ( x  2)(3)  0(3x  3 y )  3 x  6
y

Since you have found f x and f y , then

70
 f x (2,3)  6(2)  3(3)  6  27 f y (2,3)  3(2)  6  12

(4 x  2)
a) Given the function z  , find the partial derivatives and f x (2,3) and
( y  2)
f y (2,3) .

Solution
Here, you need to use the quotient rule. By holding y constant, you get
z 4( y  2)  0(4 x  2) 4
 fx  2

x ( y  2) ( y  2)
By holding x constant, you have
z 0( y  2)  1(4 x  2) 4x  2
 fy  2

y ( y  2) ( y  2) 2
Therefore,
4 4(2)  2
f x (2,3)   4 f y (2,3)   10
(3  2) (3  2) 2

Exercise One
Answer the following questions. Use the space below each question to write your answer.
a) Determine the partial derivatives of the function z  8 x 3  12 y 4 , and find f x (4,1) and f y (4,1) .

b) Determine the partial derivatives of the function z  4 x 4  12xy  3 y , and find f x (0,1) and

f y (0,1) .

c) Determine the partial derivatives of the function z  ( x  3)( x 2  xy  y 2 ) , and find f x (3,3)

and f y (3,3) .

2 x  4 xy
d) Determine the partial derivatives of the function z  , and find f x (1,1) and f y (1,1) .
x y

3.9.3. First Order Partial Derivative of a Function with Several Variables

This is an extension of the previous discussion to a function with more than two variables. Let us
consider z  f ( x1 , x2 ,..., xn ) where the variables xi are independent of one another. Then, the

71
partial derivative of z  f ( x1 , x2 ,..., xn ) with respect to xi when all the other variables are held

z
constant is given by or f xi .
xi

Example 3.21
Calculate the partial derivatives of the function w  x 2  y 3  z 4 .
Solution
By holding y and z constant,
w
 f x  2x
x
By holding x and z constant,
w
 f y  3y 2
y
By holding x and y constant,
w
 f z  4z 3
z

Example 3.22
Find the partial derivatives of the function w  xyz .
Solution
By holding y and z constant,
w
 f x  yz
x
w
By holding x and z constant,  f y  xz
y
w
By holding x and y constant,  f z  yz
z

72
Exercise Two

Answer the following questions. Use the space below each question to write your answer.
Calculate the partial derivatives of the following functions.
a) w  3x 3  2 y 3  12z 4

b) w  x 2  x 2 y  y 3 z  z 2

3.9.4. Higher Order Partial Derivatives

Like the case of a function with a single variable, you can find the second-order partial
derivatives, the third order partial derivatives, ..., the nth- order partial derivatives for a function
with more than one variable. For the function z  f ( x, y ) , you have the partial derivatives
z z
 f x and  f y . In turn, you can measure the rate of change of f x with respect to x while y
x y
remains fixed. And this is called the second-order partial derivative of f ( x, y ) with respect to x.

In other words, this is the partial derivative of f x with respect to x while y remains fixed. It is

2z
denoted by 2  f xx .
x
Similarly, the partial derivative of f y with respect to y while x remaining constant is given by

2z
 f yy . This is the second-order partial derivative of f ( x, y ) with respect to y. In other
y 2

words, it denotes the rate of change of f y with respect to y holding x constant.

Since f x is a function of x and y , and f y is a function of x and y , the following two partial

2z 2z
derivatives can be written:  f xy and  f yx .
xy yx
Since each measures the rate of change of one first-order partial derivative with respect to the
other variable, they are called cross (mixed) partial derivatives.
The Young’s Theorem

73
 2z 2z
Given the function z  f ( x, y ) , the cross partial derivatives  f xy and  f yx are
xy yx
identical with each other as long as the two cross partial derivative exist and are both continuous.
The theorem can be extended to a function of three or more variables. For instance, if you have a
function f ( x, y , z ) , then the mixed partial derivatives will be characterized by

f xy  f yx , fxz  fzx and fyz  fzy

Example 3.23
Find the second order partial derivatives of the function z  2 x 2  2 xy  3 y 2 .
Solution
The first partial derivatives are
f x  4 x  2 y and f y  2 x  6 y

Thus, the second-order partial derivatives are

f xx  4 , f yy  6 , f xy  2 and f yx  2

You should note that the cross partials are identical: f xy  f yx

Example 3.24
Given the function z  3x 3  2 y 2 , find the second partial derivatives.
Solution
The first-order partial derivatives are, f x  9x 2 and f y  4 y

The second partial derivatives are, f xx  18x , f yy  4 , f xy  0 and f yx  0

Once again the cross partial derivatives are identical.

Exercise Three
Answer the following questions. Use the space below each question to write your final
answer.
Determine the second partial derivatives of the following functions.
a) z  8 x 3  12 y 4

b) z  10 x  4 xy  12 y 2

74
 3.9.5. Some Application of Partial Derivatives

Here we make use of some economic problems to synthesize the application of partial
derivatives in economic theories.
a. Demand – Supply analysis: - suppose quantity demanded of a given commodity is given by:
Qd = f(P) = α – βP; and quantity supplied is given by: Qs = f(P) = r + NP.
Equilibrium is attained when Qd = Qs;
α – βP = r + NP, which after some rearrangement yields:
P = (α – r) / (β + N), P is the equilibrium price. At this price, the
equilibrium quantity supplied is:
Q = α – β ((α – r) / (β + N))
= (αβ + αN – αβ + βr) / (β + N)
= (2N + βr) / (β + N)
The effects of the changes in each of the parameters, given the others, can be summarized as
follows.
1.  P/  α = 1/ (β + N) > 1
2.  P/  r = -1/ (β + N) < 1
3.  P/  N = - ((α – r) / (β + N)2) < 0
b. Marginal Utility: - given the utility function U = f(x, y), we have
 U/  x = MUx – the marginal utility of commodity x;
 U /  y = MUy – the marginal utility of commodity y.

Example 3.25
Suppose the following presents the utility function of a hypothetical consumer:
U (x, y) = 200x + 300y + 15xy – x2 – y2, find the marginal utilities of x and y when x = 100, and
y = 5.
Solution
MUx = 200 + 15y – 2x
= 200 + 75 – 200
= 75
MUy = 300 + 15x – 2y
75
 = 300 + 1500 – 10
= 1790.
Exercise
Answer the following questions. Use the space below each question to write your final answer.
1. Given the utility function: U(x, y) = Axαyβ;
A. Find the MUx and the MUy.

B. Show that  ( MUx) /  y =  (MUy) /  x.

2. The demand facing a monopolist is given by P = 225 – X; where P is the price of the commodity
X. If the production function of the firm is X = 25L + 30K – L2 – 3K2;
Find the marginal revenue products of labour and capital when L = 4, and K = 1.
3. Given the production function X = f(L, K),
A. What is the partial elasticity of X with respect to L?
B. What is the partial elasticity of X with respect to K?
4. In macroeconomic theory, the money supply can be defined as the monetary base multiplied by
the money multiplier. In turn, the money multiplier is defined as
m(c, r) = (1 + c) / (c +r);
where c is the currency deposit ratio, which expresses the public’s preference for holding money
in the form of currency over holding money in demand deposits, and r is the reserve- deposit
ratio, which is the fraction of deposits that banks hold in reserve.
a.) Determine the impact on the money multiplier of a very small change in the reserve ratio.
b.) What is the impact on the money multiplier of a very small change in the currency deposit ratio?

3.10. Differentials and Total Derivatives

In this section of the chapter we discuss on differentials and total differentials and apply rules for
finding differentials of functions. We start by defining what is meant by differentials of
functions. Gradually, you will learn some of the important rules that will help ease the
determination of differentials.

76
 3.10.1. Differentials

Do you have any idea of what differentials are? You can use the space below to write your
answer.
_____________________________________________________________________________
___________________________________________________________________
Consider a function y  f (x) . If change in x , x , occurs, then a corresponding change in y , y ,
y
follows. The difference quotient represents the rate of change of y with respect to x . Thus,
x
 y 
y   x which means that the change in y can be found once you know the rate of change
 x 
y
and the change in x , x , are known.
x
For an infinitesimal change in x , y will be very small. Therefore, denoting the infinitesimal
change in x and y by dx and dy , the above identity can be written as

 dy 
dy   dx or dy  f ( x ) dx
 dx 
dx and dy are called differentials of x and y , respectively.
Here is a geometric interpretation to the discussion. Consider figure 3.1 below.

y  f (x)
y

y
D
A dy
C
dx

x0 x0  dx x

Figure 5.1 A Graphic Illustration of Differentials.

Suppose x changes by dx and a movement from A to B along the curve y  f (x) . In this case,
the actual change in the vertical height of the point is y . Instead, if you consider a movement
along the tangent to the graph from A to D , then the change in height that corresponds to dx is
77
dy . Thus, y  dy and BD represents the difference between y and dx . The approximation
y  dy is better if dx is smaller in absolute value since the difference between y and dx ( BD )
tends to 0 as dx tends to 0 .

Example 3.26
Find the differential dy for the function y  x 2  x .
Solution
First find the derivative of the function. Thus
f ( x )  2 x  1
Therefore, the differential dy is
dy  ( 2 x  1) dx
Assume that x changes from 2 to 2.01 and hence, dx  0.01 .Thus,
dy  2(2)  1(0.01)  0.05
You can also calculate the actual change in y ( y ).
At x  2 , y  6
At x  2.01 , y  6.0401
Thus, y  6  6.0401  0.0401
Therefore, dy  0.05 is an approximation to the true change y  0.0401 and the error of
approximation is 0.0099 .

Example 3.27

Given y  ( x  2)(2 x  1) , find the differential dy .

Solution
Using the product rule, the first derivative is
f ( x )  1( 2 x  1)  ( x  1)(2)  4 x  1
Hence, dy  ( 4 x  1) dx
Assume that x changes from 4 to 4.01 which means that dx  0.01 . It follows that
dy  4(4)  1(0.01)  0.17

78
The actual change in y
At x  4 , y  42
At x  4.01 , y  42.1902
y  42  42.1902  0.1902
This means that you can approximate the actual change in y , y  0.1902 , as dy  0.17 using
the concept of differential. Here, the error of approximation is 0.1902  0.17  0.0202 .

3.10.2. Total Differentials

So far, you have studied the concept of differential applied on a function involving a single
independent variable. In this sub section, the discussion will be extended to a function with two
or more independent variables.
Let z  f ( x, y ) be a smooth and differentiable everywhere.
z
The partial derivative measures the rate of change of z with respect to an infinitesimal change
y
in y holding x. The resulting change in z following the change in y can be represented by

 z 
 dy . Similarly, the change in z resulting from an infinitesimal change in x , holding y, can
 y 
 z 
be expressed as  dx .
 x 
Therefore, the total change in z will be equal to
 z   z 
dz   dy   dx or alternatively dz  f y dy  f x dx .
 y   x 
Thus, dz is the sum of the changes from both sources and it is called total differentialof z. The
process of finding a total differential is called total differentiation.
What happens only if y changes and x remains constant? In this case, dx  0 and the total

 z 
differential reduces to a partial differential. That is dz    dy . Likewise, if dy  0 ,
 y 
 z 
dz   dx .
 x 

79
Generalizing to a function with n independent variables say, y  f ( x1 , x2 ,..., xn ) , then

 y   y   y 
dy   dx1   dx2  ...   dxn .
 x1   x 2   xn 

Example 3.28
Given the function z  3x 2  xy  2 y 3 , find the total differential.
Solution
 z   z 
dz   dy   dx
 y   x 
 z   z 
Since    x  6 y 2 and    6 x  y
 y   y 
dz  ( x  6 y 2 )dy  (6 x  y)dx

Example 3.29
1
Find the total differential for the function z  .
x y
Solution
 z   z 
dz   dy   dx
 y   x 

 z  1  z  1
Since    2
and    2
 y   x  y   y   x  y 

 1   1 
dz   2  dy   2 
dx
 x  y    x  y  

80
Exercise Five
Answer the following questions. Use the space below each question to write your answer.
a) Given y  2 x 3  2 x , find dy , and calculate the error of approximation if x changes from
x  2 to x  2.01 .
b) Find the total differential for the function z  ( x  2)(3 x  3 y ) .

c) Find the total differentials for the function z  2 x 2  2 xy  3 y 2

3.10.3. Rules of Differentials

The rules that you will study below provide you a more convenient way of finding differentials.
Actually these rules are similar to the rules used to obtain the derivative of a function. Given k as
a constant and two differentiable functions u and v , you have the following rules.
a) The Constant Function Rule
dk  0
b) The Power Function Rule
d (ku n )  knu n 1 du
c) The Sum-Difference Rule
d (u  v)  du  dv
d) The Product Rule
d (uv )  vdu  udv
e) The Quotient Rule
u vdu  udv
d( ) 
v v2
f) Differential of a Function of a Function
If u and v are functions of x and y, then d(uv) = u.dv + v.du.
By definition,
 uv   uv   v u   v u 
d  uv    dx   dy   u  v  dx   u  v  dy
x y  x x   y y 
 v v   v v 
 u  dx  dy   v  dx  dy   u.dv  v.du
 x y   x y 
81
Example 3.30
Find the total differential dz of the function z  3x 2  2 y 3 .
Solution
Let u  3x 2 and v  2y 3 . Thus, according to the Sum-Difference Rule
dz  d (u  v )  du  dv

dz  d (3x 2 )  d (2 y 3 )

Since d (3x 2 )  6 xdx and d (2 y 3 )  6 y 2 dy (using the Power Rule), you have

dz  6 xdx  6 y 2 dy
Example 3.31
x y
Find the total differential of the function z  .
2x 2
Solution
(2 x 2 )d ( x  y )  ( x  y )d (2 x 2 )
dz  (using the Quotient Rule)
(2 x 2 ) 2

(2 x 2 )(dx  dy )  ( x  y )4 xdx
dz  (using Rules 3 and 4)
4x 4
 2 x( x  2 y )dx  2 x 2 dy
dz 
(4 x 4 )
 ( x  2 y ) dx 1
dz  3
 2 dy
2x 2x

Example 3.32
Given the function z  (2 x 3 )( y 2 ) , find the total differential.
Solution

dz  (2x3 )d( y2 )  ( y2 )d(2x3 ) (Using the Product Rule)

dz (2x3)2ydy(y2 )6x2dx (Using the Power Rule)

dz  4x3 ydy 6x2 y2dx

82
Exercise Six
Answer the following questions. Use the space below each question to write your answer.
Find the total differentials for the following functions.
x y
a) z 
2x 2

b) z  ( x 2 )(2 y 3 )

c) Q  x10.25 x20.75

3 x2
d) y  2 x12 e

e) y = 4 x13  ln  x1 x2   6 x2

3.10.4. 3Total Derivatives

In the previous discussions, you have studied the partial derivative of a function with respect to a
particular independent variable in which case the remaining independent variables were assumed
to remain fixed. In this section, you will study total derivatives which make use of the concept of
differentials in order to find the rate of change of a function when the independent variables are
related. That is, here we deal with a situation where we try to measure the direct and indirect
effect of an independent variable on a given dependent variable at a time.

Dear student! do you have any idea about total derivatives? You can use the space below to
write your answer.
_____________________________________________________________________________
_____________________________________________________________________________
________________________.
Have you tried it? Good!

83
Given the function z  f ( x, y ) and x  g ( y ) i.e. assuming that y and x are related, how do you
find the rate of change of z with respect to y ? The answer lies in the concept of total derivatives.
Let us consider the following figure which shows how a change in y affects z .

f g
z x y

Figure 3.3: The route through which y affects z

Since y and x are related, the figure shows that the change in y can affect z through two channels:
1) Indirectly via the function g and then through f ; and
2) Directly via the function f (the curved arrow).
z
In expressing the direct effect, the partial derivative is adequate. However, in order to express
y
both effects jointly, a total derivative is needed.
How do you find the total derivative? First, you need to get the total differential dy . Thus, you
z z
have dz  dx  dy .
x y
Then, dividing both sides of the differential by dy , you get
dz z dx z dy
 
dy x dy y dy
dz z dx z dy
  (since  1)
dy x dy y dy
z dx
The first term on the right side, , measures the indirect effect of y and the second term
x dz
dz
measures the direct effect of y . Therefore, is called the total derivative. This process of
dy
obtaining the total derivative is referred to as total differentiation of z with respect y .
dz z
N.B:- it is quite important to distinguish the two look-alike symbols: and . While the
dy y
former represents total derivative the latter one represents partial derivative.

84
Example 3.33
dz
Find the total derivative of the function z  f ( x, y)  2 x  y 2 where x  g ( y)  y 2  y  2 .
dy
Solution
dz z dx z
 
dy x dy y
z z dx dz
Since  2,  2 y and  2 y  1 It follows that  2(2 y  1)  (2 y )
x y dy dy

Example 3.34
1
Given the function z  6 x 2  3xy  2 y 2 where x  , find the total derivative.
y
Solution
dz z dx z
 
dy x dy y
z z dx  1
Since  12 x  3 y ,  4 y  3 x and 
x y dy y 2
dz 1
Therefore,  (12 x  3 y )( 2 )  (4 y  3 x )
dy y

85
Exercise Seven

Answer the following questions. Use the space below each question to write your final
answer.
dz
1. Find the total derivative given:
dy

a) z  2 x  xy   y 2 , where x  2y 2

b) z  x 2  8xy  y 3 , where x  3 y
dx 1
c) z  ( x  y )( x  y ) , where 
dy dx
dy
2. Find the total derivative dz / dt, given:
z  x 2  8xy  y 3 , where x = 3t, and y = 1-t
3. Let the production function of a giant firm be given as:
Q = f(L, K, T) where L and K represent the usual labor and capital variables. T indicates that
the production function may shift over time as a result of technological improvements. Thus, Q
represents a dynamic production function; and productivity of labour and capital is also a
function of time:
L = L(T), and K = K(T);
Develop the expression for the change in output with respect to time.

86
 CHAPTER FOUR
4. ECONOMIC APPLICATION OF DIFFERENTIAL CALCULUS

Many models of economic behavior are based on the explicit assumption that people attempt to
achieve the best result for themselves. Thus, standard models of production, investment or
consumption identify the best or optimal outcome interms of the lowest cost, the most rewarding
return, or the highest level of well-being. Even models of seemingly noneconomic behavior,
such as interactions within the family, crime, or political activity, are predicted on the
assumption that there is an effort to achieve some type of optimal outcome.

This chapter presents mathematical techniques that are used by economists to identify optimal
outcomes in economic models. These techniques show how find the extreme values of a
differentiable function. In economics, an extreme value represents the best outcome, and,
therefore, these mathematical techniques are often referred to as optimization.

The two of the most important applications of derivatives are obtaining the graphs of functions
and finding the optimum values. Optimization is the “quest for the best!” It involves either
maximization or minimization. Since the economic person is an optimizer, most part of the
chapter deals with the applications of derivates to static optimization problem. However, this
doesn’t mean the application of derivatives to find out a graph of a function is irrelevant for
economists. I hope no one forgets the relevance of graphs in economics for Paul. A. Samuelson
has said it “a graph is worth more than thousand words.” In fact, we will briefly see the
applications of derivatives to graphing functions first and divert our attention to optimizations.

Curve sketching- involves identifying the x-intercept and y-intercepts, whether a function is
increasing or decreasing in a given range, finding out its extreme points, and finally checking
whether the function is concave up or concave down at a point or a point is an inflection point.
Let’s see each of these concepts and tie them with the derivatives of f(x). Note that we
commonly read graphs from left to right.
Chapter Objectives
After the completion of this chapter, you should be able to
87
  Identify the practical applications of derivatives for functions such as revenue, cost and
profit functions including their marginal functional forms
 Distinguish between constrained and unconstrained Optimization
 Explain the relationships between average and marginal revenue with point elasticity of
demand.
 Discuss the role of derivatives in formulating the various types of elasticities such as
income elasticity of demand, elasticity of demand and elasticity of supply
 Explain the applications of derivatives in optimization problems especially maximization
and minimization problems.
Chapter Contents
This chapter can be organized as follow:
 Introduction
 Derivatives of Some Economic Functions (Marginal Cost, Marginal Revenue, Marginal
Utility, Marginal Productivity and Partial Elasticity of Demand
 Elasticity of Substitution
 Unconstrained Optimization
 Constrained Optimization
 The Profit Equation
 Income and price elasticity
 Relationship between AR, MR and Point Elasticity

4.1. Introduction
Dear students: from the previous chapter we believe that you are able to understand the concepts
of derivatives and the several rules involved in it. Hence, by now you should have a solid
understanding of the techniques of derivatives that will help you in your study of their practical
economic applications.
In this chapter, an effort has been made to clearly show the economic applications of derivatives
in three sections. The first part of this chapter deals about the concepts of major functions in
economics such as revenue, cost and profits functions and how we can employ the rule of
derivatives in finding their marginal forms. The second section focuses on the use of derivatives
in making the mathematical formulation of elasticities namely income elasticity of demand,

88
point elasticity of demand and elasticity of supply. Finally, a deep treatment of the roles of
derivatives in optimization [i.e. maximization and minimization] problems will be given.

4.2. Increasing and Decreasing Function

A function f(x) is increasing if the value of the dependent and the independent variables are directly
related. That is as the value of x increases, the value of f(x) increases too and vice versa. A function f(x)
is said to be an increasing function of x in an interval if as x increases in as interval the vales of the
function f (x) also increases thus f (x) is an increasing function of x if f (x2) > (x1), whenever x2> x1 for
all x1 and x2 in an interval, e.g. in the interval (0, ∞ ), f (x) = x2 increases as x increases. Therefore, f (x)
= x2 is an increasing function of x in this interval.

On the other hand, a function f(x) is decreasing if the value of the independent and the dependent
variables are inversely related. That is, as the value of X increases, the value of f(x) decreases and vice
versa.
A function f (x) is said to be a decreasing function of x in an interval if, as x increases in an
interval, the value of the function f (x) also decreases thus f (x) is a decreasing function of x if f
(x2) < f (x1 ), whenever x2> x1 for all x1 and x2 in an interval .
For instance, f (x) = -1 /x =diereses as x increase or for x>0
Therefore, f (x) = -1/ x is a decreasing function of x in the interval x>0

Test for increasing and decreasing function .if f '(x) > 0 for all x in an interval (a, b,)
then f(x) is increasing on (a, b) and if f '(x) < 0 for all x in an interval (a, b), then f(x) is
decreasing on (a, b,)

The graphs of some functions, like that of marginal utility, have increasing or decreasing
property throughout. But, most of functions are increasing in a given range and decreasing in
another range. For example, the graph of total product increases first, reaches maximum and
then decreases. Most of the economic functions are not increasing or decreasing throughout.
Graphs of marginal cost, average total cost, average variable costs, average product, and
marginal product are not increasing or decreasing throughout. The point at which the graph

89
changes from decreasing to increasing or vice versa is known as an extreme point or critical
point or stationary point. An extreme point is a point of relative maximum or relative minimum.

If a function is increasing, it has positive slope which implies that f ’(x) is positive. If a function
is decreasing, it has negative slope and negative first derivative. If the point is an extreme pint,
there is zero slope or undefined slope at that point and is zero or undefined.

Y=f(x)

f(x)

Increasing Function

Y=f(x)

f(x)

Decreasing Function

Remark: The term upward sloping is also sometimes used for an increasing function and
downward sloping foe decreasing function.
90
 Example 4.1
Write down the derivative of 3x + 3x + x − 1 and show that this function is monotonic
increasing
Solution

(3x + 3x + x − 1)=9x + 6x + 1 = (3x + 1) , which is always positive.

(3x + 3x + x − 1) is monotonic increasing

4.3. Convex and Concave Function

The second derivative f ‘’ (x) of a function, being the derivative of the first derivative
f ’(x) , measures the rate of increase of f’(x) i.e the rate of increase or derease of the tangent slope to the
curvey = f (x) as we pass through the concerned point .
The sing of f  (x) at any point x = c proving the following useful informations
(i) f (c)> 0 implies that the function f (x) changes at an increasing rate as x increases through the
value c and that the curve y = f (x) is convex from below at the point x = c
(ii) f  (c) < 0 implies that the function f (x) changes at a deceasing rate as x increases though the
value c and that the curven y = f = (x) is concave from below at the point x = c

Definition: If 2nd derivation of a function f (x) is positive, i.e. f (x) > 0 ∀x ∈a, b,
 then function is said to be a convex function in the given interval.
If f  (x) < 0 ∀ x ∈a, b,  then the function is said to be a concave function in
the given interval

Point of inflexion if c ∈ a, b such that f (c) = 0 then f is said to have a point
of inflexion at x= c

Example 4.2
The cost of producing x unit is given as
91
 ( ) = 0.001x − 0.3x + 30x + 42
Determine where the cost function is concave up ward and where it is concave down and also find the
inflection point.
Solution
Differentiating with respect to x ( ) = 0.003x − 0.6x + 30
And ( ) = 0.006 − 0.6
To be concave up c’’(x) > 0 ( ) = 0.006 − 0.6 > 0 i.e x>100
To be concave down c’’(x) < 0 ( ) = 0.006 − 0.6 < 0 . < 100
Inflexion point c’’(x) =0 This gives us X=100

Knowing the range over which the function increasing, decreasing, and achieving relative
extreme point is important to draw graphs of functions but they are not all about. A given
function increases over a range but it can increase at an increasing rate, a constant rate or at a
decreasing rate. Thus, we have to see the concavity of graphs to add this dimension. As we
move from left to right the slope of f(x) increases; i.e., f ’(x) is an increasing function. Which
means f’’(x) is positive.

A given function is concave up (changes at increasing rate) if the function lays above all its
tangent lines.

92
A given function is concave down (changes at a decreasing rate) if the function lies below its
tangent line.

As we move from left to right the slope of f(x) decreases to zero. This shows that f ’(x) is a
decreasing function implying that<0. Hence, if a function is concave down, then its f’’(x) is
negative.
In summary If

a. f’’(x) < 0, the function is concave down

b. f’’(x) > 0, the function is concave up
c. f’’(x) =0, it may or not be point of inflection. At point of inflection the function
transforms itself from changing at an increasing rate to decreasing rate and vice versa.

Note that if a function changes at constant rate, f’(x) is a constant function and f’’(x) =0. These
curves are linear curves. Hence, getting f’’(x)=0 may not be a sufficient condition for a point to
be an inflection point.

Example 4.3
1. Given find ( ) = -3x+2
a. The ranges of x over which f(x) is decreasing and increasing
b. The point at which f(x) attains its relative extreme value
c. The ranges of x over which f(x) is concave up and down
d. The point of inflection

93
 e. Plot the graph

Example 4.4
Given TVC = 18 − 15 +4
a. MC function
b. The point of diminishing returns
c. The point at which stage II of production begins
d. Plot the graph

4.4. Derivatives of Some Economic Functions

a) Averages: in simple terms, it is defined as the ratio of two quantities.

b) Marginal: It is an instantaneous change in one variable caused by a small change in another
variable. The marginal concept of any economic function can be expressed using the first
derivative.

4.4.1. Average and Marginal Cost

Given a total cost function, it is possible to find its marginal and average cost functions.
General cost function: C  f (Q)
Specific linear cost function: C  a  bQ (b>0).
Two components of the total cost
i. Fixed cost: It is the component of the total cost that does not vary with output (with a given time
interval that could be considered as the short run).
ii. Variable cost: It is part of the total cost that changes with the level of production.
The average cost function is calculated from the general cost function as follows:
C (Q) a  bQ a
Average cost ( AC )    b
Q Q Q
Suppose output increases from Q to Q+L and therefore total cost from C(Q) to C(Q+L), then
marginal cost (MC) can be calculated as,
C (Q  L) _ C (Q ) dC
MC  lim L  0  , which is typically the first derivative.
(Q  L)  Q dQ

94
 dc
Let’s say  b [form the specific linear cost function above] and see what it represents
dq
graphically as follows,

MC (AC)
C

C  a  bQ

a
AC= b
Q

a Fixed Cost
MC=b Q
Q

Note : The average cost (AC) curve lies above the marginal cost (MC) curve but this is not
always true.

4.4.2. Relationship between Average and Marginal Cost

Just awhile ago, we have seen how we can find derive the average and marginal costs from the
total cost function. Now, it is appropriate to see how the average cost (AC) and marginal cost
(MC) functions are related to each other using simple mathematical manipulations.
Given the total cost function, C(Q), the average cost function is given by

AC  C (Q)
Q

d(AC) dC(Q)Q
Taking the first derivatives of both sides, we get: 
dQ dQ

95
 d(AC) [dC(Q)dQ]QC(Q) 1 dC(Q) C(Q)
   
Applying the quotient rule of derivatives:
dQ Q2 Q dQ Q 
Depending on the sign of the slope of the average cost function, we notice the following three
scenarios:
i. If the slope of AC is negative ,
d ( AC)
0
dQ
1 dC (Q) C (Q)  dC (Q) C 
( _ )  0      0
Q dQ Q  dQ Q

dC (Q) C (Q)
  MC  AC
dQ Q
d ( AC ) 1
ii. If the slope of AC is positive  0  (MC  AC )  0  MC  AC
dQ Q
d ( AC ) 1
iii. If AC is neither increasing or decreasing  0  (MC  AC )  0  MC  AC
dQ Q
Example 4.5
50 Q
Give a cost function: C (Q)  500  
Q 10
a) Find AC and MC when Q=20.
Solution
2
500  50 Q
C (Q ) Q 10 500 50 Q
AC     
Q Q Q Q 2 10
500 50 20
Then, at Q=20, AC     27 1
20 (20) 2
10 8

dC (Q) 50 Q 50 20
MC=  2   2
  3.875
dQ Q 5 (20) 5

b) What is the actual cost for producing the 21st good?

Solution
It is mathematically calculated as the difference between the cost of producing 21 and 20 units of
the commodity.

96
 50 Q 2
c(Q)  500  
Q 10
50 (21) 2 50 (20) 2
c(21)  c(20)  (500   )  (500   )
21 10 20 10

Example 4.6
800
Given an average cost function AC  0.0002q 2  0.05q  7  , find the marginal cost function
q
and calculate the marginal cost when q = 100.
Solution
TC
AC   TC  q ( AC )
q
800
TC  q(0.0002q 2  0.05q  7  )
q
TC  0.0002q 3  0.50q 2  7q  800
Then,
dTC
MC   0.0006q 2  0.1q  7
dq

When q  100, MC  0.0006(100) 2  0.1(100)  7  3

4.4.3. Average and Marginal Revenue

For any demand function given as Q  f ( p ) , where Q is the amount of quantity demanded and p
is unit price of a commodity.
TR  PQ  pf ( p)
TR PQ
a) Average revenue: AR   P
Q Q
d ( PQ) dP
b) Marginal revenue: MR  R' (Q)   P Q
dQ dQ
dP
Under perfect competition, supply price (P) remains constant so that  0 . As a result we get
dQ
the following equalities.

97
 MR=P => MR=AP=P
Under imperfect competition

Example 4.7
Q3
Given R(Q)  600Q  , find
25
a) AR and MR when Q=25
b) The actual R(Q) from the side of the 16 th item
Solution:
3

RQ 600Q  Q 2
a) AR   25  600  Q
Q Q 25

25 2
At Q=25, AR  600   575
25
3Q 2
MR  R' (Q )  600 
25
3(25 2 )
At Q=25, MR  600   525
25
b) The actual revenue of the 16th item can be found as follows:

 26 3   25 3 
R(26)  R(25)   600(26)     600(25)    521.96
 25   25 

4.5. The Profit Equation

Total profit is the difference between total revenue and total cost. It is usually denoted by the
Greece letter  .
  TR  TC  R (Q)  C (Q )
Marginal profit is calculated as the first derivative of the profit function with respect to
production quantity. Numerically, it is give as
 ' (Q)  R ' (Q )  C ' (Q )
Note: At the break event point, TR=TC so total  =0.
0 = TR-TC  TR=TC

98
 Example .8
Given the revenue and cost functions of a firm below
R(Q) =20-2Q
C(Q) = Q 2  16Q  20
a) Determine the break event point.
Solution
From economic theory we know that break event point occurs at the level of output when  (Q)
= R(Q)-C(Q) = 0
 (Q)= R(Q) - C(Q) = (20-20)-( Q 2 -16Q+20) = 0

20-20- Q 2 +16-20=0

Q 2  14Q
Q=14
b) Determine marginal profit [  ' (Q)] when 5 units are produced.
Solution
 ' (Q) =14-2Q
 ' (Q) =14-10 = 4

Example 4.9
X2 
A firm assumes a cost function, C ( X )  X   200  where X is the monthly output in
 10 

thousands of units. The revenue function is given by R( X )  2200  3 X  X

2
i. If the firm decides to produce 10,000 units per month, find the firm’s total cost and marginal
cost?
Solution
At 10,000 units of output, x=10 since X is measured in thousands of units.
 x2   100 
At x=10, C ( x)  x  200   10  200   2100
 10   10 

3X 2 3(10) 2
At x=10, MC   200   200  230
10 10
99
ii. If the firm decides to produce when MC = 320, find the level of output per month and the cost to
firm.
Solution
3x 2 3x 2
 200  320   120  x 2  400  x  20
10 10
 400 
At x  20 , C ( X )  20  200   20240  4800
 10 
iii. Find the firms marginal revenue function
Solution
MR  R ' ( x )  1100  3x
iv. If a decision is taken to produce 10,000 units each month, find the TR and the MR of the firm?
Solution
10
At x=10, R (10) = 2200  3(10)  10,850
2
MR=1100-3(10) =1070
v. If the firm produces with marginal revenue of 1040, find the firms monthly output and monthly
revenue.
Solution
Given MR=1040
From (iii) above, MR=1100-3x 1040=1100-3x 3x=1100-1040  3x=60  x=20
Therefore, the firm’s monthly output is 20,000 units. And, at x=20, the monthly revenue of the
firm is given by
20
TR  2200  3(20)  21,400
2
vi. Obtain the firm’s profit function and marginal profit function
Solution

x  x2  3x 2 x 3
  TR  TC  R ( x)  C ( x ) 2200  3 x   x 
 
 200   1100 x    200 x
2  10  2 10

x 3 3x 2 3x 2
 =   900 x  ’(x) =   3 x  900
10 2 10
vii. Find the output required per month which makes the marginal profit [  ' ( x) ] to be zero and
find the profit at this level of output.
100
 Solution
 3x 2
If  ' ( x )  0 , from (vi) above  ' ( x) =  3 x  900 = 0 x 2  10 x  3000 = 0
10

 b  b 2  4ac
Since x  a=1, b=10, c=-300 x=50 or x = -60
2a
x = -60 will not be a solution since level of output[quantity] can not be negative. Hence, our
solution is x = 50. That means, the firm has to produce 50,000 units of output in order for the
 ' ( x) , to be equal to zero. Thus at x=50, from (vi) above

x 3 3x 2 10 3 (10) 2
=    900 x  (x) =  3  900(10)  28,750
10 2 10 2
viii. Find the MR and MC at the above level of output [x = 50] and comment on the result.
Solution

At X=50, MR=1100-3(50) =950

(50) 2
MC  3  200  950 MR=MC at the level of output that makes  ' ( x) =0
10
Proof: Given  ( x)  R ( x)  C ( x)
 ' ( x )  R ' ( x )  C ' ( x) First order condition (FOC) is given by
 ' ( x )  0  R' ( x )  C ' ( x )  0  R ' ( x )  C ' ( x )

101
 Exercises 1
1. The total cost of a firm is given by 0.01x 3  2 x 2  400x, find:
(i) The Marginal cost function.
(ii) The expression for the slope of the Marginal cost curve.
(iii) The Average cost function, and
(iv) The value of x at which MC = AC.
150
2. The demand function of a commodity is given by p   4, where p is price per
x2  2
unit and x denotes quantity. Determine the marginal revenue function.
3. The demand function facing a monopolist is given by x = 300-15p, where x denotes
quantity and p denotes price per unit.
(i) Find total revenue if current monopoly price is 12 Birr.
(ii) Should the monopolist increase or decrease price to increase total revenue?
Support your argument by calculating total revenue when (a) price is increased
by 5%, (b) price is decreased by 5%.
(iii) At what price will he be able to maximize his total revenue?
4. Let the total cost function of a manufacturer be given by C = F(x), where x denotes the
MC  AC
level of output. Show that the slope of average cost curve is , where MC and
x
AC denote the marginal and average cost respectively.
5. The production function of a firm that uses only one variable input (labor) is
x  125 L  L2  0.1L3 . Find the marginal cost if the firm employees 20 units of labor
and the wage rate is fixed at 90 Birr per unit.

4.6. Price and Income Elasticity

4.6.1 Elasticity of a Function

Consider the following function y=f(x)

102
Let x changes from x to x+n, then the percentage or proportionate change in x is given by:
x  X  L   X L
 
x X X
And the percentage (proportionate) change in y is given by:

Y f ( x  L)  f ( x )

Y ( X  L)  X
The average proportionate change in y per unit proportionate change in x is:
Y
Y  Y . X  f ( x  L )  f ( x ) . X
X X Y L Y
X
Then taking the limit of this function, we get

 f (x  L)  f (x) x  f (x  L)  f (x) x
limL0  .   limL0 .limL0
 L y L y
x dy x
= f ' ( x).  . [See limits of a function]
y dx y
This is known as the point elasticity of y with respect to x and written as
x
 xy  dy dx .
y
The elasticity equation can be written as:
dy
y
 . dx  m arg inal. function
x
y average. function
x

Definition: Given a function y = f(x) and if it is a differentiable function, the point elasticity of
the function at a point x is the rate of proportionate change in y per unit proportionate change in
x.

4.6.1. Elasticity of Demand

Definition: Elasticity of demand (  dp ) measures the proportionate change in quantity demand per

unit proportionate change in price. It is a figure that shows consumers’ responsiveness to change
in price.

103
 dQ
 d Q dQ p
p=  .
dp dp Q
p

The negative sign is included because  dp is expected to be negative because of the inverse

relationship between quantity demand and price. Hence, this would make the value of elasticity
of demand to be within the range of conventional agreement i.e.
d
[ 0  p  ]
Example: Suppose the demand function for cigarettes is given by Q  75  p 2 , where Q is
quantity of cigarettes per packet and P is price of a packet of cigarettes. Find the elasticity of
demand when p=7.5.

Epd =  dQ p p 2 p2 2 p2
 
dp . Q    2 p  
Q Q 75  p 2

At p=75, Epd = 27.5 2

2
6
75  7.5

4.6.2. Elasticity of supply

Definition: Elasticity of supply [  sp ] is defined as the percentage change in quantity supplied

due to a unit percentage change in price of a commodity.

Price elasticity of Supply is given by:  sp = dQ .p

dp Q
Note: a) 0    1 or /  /  1 price inelastic
c)   1 unitary elastic
d)   1 price elastic

4.6.3. Elasticity of Income

Definition: Elasticity of Income ( y ) measures the proportionate change in the quantity demand

of a commodity due to a unit proportionate change in the income of a consumer.

104
 Given the Engel Curve equation Q  f ( y ) , where Q is the amount of quantity demanded and y is

dQ
Q dQ y
level of income. Then, the income elasticity equation can be written as  y   .
dy dy Q
y

If  y  1 , then the commodity is a luxury item.

If 0   y  1, the commodity is a necessity (necessary) item.

If  y  0 , the commodity is inferior item.

Example 4.10

If the angel curve is given by the equation 50Q=20+5Y, find  y when y=400.

Solution
dQ y 2 1
Elasticity of Income is given by  y  . . In this particular example, Q   y , so that
dy Q 5 10
dQ 1
 . Therefore, Income elasticity at y  400 is given by
dy 10
1 y 1 y 1 400
y  .  .  .  0.99
10 Q 10 2 1 10 2 1
 y  (400)
5 10 5 10

4.7. Relationship between AR, MR and Point Elasticity

Given the demand function: Q  f ( p ) and revenue function: R(Q)=P(Q).Q(P)=PQ

dp
 MR  R ' (Q)  f ' g  fg ' = dp dQ Q ( p )  p(Q)  Q ( P)  p (Q )
dQ

 
 Q dp   1  1
 MR  p1    p 1    p1  
 p dQ   p dQ   
 Q dp 

1 dQ p dQ p
The last term is p (1  ) since      
 dp Q dp Q

105
And, since P=AR:
 1
MR  AR1  
 
The elasticity equation can be obtained from this equation as:
MR 1 1 MR AR  MR
 1   1 
AR   AR AR
AR AR
 or   1 
AR  MR MR
If   1  MR  0
  1  MR  AR
  1  MR  AR

106
Exercise 2
1. If e is the elasticity of demand, show that elasticity of total revenue with respect to
(e  1)
output is always .
e
AR
2. Verify that e  for the demand curve p  f (x) . Here e denotes the
( AR  MR)
elasticity of demand and AR and MR denote the average and marginal revenue
respectively.
3. If p  f (x) is an inverse demand function facing a monopolist, write total revenue
d (TR)
(TR) as a function of output x. Find using the chain rule and show that an
dx
increase of price leads to
(i) an increase in total revenue if the demand is inelastic.
(ii) a decrease in total revenue if the demand is elastic.
(iii) no change in total revenue if the demand is unitary elastic.
4. The price per unit at which a company can sell its product is given by 400-3x, where x
denotes quantity demanded. The cost function is given to be
C ( x)  200  5x  0.02 x 2 .
(i) Write the expression for total revenue as a function of x.
(ii) Find the marginal and average revenue functions.
(iii) Find the marginal and average cost functions.
(iv) Find elasticity of demand as a function of x.
(v) Find the break-even point.
5. If the marginal revenue of a monopolist is 30 Birr and price elasticity of demand is
1.5, find price.

107
 4.8. Optimizations of Economic Functions

4.8.1. Free (unconstrained) optimization

Optimization, as described earlier involves maximization or minimization of a given objective

function. Most of our problems in economics are optimized subject to some constraints but to
grasp the basic idea, let’s begin how one can handle optimization problems functions without
any constraint. In the next section we will extend the technique to the constrained one. We will
begin by briefly describing an optimum value and proceed to the next section.

4.8.2. The concept of optimum (extreme) value

An extreme value of a function is the maxima or minima value of that function. We can have
two types of extreme values.

Relative
Minima
Relative
Extreme Value
Relative
Maxima
Extreme Value
Absolute
Minima
Absolute
Extreme Value
Absolute
Maxima

A. Relative Extreme Value

Relative extreme value: is an extreme value when compared with the values near to it. It can be
relative maxima (when it is higher than any other point near to it) or relative minima (when it is
lower than any value near to it)
108
Exercise

Determine the extreme value for the function ( ) = − − 3 + 2.

In general
a. If a function f has a relative maxima at x= if there exist an interval around x0 on which

f( )≥ f(x) for all x in the interval

b. If a function f has a relative maxima at x= if there exist an interval around x0 on which

f( )≤ f(x) for all x in the interval

-
m
m

109
It is easy to find out relative extreme values using the derivative. Previously we have seen
that a function changes from increasing to decreasing and vice versa. When its first derivative
is zero or undefined. Since a function changes from decreasing to an increasing at a relative
minima, we have f’(x) = 0 or f’(x) is undefined at relative minima or maxima.

Hence, we can find relative maxima and minima for a function by finding the values of x for
which f’(x) = 0 or f’(x) is undefined. Once we get the critical value, we can use the behavior
of f ‘(x) near the extreme point to know whether it is a relative minima or relative maxima
point.

Exercise
Find the relative extremes of the following functions
a. ( )= − −3 +2

b. ( )=2 −6 +6 +1
c. ( )= −3 +6

B. Absolute Extrema

Absolute extreme value: is an extreme value that the function attains throughout its domain.
The possible largest value that the function attains in its domain is called absolute maxima of
the function. Similarly, the smallest possible value that the function attains throughout its
domain is known as the absolute minima of the function. Note that a function may (or may
not) have absolute extreme value like there may or may not exist relative extreme value.

For example consider a function y=2x+1. As we increase the value of x, the value of y
increases continuously. Again, when we decrease the value of x, the value of y decreases
continuously. However, if the domain is restricted to a closed interval [a, b] which means a≤
x ≤b and the function is continuous everywhere within the interval, the function will have an
absolute minima and absolute maxima within the interval. They may be located either:
a. At the end points; i.e., a and b or
b. At the interior points

To find absolute extrema within an interval

110
 a. Find the critical values and critical points and check whether they are within the
interval
b. Calculate f(a) and f(b)
c. The largest value and smallest value obtained from the above steps represent the
absolute maxima and the absolute minima of the function over the interval
respectively.

Example 4.11

Find the absolute maxima and minima of ( ) = − 6 + 2 over the interval 0≤ ≤5

f’(x) = 0
f’(x) = 2x-6= 0
x=3
There is absolute maxima at x=0 and absolute minima at x=3 within [0, 5].

Exercise
1. Find the absolute extrema of ( ) = +3 + 4. Over the interval
[-4, 2]
2. Given TC = 5x+200 and TR = 10x-0.1 , what is the value of x, which will maximize
profit
3. Given TC = 200+25x+ 2 what is the level of x which minimizes average cost?
4. A farmer uses his 1000 hectare land to raise two grain crops. Grain A is sold at a market
and grain B is fed to his herd of 1000 cattle. Using the data below determine how many
hectares of each crop should be planted in order to realize greatest profit.
a. A hectare planted with grain A yields 150 bushels which is sold at $5 per bushel.
b. Feeding the herd, the yield of x hectares of grain B will result in each steer weighing
350+x-0.001 pound. Steer sells for $1 per pound.

5. A book publisher sells 100,000 copies of a certain book each year. Setting up each run
costs $2000, each book costs $5 in material and labor, and storage fees are $1 per book
per year. Assuming, a uniform rate of sales throughout the year, find the number of runs
that minimize the publishers cost.

111
 6. A travel agency will plan a group four for groups of size 25 or larger. If the group contains
exactly 25 people, the cost is $300 per person. However, each person’s cost is reduced by
$10 for each additional person above 25. What size group will produce the largest
revenue for the agency?

Therefore, the function f(x) is said to have a maximum at a point where it changes from an
increasing to decreasing function. The function f(x) is said to have attained a minimum at a
point where it changes from a decreasing function to an increasing function.
Graphically, it can be shown below

Y Local
Maximum

Local
Minimum

Definition: The values x  x0 where f(x) is stationary are called critical values of x.

i) At a critical value [ x0, f ( x0 )] , a function is a relative maxima if f ( x0 ) is greater than the

immediately preceding and succeeding values of f(x).

ii) At a critical value [ x0, f ( x0 )] , a function is a relative minima if f ( x0 ) is less than the

immediately preceding and succeeding values of f(x).

iii) The point [ x0, f (x0 )] is an inflexion point if the function changes from concavity to

convexity or vice versa. It is a point where the first derivative of the function is zero.

Example 4.12
Given a function f ( x)  x 2  3x , then the first derivative of this function is given by
dy
 f ' ( x)  2 x  3
dx

112
 dy 3
If  0, then 2x + 3 = 0, so that x   which is the critical value of x. i.e. the first
dx 2
3
derivative becomes zero at  . By considering this point it is not possible to determine
2
whether the function is increasing or increasing. First, we take the second derivatives test.
d2y 3
f ' ' ( x)  2
 2  0  x   defines a maximum.
d x 2
The second derivative test
Since f ' ' ( x) is the rate of change of f ' ( x),
i) If f ' ' ( x) < 0, the critical point is a maximum.
ii) If f ' ' ( x) > 0, the critical point is a minimum.

Necessary and Sufficient Conditions for Maxima and Minima

- f ' ( x0 )  0 is a necessary condition for maxima or minima.

- f ' ' ( x) < 0 is a sufficient condition for maxima.

- f ' ' ( x) > 0 is a sufficient condition for minima.

Working Methods for Finding Minima and Maxima

There are four common steps employed in optimization problems.
Step 1: Find f ' ( x ) for a given function y = f(x).
Step 2: Find the values of x that make f ' ( x ) = 0.
Step 3: Find f ' ' ( x) of the function y = f(x).

Step 4: Put x  x0 in step 3.

If f ' ' ( x0 )  0, f ( x) attains maxima at x  x0 .

If f ' ' ( x0 )  0, f ( x) attains minima at x  x0 .

Example 4.13
Optimize f ( x)  x 3  6 x 2  9 x  8 using the working methods given above.
Solution
Step 1: f ' ( x)  3x 2  12x  9

113
Step 2: f ' ( x)  0  3x 2  12x  9  0

x 2  4x  3  0
x0 =3 or x0 = 1 are the critical values.
Step 3: f ' ' ( x)  6 x  12

Step 4: At x0 = 3, f ' ' (3)  6  0  f(x) attains a minima at x =3, f(3) = -8

At x0  1, f ' ' (1)  6  0  f(x) attains a maxima at x = 1, f(1) = -4.

The graph of the function is given below.

(1,-4)

(3,-8)

Example 4.14
Optimize f ( x )  x 4  2 x 3  3x 2  4 x  4 .
Solution
Step 1: f ' ( x)  4 x 3  6x 2  6x  4

Step 2: f ' ( x)  4 x 3  6 x 2  6 x  4  0

2 x 3  3x 2  3x  2  0
x  12x 2  5x  2  0
1
(x-1)(2x+1)(x+2)=0 Hence, x 0  1, x 0   & x 0  2 are the critical values.
2
Step 3: f ' ' ( x)  12x 2  12x  6

Step 4: At x0  1, f ' ' (1)  18  0 [A sufficient condition for minimum]

At x 0   1 2 , f ' ' ( 1 2)  9  0 [A sufficient condition for maximum]

At x0  2, f ' ' (2)  18  0 [A sufficient condition for minima]

114
The graph of the function looks like the following.

(0,4)

(-2, 0) (1, 0)

Example 4.15
The total cost function of a firm is given by C ( x)  x3  315x 2  27,000x  20,000
Determine the number of units that should be produced to minimize total cost.
Solution
Step 1: C ' ( x)  3x 2  630x  27000

Step 2: C' ( x)  0  3x 2  630x  27000  0

x 2  210 x  9000  0
x0  150 & x0  60
These are the critical values.
Step 3: f ' ' ( x)  6 x  630

Step 4: At x0  60, f ' ' (60)  270  0 [A sufficient condition for maximum]

At x 0  150, f ' ' (150)  270  0 [A sufficient condition for minimum]

Since C (x) is minimum at x  150 units, the firm should produce 150 units to minimize its
total cost.

Example 4.16

Derive the necessary and sufficient conditions for profit maximization (for perfectly
competitive market).
Solution
We know that profit is the difference between revenue and cost. All of them are functions of
output given as,

115
 (Q )  R (Q )  C (Q ) , but R(Q)=PQ
The necessary condition for profit maximization is:
 ' (Q)  0
R' (Q )  C ' (Q )  0  MR  MC
To determine the point where profit could be maximized, we take the second order derivative,
which is a sufficient condition.
 ' ' (Q )  R ' ' (Q )  C ' ' (Q ) Profit is maximized when
 ' ' (Q )  0  R ' ' (Q )  C ' ' (Q )  0  R ' ' (Q )  C ' ' (Q )

Example 4.17

Given the revenue and profit function of a firm as R ( x)  1200 x  2 x 2 , and

C ( x)  x 3  61.25x 2  1528.5 x  200 . Find the level of output where  is maximum.

Solution
The first task here should be to formulate the profit function as follows:
 ( x)  R( x)  C ( x)

= (1200x  2x 2 )  ( x 3  61.25x 2  1528.5x  200)

= 1200 x  2 x 2  x 3  61.25 x 2  1528.5 x  200

 (x) =  x 3  59.25 x 2  328.5 x  200

Step 1:  ' ( x)  3x 2  118.5 x  328.5

Step 2:  " ( x)  0

 3 x 2  118.5 x  328.5  0
3 x 2  118.5 x  328.5  0
x 2  39.5 x  109.5  0
x 2  3 x  36.5 x  109.5  0
Step 3:  ' ' ( x )  4  6 x  122.5  6 x  118.5
Step 4: At x  3,  ' ' (3)  100.5  0 [A sufficient condition for minimum]
At x  36.5,  ' ' (36.5)  100.5  0 [A sufficient condition for maximum]
Finally, we can check the total profit of the firm substituting the critical values in the
objective function [  (x) ]:

116
  (3)  661.23
 (36.5)  16,318.44
Hence, the maximum profit of the firm is 16, 318.44 when x  36.5.

Exercise 1
1
1. Show that the function y  x  has one maximum and one minimum value and the
x
later is larger than the former. Draw the graph to illustrate it.
2. The utility function of a consumer of two goods is u=xy. Price of x is 10 Birr per unit
and that of y is 15 Birr per unit. If the consumer has only 90 Birr to spend on the two
goods, determine his optimum purchases.
1
3. Let the cost function of a firm be given by the equation: C  300  10 x 2  x 3 , where
3
C stands for cost and x for output. Calculate:
(i) Output at which marginal cost is minimum.
(ii) Output at which average cost is minimum.
(iii) Output at which average cost is equal to marginal cost.
1
4. The production function of a commodity is given by Q  40F  3F 2  F 3 , where Q
3
is total output when F units of input are used.
(i) Find the number of units required to give maximum output.
(ii) Find the maximum value of the marginal product.
(iii) Verify that when average product is maximum, it is equal to marginal product.
x
3
5. The demand function of a particular commodity is given by y  15e for 0  x  8
where y is price per unit and x is the number of units demanded. Determine the price
and quantity for which revenue is maximum.

117
 4.8.3. First and Second Order Conditions for a Function with Two Explanatory
Variables

This is a simple extension to your study on optimization of a function with a single variable.
What do you think are the first and second order conditions for a function with two
explanatory variables? You can use the space below to write your answer.
___________________________________________________________________________
_____________________________________________________________________

A. First Order Condition: - Consider the function z  f ( x, y ) . In this case, the first order
necessary condition for an extremum (either a maximum or a minimum) requires the first
partial derivatives of the function z  f ( x, y ) be equal to zero simultaneously. This involves
finding the values of x and y so that the first partial derivatives are zero at a time. That is
z z
f x  f y  0 or   0.
x y
Can you make a conclusion based upon this first order condition for an extremum? Or, is it
possible for you to conclude whether a particular point is a maximum or a minimum on the
basis of the first order condition? The answer is no because of the presence of points which
satisfy the first order condition but neither a maximum nor a minimum. One good example is
the case of an inflection point. Therefore, similar to what you have studied in the case of a
single variable optimization, the first order condition is only a necessary but not a sufficient
condition. As a result, you need to make use of additional criteria. With this comes the
second order test.

B. Second Order Condition: - The second order condition for the function z  f ( x, y )

involves restrictions on the signs of the second order partial derivatives: f xx , f yy and f xy .

The second order condition which is also known as the sufficient condition can be stated as
follows.

Let ( x0 , y 0 ) be the critical values of the function (i.e., where f x  f y  0 ) and the second

order partial derivatives are evaluated at these points. Thus,

a) f ( x0 , y0 ) is a relative maximum if and only if f xx , f yy  0 and f xx f yy  f xy2 .

b) f ( x0 , y0 ) is a relative minimum if and only if f xx , f yy  0 and f xx f yy  f xy2 .

118
c) f ( x0 , y0 ) is a saddle point if f xx f yy  f xy2 , and f xx and f yy have different signs.

d) f ( x0 , y0 ) is an inflection point if f xx f yy  f xy2 , and f xx and f yy have the same signs.

e) f ( x0 , y0 ) could be a relative maximum, a relative minimum, or a saddle point if f xx f yy  f xy2 .

That is the second order test fails to tell the behavior of the function.
The table below summarizes both the first and the second order conditions for relative
extremum of the function z  f ( x, y ) .

Table 4.1 Conditions for Relative Extremum

Condition Maximum Minimum

First order necessary condition fx  f y  0 fx  fy  0

Second order sufficient condition f xx, f yy  0and f xx , f yy  0 and

fxx fyy  fxy2 fxx fyy  fxy2

Generally, in finding the relative maximum/minimum of a function with two explanatory

variables, you need to find first the critical values of that function using the first order
necessary condition and then carry on the second order test to determine if the critical values
are either maximum, minimum, saddle or inflection points.

Example 4.18

Find the critical values of the function z  x 2  2y 2 and determine whether they are maximum
or minimum.
Solution
Using the first order condition, you can find the critical values. Thus, you need to find the
first partial derivatives, f x and f y .

z
fx   2x
x

119
 z
fy   4y
y
Then, find the values of x and y (the critical value) which satisfy the condition f x  f y  0 .

Hence,
2 x  4 y  0 for x  0 and y  0 , i.e., the critical point in this case is ( 0,0)
Now, you go to the second order test. Here, you need to find the second order partial
derivatives.
2z
f xx  2
x 2
2 z
f yy  4
x 2
2 z
f xy  0
x 2
Evaluating the second partial derivatives at the critical value, you have
f xx (0,0)  2

f yy (0,0)  4

f xy ( 0,0)  0
2
Therefore, f xx  0 and f yy  0 , and f xx f yy  f xy . Hence, you conclude that the critical value

( 0,0) is a relative minimum.

Example 4.19

Given the function z  2x 2  xy  3 y 2 , find the stationary values and examine whether they
are maximum or minimum.
Solution
First order condition
The first partial derivatives are
f x  4x  y

fy  6y  x

The first order condition requires f x  f y  0 . Thus, you have

4x  y  0
6y  x  0

120
Solving the above equations simultaneously, you get x  0 and y  0 and hence, the critical
value is ( 0,0) .
Second order condition: - The second partial derivatives are
f xx  4

f yy  6

f xy  1

2
Since fxx 0and f yy  0, and f xx f yy  f xy (because fxx f yy  24and f 2 xy  1 ), the critical

value ( 0,0) is a relative minimum.

Example 4.20

Find the extremum for the function z   x 2  xy  y 2  2 x  y and examine whether they are
maximum or minimum.
Solution
First order condition: The first partial derivatives
f x  2 x  y  2

f y  2 y  x  1

The first order condition requires f x  f y  0 . Thus, you have

 2x  y  2  0
 2y  x 1  0
5 4
Solving the above equations simultaneously, you have x  and y  . That is the critical
3 3
5 4
value is ( , ) .
3 3
Second order condition: - the second partial derivatives
f xx  2
f yy  2

f xy  1

Since f xx  0 and f yy  0 , and f xx f yy  f xy2 (because f xx f yy  4 and f 2 xy  1 ), you have a

5 4
relative maximum at ( , ) .
3 3

121
Example 4.21

Find the critical values of the function z   x 3  xy  y 2  x and explain whether they are
maximum or minimum.
Solution
First order condition
The first order derivatives are
f x  3 x 2  y  1

fy  2y  x

The first order condition requires f x  f y  0 . Hence, you have

 3x 2  y  1  0
2y  x  0
1 2
After solving the above equations simultaneously, you get x  and x   , and the
2 3
1 1
corresponding values of y are y   and y  . That is the function has two critical values:
4 3
1 1 2 1
( , ) and ( , ) .
2 4 3 3
Second order test
The second order derivatives are
f xx  6 x

f yy  2

f xy  1

1 1
At the critical value ( , ) , you have f xx  3  0 , f yy  2  0 and f xy  1  0 . Since f xx
2 4
1 1
and f yy have different signs and f xx f yy  f xy2 , the point ( , ) is a saddle point.
2 4
2 1
At the critical value ( , ) , you have f xx  4  0 , f yy  2  0 and f xy  1  0 . Therefore,
3 3
2 1
since f xx  0 and f yy  0 , and f xx f yy  f xy2 , the point ( , ) is a relative minimum.
3 3

122
Exercise Nine

Answer the following questions. Use the space below each question to write your
answer.
Find the critical values of the following functions and examine if they are maximum or
minimum.

a) z  x 4  2 y 2  2xy

b) z  3x 2  2 y 2

c) z  x 3  y 3  3xy

d) M  p1 , p2 ,... pn

4.8.4. Constrained Optimization

In the previous section we have seen how the relative extreme values of an objective function
with two choice variables are investigated. The objective function refers to a function that
represents the goal of economic agents, like profit maximization of firms or utility
maximization of consumers. The functions thus far we dealt with are unconstrained or free
from constraints and the choice variables are independent of one another. This means the
quantity of a choice variable that optimizes (maximize or minimize) the objective function is
decided independently of the optimum quantity of the other variable.

However, the existence of resource scarcity affects economic agents’ decision making
process of a certain variable by taking into account the value of the other variables. In
economics many of the problems involve relations among the choice variables. For example,
in the utility function, the quantity to be consumed for a certain product is related to the
quantity of the other commodity through the budget constraint line.

123
Consequently, the objective function will be affected by such relations between the choice-
variables because the optimum value is subject to the constraints established between these
variables. The optimum results thus obtained are referred to as the constrained optimum.

Example: utility maximization is the objective of consumers, whose utility index may be
given by the following function: U  f  x1 , x2 ,..., xn  , where u is the utility index and

x1 , x2 ,..., xn are quantities of commodities to be consumed and have positive values. The
marginal utilities (the partial derivatives of U with respect to each goods) derived out of the
consumption of these goods will also be non-negative. According to the unconstrained
optimization concept, a given consumer must purchase an infinite amount of all the
commodities so as to maximize his/her utility. However, he/she is constrained to his/her
purchasing power- i.e. the budget constraint. This budget constraint can be given as:

M px
1 1  p2x2 ... pnxn, where M is the money income of the individual consumer and

p1 , p2 ,... pn are the prices of the commodities purchased.

The optimization problem thus becomes meaningful when the utility function is subject to the
budget constraint. The constraints are sometimes called the restraint, side relation, or
subsidiary condition. The imposition of the budget constraint equation will narrow down both
the domain and the range of the objective function. Hence, the solution for utility
maximization is obtained along the budget constraint line. In other words points above the
budget line are unattainable and thus excluded from the domain of the objective function.

In a meaningful optimization problem, the number and the nature of the constraints should be
such as to restrict, but not eliminate the possibility of choice. Generally, the number of
constraints should be less than (or at most equal to) the number of the choice variables.

Methods of Solving Constrained Optimization

In the last subsection, we have seen what a constrained and unconstrained optimization
problem mean. Here, we try to investigate the maximum or minimum values for an objective
function, which is subject to some constraints using two alternative techniques. First we deal

124
with the so called the Lagrange- Multiplier technique, and then deal with the alternative
technique called the differential method.
N.B: - At this level of your study, it is wise to restrict the constraints to assume equality sign.

Method 1: The Lagrangean Method

This method enables us to solve an optimization problem, in which the objective function is
subject to a constraint. The Lagrange Multiplier Method allows us to convert a constrained
optimization problem into a form on which we can simply use the first order condition of the
unconstrained optimization. To do so, a third variable is needed which is called a Lagrange
Multiplier and it is represented by  (the Greek letter lambda).
Given the optimization problem f ( x, y ) subject to the constraint g ( x, y )  c where c is a
constant, the Lagrange Multiplier can be used to construct a function known as the Lagrange
Function and it is written as
L ( x , y )  f ( x, y )   ( g ( x, y )  c )
Then, finding the partial derivatives of the Lagrange Function with respect to x , y and  , and
solving them simultaneously gives us the necessary condition for stationary values of L . That
is,
z
Lx   f x  g x  0
x
z
Ly   f y  g y  0
y
z
L   c  g ( x, y )  0

f f g g
Where f x  , fy  , gx  and g y 
x y x y
Thus, the solution constitutes the stationary values of the constrained optimization problem.
gx
To find the solution to the optimization problem dg  g x dx  g y dy  0; dy   dx subject to
gy

the constraint g ( x, y )  c (using the Lagrangian Method), we need to follow the following
steps.
1. Write the Lagrange function
L( x, y )  f ( x, y )   ( g ( x, y )  c) , where  is the Lagrange Multiplier

125
 2. Differentiate the Lagrange function with respect to x , y and  , and set the partial
derivatives to zero
z
Lx   f x  g x  0
x
z
Ly   f y  g y  0
y
z
L   c  g ( x, y )  0


3. Rearranging the three equations above, you have

f x  g x
f y  g y

g  fx fy
fx  f y  x   
 gy gx gy
 
3 Solve these equations simultaneously for x , y and  .

Example 4.22

Solve the following problem of maximizing the utility function

u  xy  2 x subject to 2 x  y  30 .
Solution
Construct the Lagrange Function
L  xy  2 x   (2 x  y  30)
Find the partial derivatives and set them to zero
z
Lx   y  2  2  0
x
z
Ly   x 0
y
z
L   30  ( 2 x  y )  0

Rearranging these equations
y  2  2
x
2 x  y  30

126
Using the first two equations above, you have
y2
  and x  
2
Thus, 2 x  y  2
Solve this equation simultaneously with the last of the three equations
2x  y  2
2 x  y  30
Hence, you get x  8 and y  14 . Substituting these values into the objective function, you
have u  128 .
This result is identical to the result obtained under the method of substitution in the previous
discussion.

Example 4.23
Find the extreme values of the function z  xy  4 x subject to the constraint x  y  8 .
Solution
Constructing the Lagrange function
L  xy  4 x   ( x  y  8)
Finding the partial derivatives and setting them to zero
z
Lx   y4  0
x
z
Ly   x 0
y
z
L   8  ( x  y)  0

Rearranging these equations
y4
x
x y 8
From the first two equations above
x  y4
Solving the above equation simultaneously with the last of the three equation
x  y4
x y 8

127
Therefore, you have x  6 and y  2 and substituting these values into the objective function,
we get z  36

Example 4.24

Minimize the function z  x 2  y 2 subject to x  2 y  4 .

Solution
Construct Lagrange function
L  x 2  y 2   ( x  2 y  4)
Take the first derivatives and set them to zero
z
Lx   2x    0
x
z
Ly   2 y  2  0
y
z
L   4  ( x  2 y)  0

Rearranging
2x  
y
x  2y  4
From the first two equations
2x  y
Solving this expression simultaneously with last of the three equations
2x  y
x  2y  4
4 8
Therefore, you have the stationary point x  and y  .
5 5

128
Exercise Ten
Use the Lagrange Multiplier Method to find the stationary values of the following
functions.
a) z  x  y subject to x 2  y  1

b) z  3 xy subject to x 2  y 2  8
1 1

c) z  10 x 2 y 3 subject to 2 x  4 y  9

d) z  x 2  y  7 subject to x  y  0

e) z  x 2  3xy  y 2 subject to x  y  100

Method 2: The Differential Method

In previous subsections of this chapter you have learnt that the first order derivative of the
unconstrained optimization of z  f ( x, y ) is given by the total differential dz .

 g 
dz  f x dx  f y dy  f x dx  f   x dx   0
 gy 
 
This statement remains valid after a constraint g ( x, y )  c is added. However, with the
constraint in the portrait, we can no longer take dx and dy both as arbitrary changes as before.
For if g ( x, y )  c , then dg must be equal to dc which is zero since c is a constant.
gx
Then, we can solve for dyfrom dg  g x dx  g y dy  0; dy   dx . Then we can substitute
gy

this definition in the above formula for dz.

 g 
dz  f x dx  f y dy  f x dx  f   x dx   0
 gy 
 
g  fx fy
fx  f y  x   
 gy gx gy
 
This result together with the constraint g ( x, y )  c , will provide two equations from which to
find the critical values of x and y. the results obtained by the two methods yield the same
result. The only difference that can be observed from the total differential approach is that we

129
cannot find a solution for the value of  , which represents a measure of the sensitivity of the
Lagrangian function to a shift of the constraints.

Example 4.25
Suppose a farmer’s total revenue function and total cost function are respectively given by
R  20Q1  10Q2 and C  3Q12  2Q1Q2  2Q22 where Q1 and Q2 are the commodities produced.
Find the profit maximizing levels of Q1 and Q2 , and the maximum profit.
Solution
The profit function is given by   R  C . The profit function in this particular case is
  20Q1  10Q2  (3Q12  2Q1Q2  2Q22 )
In order to gets the profit maximizing levels of Q1 and Q2 , you need to compute the first
derivates of the profit function (i.e., the marginal profit functions) and solve them
simultaneously. Thus, marginal profit functions are

1   6Q1  2Q 2  20
Q1

2   2Q1  2Q2  10
Q 2

Solving the marginal functions simultaneously, you get Q1  3 and Q2  1 .

Now, consider the second order test. Computing the second order derivatives, you have
 2
 11  2
 6
Q1

 2
 22  2
 4
Q2

 2
 12   2
Q1Q2

Since  11  0 ,  22  0 and  11 22   122 , the output levels Q1  3 and Q2  1 maximize the profit
function.
The maximum profit obtained by substituting Q1  3 and Q2  1 into the profit function is 33.

Example 4.26

130
Suppose a firm wants to produce a particular commodity and the relationship between inputs
and the output is given by the Cobb-Douglas production function Q  25l 0.4 k 0.6 where l and
k measure respectively the units of labor and capital used for production and Q represents the
units of the commodity produced. Each unit of labor cost birr 50 and each unit of capital costs
birr 75. If the firm can spend birr 20000, find the optimal levels of labor and capital that
maximize profit and the maximum level of output produced.
Solution
This is a constrained maximization problem with equality constraint. Hence, you need to use
the Lagrange Multiplier method to solve the problem. The problem can be stated as
Max Q  25l 0.4 k 0.6
Subject to 50l  75k  20000
The Lagrange function is therefore
L  25l 0.4 k 0.6   (50l  75k  20000)
According to the first order condition, you need to find the partial derivatives of the Lagrange
function and equate them to zero. Thus, you have
L
Ll   10l 0.6 k 0.6  50  0
l
L
Lk   15l 0.4 k 0.4  75  0
k
L
L   20000  (50l  75k )  0

Rearranging the first two equations
1 0.6 0.6
l k 
5
1 0.4  0.4
l k 
5
From the equations, you get
lk
You need to solve this equation simultaneously with the last of the three equations above.
That is
lk
20000  50l  75k  0
Therefore, you get l  160 and k  160 as the optimal levels of labor and capital that maximize
profit.
131
It follows that the level of production is
Q  25(160) 0.4 (160) 0.6
Q  4000 units

Example 4.27
Suppose a consumer’s utility function is given by U  2 x 2 y where x and y are the goods he
consumes. If the price of good x is birr 4 per unit and that of good y is birr 2 per unit, and if
the has birr 400 to spend on the two commodities, calculate the optimal levels of the two
goods that can maximize the utility of the consumer.
Solution
Once again, this is a constrained optimization problem and thus calls for the use of the
Lagrange Multiplier method. Mathematically, the optimization problem can be stated as
Max U  2 x 2 y
Subject to 4 x  2 y  400
Therefore, the Lagrange function is
L  2x 2 y   (4 x  2 y  400)
The first order necessary conditions are
L
Lx   4 xy  4  0
x
L
Ly   2 x 2  2  0
y
L
L   400  4 x  2 y  0

Rearranging the first two equations
xy  

x2  
It follows that
x y
Then, you need solve this last expression with the last of the three equations above. That is
x y
400  4 x  2 y  0

132
 200
Therefore, the optimal values of that should be consumed to maximize utility are x  and
3
200
y
3

133
 4.9. Revision Exercises

Answer the following questions accordingly.

a) Suppose the revenue and cost functions of a firm producing two commodities Q1 and Q2 are

R  45Q1  30Q2 and C  3Q12  Q1Q2  5Q22 . Find the profit maximizing levels of Q1 and Q2 .

b) A consumer’s utility function is given by U  x 2 y 2 where x and y are the two goods she
consumes. If the consumer is willing to spend birr 600 on the two goods and if the price of x
and y is birr 8 and birr 10 respectively, compute the optimal level of the two goods that she
needs to consume in order to maximize her utility.

C) A firm’s production function is given by Q  150l 0.8 k 0.2 where l and k measure respectively
the units of labor and capital used for the production of Q . Each unit of labor costs birr 75
and each unit of capital costs birr 100. If the firm can spend birr 40000, determine the optimal
levels of labor and capital that the firm must employ to maximize its profit and the maximum
output level it produces at the optimal levels of labor and capital.

134
Hints and Answers
Check your self – I

1. (i) 2x – 2 (ii) 12x3 + 57x2 + 16x + 17 (iii) x2(1 + 3 ln x) (iv) (5x + 4) x3e5x

(v) x5e3x (1 + 3x ln x + + 6 log x) (vi) 1 + lnx + 3x ln 3

– ( – )
2. (i) (ii) (iii) (iv) (v)
( ) ( ) ( )

( ) ( – )
3. (I) (12x – 6x3 + 5) (2 – 3x2) (ii) − (iii)
( – )

(iv) ex3 + x2 – 1 (3x2 + 2x)

4. (i) 36 (x3 + 7x2 – 5x)11 (3x2 + 14x) (ii) (6x + 7) / (3x2 +2x)

(iii) e7x (2x 7x2) / x2e7x

Check your self – II

x 1 + + √1 + squaringbothsides
x (1 + )=(1 + )
(x − y ) + (x y − y x) = 0
(x − y ) + xy(x − y) = 0
+ +̇ =0
Y (1+x) =0 ∴ y=-( )

Differentiating both sides with respect to x we obtain

dy (1 + x). 1 − x. 1 −1
=− =
dx (1 + x) (1 + x)

135
 Chapter Summary

 Derivatives are helpful in finding the marginal counterparts for revenue, cost and profit
functions. The marginal functions are represented by the first derivatives of the respective
functions.
 In the process of calculating elasticities, whatever type it is, the concepts of derivatives are
central.
 The classical approach of optimization follows the application of derivatives in finding the
optimal points using the first order and second order conditions.
 Finally, in economics optimization problems are most common and hence the application of
derivatives in this regard is paramount.

136
 CHAPTER FIVE
5. INTEGRAL CALCULUS

In this section, you will be briefly introduced the tools of mathematical economics required to
handle dynamic analyses of economic theories and empirics. In the first section, we will
touch on topics of anti-derivatives and the indefinite integral, techniques of integration and
the general power rule, definite integral, fundamental theorem of calculus, and area of
irregular shaped bodies, and some economic applications of integrals like consumer’s,
producer’s surpluses and social welfare.

Up to this time, we have been concerned with finding the derivative of a function. However,
there are some problems in economics that require us to come up with the original function
given its rate of change. These problems are common in the area of social welfare,
distribution of income of a country etc. The technique of finding out the original function
based on its derivative is known as integration or antiderivative. For introduction let’s begin
with illustrations.

Objectives
When you are through the chapter, you will be able to:

 Explain what integral calculus is all about and its relationship with the concepts of
derivatives you have studied earlier.
 Distinguish between the different techniques associated with integral calculus
including the specific rules of integrations.
 Differentiate definite, indefinite and improper integrals including their graphical
representations.
 Clearly identify the applications of integral calculus in economics.

Chapter Contents:

137
  Introduction
 The Indefinite Integral or Anti-derivaives
 Rules of Integration
 The Definite Integral and Improper Integrals
 The Definite Integral as an Area under a Curve
 Applications of Integral Calculus in Economics

5.1. Introduction
Dear Students: Up to now, you have studied major concepts such as limits and continuity and
differential calculus by focusing on their important applications to economics. In this chapter,
we will be discussing about another major component in calculus algebra called integral
calculus.

The chapter has been organized to comprise three major sections. We start from its
definitions, concepts and rules applicable to integral calculus. We will also discuss on
definite, indefinite and improper integrals at a greater depth. Finally, we give our focus to the
important applications of integral calculus specifically to the discipline of economics.
This section is devoted to the basic concept of integration. First, you will be introduced to the
concept of integration and related explanations. Subsequently, you will study what indefinite
integrals are, and rules of integration which are instrumental in calculating integrals of
functions. You will also learn that the rules of integration are very much related to the rules
of integration.

As you recall, the discussion in the previous Units is focused on finding the derivative of a
function and the process of differentiation. That is, given the function y  f (x) , we find the
derivative f (x ) . By contrast, the problem you are confronting in this Unit is different. Here,
the interest is to find the primitive function y  f (x) from a given derivative function f (x) .
Therefore, you do the exact opposite of what you have studied under differentiation or
differential calculus.

Generally speaking, the concept of integration or of integral calculus is concerned with the
process of uncovering a primitive function from a given derived function. How do you
recover the primitive function from a given derivative function? The sub section that follows

138
provides the answer by first introducing you the indefinite integral. For convenience, the
primitive and derived functions will be denoted by F (x) and f (x) , respectively.

5.2. 6. The Indefinite Integral or Anti-derivaives

If you are given the derivative of a function, then integration is the process of driving the
function itself. Integration is thus the reverse process of differentiation. Given the derivative
of a function f (x) , we wish to recover the primitive function F (x) . This can be done by

F ( x)   f ( x) dx

Where,  is the integral sign.

f (x) is the integrand i.e. the function to be integrated.
x is the variable of integration.
dx indicates the variable with respect to which the f ' ( x ) is to be integrated . It also denotes
where the function to be integrated finishes. Hence, if f (x) is the derivative of F (x) , then
F (x) is the integral (anti-derivative) of f (x) . And, the process of finding the integral of the
function is called Integration.

One important point that you should note is that while the primitive function F (x) invariably
yields a unique derivative f (x) , the derived function can have an infinite number of possible
primitive functions through integration. Why? Because, if F (x) is an integral of f (x) , then so
is F (x) plus a constant for the derivative of a constant is zero.

This implies that you can write the integration of the derived function f (x) with respect to x

as  f ( x)dx  F ( x)  c , where c is known as an arbitrary constant of integration which

indicates the presence of multiple parentage of the integrand.

With this in mind, you have now the definition of the indefinite integral as given below.
Definition
 The integral  f ( x ) dx is known as the indefinite integral of f (x) as it has no definite

numerical value i.e., it equals to F ( x)  c and hence, its value will vary with the value of
x even when the value of c is determined.

139
You should note from the above definition that the indefinite integral is a function of the
variable x just like the derivative is.

5.3. Rules of Integration

The rules that you will learn shortly allow you to determine integrals of different functions.
As you will see, these rules are closely linked to the rules of derivation and many of them can
be obtained by stating the corresponding rules of differentiation in reverse order.

1) The Power Rule

n 1 n 1
x dx 
n 1
x c

Example 5.1
Find the integral  x 2 dx .

Solution
Here, n  2 and hence,
1 1
x
2
dx  x 21  x 3  c
(2  1) 3

Example 5.2
Find the integral  xdx .

Solution
In this case, n  1 and hence,
1 11 1 2
 xdx  (1  1) x 
2
x c

Example 5.3
Find the integral  1dx .

Solution
Since x 0  1 , n  0 . Therefore,
1
1dx  x 01  x  c
(0  1)

140
Example 5.4
1
Find the integral  x 3 dx .

Solution
1
Here, you have n  . Thus,
3
1 1 4
1 1 3 3
 x 3 dx  x3  c  x c
1 4
(  1)
3
Example 5.5

1
Find the integral  dx where ( x  0 ).
x2
Solution
1
Since  x  2 , you have n  2 . Therefore,
x2
1 1 1 1
x 2
dx  x 31  c   x  2  c   2  c
(3  1) 2 2x
Note that you can check the correctness of your result by simply taking the derivative of the
integrals.

b) The Exponential Rule

You recall that derivative of an exponential function e x is the function itself. That is
d x
e  e x . It follows that the integral of e x is
dx
x
e dx  e x  c

As a variant of this rule, you have

f ( x)
 f ( x)e dx  e f ( x )  c

Example 5.6
Find the integral  4e 4 x dx .

Solution
4x
 4e dx  e 4 x  c

141
Example 5.7
Find the integral  2e 2 x dx .

Solution
2x
 2e dx  e 2 x  c

c) The Logarithmic Rule

1
 x dx  ln x  c , (for x  0 )

In order to accommodate the negative values of the integrand, you have the following general
formulation:
1
 x dx  ln | x |  c , (for x  0 )
1 1 1
You should that the integrand can be expressed as power function; that is  x .
x x
However, it is not possible to integrate it using the power function rule. That is why you have
the logarithmic rule.
As in the exponential function rule, you have also a variant of the logarithmic function as
presented below.
f ( x )
 dx  ln f ( x)  c , (for x  0 )
f ( x)

f ( x)
 dx  ln | f ( x ) |  c , (for x  0 )
f ( x)

Example 5.8
4x 3
Find the integral  dx .
x4 1
Solution
4x 3 is the derivative of x 4  1 . Hence,
4x 3 4
 x 4  1 dx  ln( x  1)  c

142
Example 5.8
2x  1
Find the integral  2
dx .
x  x 1
Solution
2 x  1 is the derivative of x 2  x  1 . Thus,
2x  1
x 2
dx  ln( x 2  x  1)  c
 x 1
d) The Integral of a Sum
The integral of a sum of functions is the sum of the integral of the functions. For the case of
two functions f (x) and g (x) ,

  f ( x)  g ( x)dx   f ( x)dx   g ( x)dx

Example 4.9
Find  ( x 2  x  1)dx .

Solution
You can express this integral as a sum of three integrals:
2
x dx   xdx   1dx

Since
2 1 3 1 2
x dx  x  c1 ,  xdx  2 x  c 2 and  1dx  x  c 3 (refer to the examples
3
under the power rule to see how each of these integrals are obtained)
Therefore,
1  1 
x
2
dx   xdx   1dx   x 3  c1    x 2  c 2    x  c3 
3  2 
2 1 3 1 2
x dx   xdx   1dx  x  x  xc (where c  c1  c2  c3 )
3 2

Example 5.10
Find  (2e 2 x  5 x)dx .

Solution
2x
 (2e  5 x)dx   2e 2 x dx   5 xdx

Since

143
 2x 1 6
 2e dx  e 2 x  c1 and  5 xdx  x  c2 (using the exponential and the power rules
6
respectively)
Thus,
1 
 (2e
2x
 
 5 x)dx  e 2 x  c1   x 6  c2 
6 
2x 1 6
 (2e  5 x )dx  e 2 x  x c (where c  c1  c 2 )
6
e) The Integral of a Multiple
Given k is a constant number, the integral of k times an integrand is k times the integral of that
integrand. That is,

 kf ( x)dx k  f ( x)dx

Example 5.11
Find the integral  2 x 2 dx .

Solution
Factoring out 2 , you have the integral expressed as
2
 2x dx  2  x 2 dx

Using the power rule,

2 1  2 2
 2x dx  2  x 2 dx  2 x 3  c1   x 3  2c1  x 3  c (where c  2c1 )
3  3 3
Example 5.12
Find the integral  4 x 3 dx .

Solution
Factoring out 2 and using the power rule, you have

3 3 1  4
 4 x dx  4 x dx  4 x 4  c1   x 4  4c1  x 4  c (where c  4c1 )
4  4

Example 5.13
Find the integral   f ( x ) dx .

Solution
In this case, k  1and hence,

144
   f ( x)dx    f ( x)dx
This implies that the integral of the negative of a function is the negative of the integral of
that function.

Example 5.14
3
Find the integral  (3e x  x 2  ) dx .
x
Solution
Using the last two rules, you have

x 2 3 x 2 1
 (3e  x  x2
)dx  5 e dx   x dx  3 x dx

Using the exponential, the power, and the logarithm rules,

3 1 
 (3e
x
 x2  2
 
) dx  5e x  c1   x 3  c 2   3 ln | x |  c3 
x 3 
x 3 1
 (3e  x2  2
) dx  5e x  x 3  3 ln | x | c (Where, c  c1  c2  c3 )
x 3

f) The Substitution Rule

This rule is the integral calculus counterpart of the chain rule. According to the rule, the

integral of f (u ) du dx
with respect to the variables x is the integral of f (u) with respect to the
variable u . That is,
du
 f (u ) dx dx   f (u )du F (u )  c
This rule can be proved by using the chain rule. Given the function F (u ) , where u  u (x) , the
chain rule states that
d d du du du
F (u )  F (u )  F (u )  f (u )
dx du dx dx dx
du
You can see that f (u ) is the derivative of F (u ) with respect to x . Therefore, it follows that
dx
du du
the integral of f (u ) with respect to x must be  f (u ) dx   f (u ) du F (u )  c .
dx dx

145
Example 5.15
Find the integral  2 x( x 2  1)dx .

Solution
du du
Let u  x 2  1 . Then,  2 x and it follows that dx  . Thus, you can write the
dx 2x
integral as
2 du 1
 2 x( x  1) dx   2 xu   udu  u 2  c
2x 2
Then,
1 2 1 2
 udu  2 u c  ( x  1) 2  c
1 2
Therefore,
2 1 2
 2 x( x  1) dx  ( x  1) 2  c
2
du
Alternatively, we can obtain the same answer by substituting for 2 x . That is
dx
2 du 1
 2 x( x  1) dx   u dx   udu  u 2  c
dx 2
Hence,
1 2 1 2
 udu  2 u c  ( x  1) 2  c
2
In addition, you can obtain exactly the same answer by first multiplying out the integrand and
then integrating the resulting expression. This is left for you as an exercise.

Example 5.16

Find the integral  2 x 2 ( x 3  3)dx .

Solution
du du
Let u  x 3  3 . Then,  3x 2 and it follows that dx  2 .
dx 3x
Thus,
2 du 2
 2x ( x 3  3) dx   2 x 2 u 2
  udu
3x 3
2 2 1 2 1 3
 3 udu  ( 3 )( 2 )u c  ( x  3) 2  c
3

146
Example 5.17
Find the integral  4e 4 x 3 dx .

Solution
du du
Let u  4 x  3 . Then,  4 and it follows that dx  .
dx 4
Hence,
4 x 3 du
 4e dx   4e u  e u du
4 

e
u
du  e u  c  e 4 x 3  c

g) Integration by Parts
This rule is a counterpart of the product rule under differential calculus. Given two functions
f (x) and g (x ) , the rule states that

 f ( x) g ( x)dx  f ( x) g ( x )   f ( x) g ( x) dx (where f  and g  are derivatives of

f and g respectively)

Let us see how you can arrive at this rule from the product rule. Suppose you have two
functions f (x) and g (x ) . The product rule states that
d
 f ( x).g ( x)  f ( x) g ( x)  f ( x) g ( x)
dx
Integrating both sides of the above expression, you get
d
 dx  f ( x).g ( x)dx   f ( x) g ( x)dx   f ( x) g ( x)dx
d
f ( x) g ( x)   f ( x) g ( x)dx   f ( x) g ( x)dx (since   f ( x ) g ( x)  f ( x) g ( x) )
dx
Rearranging, you have

 f ( x) g ( x)  f ( x ) g ( x )   f ( x ) g ( x )

Example 5.18
1
2
Find the integral  x(x  3) .

Solution
According to integration by parts rule

147
  f ( x) g ( x)dx  f ( x ) g ( x )   f ( x ) g ( x ) dx
1 1
Let f ( x)  x and g ( x)  ( x  3) 2 . It follows that f ( x)  1 , and integrating g ( x)  ( x  3) 2 ,
3
2
you get g ( x)  ( x  3) 2 .
3
Thus,
1 3 3
2 2
 x( x  3) dx  3 ( x  3) 2 x   3 ( x  3) 2 dx
2

1 3 5
2 4
 x( x  3) 2 dx  3
( x  3) 2 x  ( x  1) 2  c
5

Example 5.19
Find the integral  xe x dx using integration by parts.

Solution
Let f ( x)  x and g ( x)  e x . Thus, f ( x)  1 and g ( x)  e x .
Hence,
x
 xe dx  x   e x dx  x  xe x  c

Example 5.20
Find the integral  ln xdx for ( x  0) .

Solution

 f ( x) g ( x)dx  f ( x ) g ( x )   f ( x ) g ( x ) dx

1
Let f ( x )  ln x and g ( x)  1 . Since, f ( x )  and g ( x)  x .
x
1
 ln xdx  x ln x   x xdx  x ln x  x  c  x(ln x  1)  c

148
Exercise 1
1
4
a) Find the integral  x dx .

b) Find the integral  3e 3 x dx .

4
c) Find the integral  4
dx .
x 2

d) Find the integral  3 x 3 dx .

e) Find the integral  ( 2 x 3  3 x  5) dx .

f) Use the substitution rule to find the integrals:

i)  xe 2 x 1 dx , ii)  3 x( x 3  10) 2 dx , iii)  ( x  6) 2 dx

e) Use integration by parts to find the integrals:

x 3x
i)  xe dx, ii)  2 xe dx , iii)  x ln xdx

5.4. The Definite Integral and Improper Integrals

In the preceding section, you have studied the basic concepts of integration and of indefinite
integrals. In this section, you will learn the definite integral and its difference from that of the
indefinite integral. In addition, you will study the application of the definite integral in
measuring area under a curve. Lastly, you will be introduced to improper integrals.

5.4.1. The Definite Integral

149
 All integrals that you have come across so far are indefinite integrals. That is each is a
function of the variable x . As a result, they all possess no numerical value. If they happen to
have a specific numerical value, in that case you have definite integrals. This is the difference
between definite and indefinite integrals.
Definition: Suppose we have an indefinite integral of a continuous function f (x) as given by

 f ( x)dx  F ( x )  c . Let us choose two values of x in the domain, say a and b where b  a .
Substituting them into the right side of the equation  f ( x ) dx  F ( x )  c , and forming the

difference, you get

F (b)  c  F (a)  c  F (b)  F (a) .
That is, you have a numerical value which is free of x and the arbitrary constant c This value is
known as the definite integral.
 The values a and b are respectively referred to as the lower and the upper limits of integration.
The definite integral can be symbolized as
b
f ( x)dx  F ( x)a  F (b)  F (a)
b
 a

In general, in finding the definite integral, first determine the indefinite integral and then
substitute a and b (the lower and the upper limits of integration) for x and take the difference
of the integrals.

Example 5.21
4
Evaluate the integral  2 x 3 dx .
2

Solution
First, you need to determine the indefinite integral. Therefore, you have
3 3 1 4
 2 x dx  2 x dx  2 x c

Evaluating the indefinite integral at the lower and upper limits and taking the
difference
4
4 1 43 1 4 1 4
2 2 x  2 x  2  2 (4)  2 (2)  32  8  24

Example 5.22

150
 2
Evaluate the integral  (2 x  x 2 )dx .
1

Solution
Finding the indefinite integral, you have
1  1
 (2 x  x
2
 
) dx   2 xdx   x 2 dx  x 2  c1   x 3  c 2   x 2  x 3  c (where
3  3
c  c1  c 2 )
Thus,
2
2 1   1   1 
 (2 x  x 2 )dx  x 2  x 3    (2) 2  (2) 3    (2)  (2)   4
1 3 1  3   3 

Example 5.23
a
Evaluate the integral  ke x dx where k is a constant.
b

Solution
Finding the indefinite integral, you get
x
 ke dx  k  e x dx  ke x  c

Therefore,

 b
a
ke x dx  ke x  a
b  ke b  ke a  k (e b  e a )

151
Exercise 2
3
a) Evaluate the integral  xdx .
1

5 1
b) Evaluate the integral  dx .
2 x

2
c) Evaluate the integral  ( x 2  4 x  3)dx .
1

3
d) Evaluate the integral  x ln xdx . (Hint: use integration by parts to get the
2

indefinite integral)

4
e) Evaluate the integral  2 x( x 2  2)dx . (Hint: use the substitution rule to get the
1

indefinite integral)

2 2
f) Show that 2 (x2 3)dx 2 (x2 3)dx.
0

3
3
g) Show that  (x  x)dx 0.
3

5.4.2. The Definite Integral as an Area under a Curve

As you have seen, every definite integral has a definite value. This value can be interpreted
geometrically as a particular area under a given curve.

152
Suppose you have a function y  f (x) whose graph is shown below. How can you measure
the shaded area under the curve between points a and b ? One of the most important
applications of definite integral is the calculation of area under a curve.

y
f(x)=y

x
a b

Let f(x) be a function that is continuous and non-negative for all X between “a” and “b”
where a<b, determine the area of the shaded region lying beneath the curve Y=f(x) and above
the X-axis from X=a to X=b. The area of the shaded region is calculated using the
fundamental theorem of calculus stated above. It is given by,

∫ ( ) = ( )− ( )

Example 5.24
Find the area under the curve y  2 x  4 over the interval 4,6 .
Solution
First, you need to find the indefinite integral  ( 2 x  4) dx . Thus,

 (2 x  4)dx   2 xdx   4dx  x 

 c1  4 x  c 2   x 2  4 x  c
2
(where c  c1  c 2 )

Therefore, the area under the curve over the interval 4,6 is given by the definite integral
6
 (2 x  4)dx  ( x
4
2
  6
 
 4 x) 4  (6) 6  4(6)  (4) 2  4(4)  28 

153
Example 5.25

Compute the area under the curve y  x 3 over the interval 0,1 .
Solution
Finding the indefinite integral, you have
3 1 4
 x dx  4 x
Therefore, the area under the curve over the interval 0,1 is given by
1
1
3 1 4 1 4 1 0 1
0 x dx  4 x  0  4 (1)  4 (0)  4

Exercise 3
a) Compute the area under the curve y  x 2  5 x over the interval 3,5 .
1
b) Compute the area under the curve y  over the interval 2,4.
x2
c) Compute the area under the curve y  e x over the interval  1,1 .

d) Find the area under the curve y  6x  x 2 , between x=0 and x=6.

e) Find the area included between the parabolas y  x 2 & y  4 x.

f) Find the area bounded by the curve y  ( x  2) 3 , the x-axis and the ordinates x=1 and
x=3.

5.4.3. Continuous Money Streams

You will formally be introduced with the notion of continuous compounding of interest in
monetary economics. If P dollars is invested at annual rate r compounded continuously, then
its value F at the end of t years is given by = . Solving this equation for P in terms of
F gives the equation

154
 =

Written in this from, the equation tells us the present value P of F dollars that will be received
t years from now, assuming that interest is compounded continuously at the annual rate r.

Example 5.26
Bethel knows that she will need to replace her car in 3 year How much would she have to put
in the bank today at 8% interest compounded continually in order to have the $12,000 she
expects to need 3 years from now?

Solution
We apply the boxed formula, remembering that the interest rate of 8% must be written in its
decimal form.

.
= , = $9439.53

5.4.4. Continuous Money Streams within a Period

There are many situations in business and industry where it is useful to think of money as
flowing continuously into an account. For example, the ABC Company plans to buy an
expensive machine which it estimates will increase the company’s net income by $10,000 per
year. But this income won’t come at the end of each year; it will come in dribbles throughout
the year. As a model for what will happen, it is convenient to think of the machine as if it will
produce income continuously. Our next example raises an important question for the
company to answer.
Suppose that the annual rate of income of an income stream is R (t). Suppose further that this
income stream will last over the period 0 < t < T. If interest is at rate r compounded
continuously, then the present value PV of this income stream is given by

( )= ∫ ( )

155
Example 5.27
Suppose the ABV Company takes a more optimistic view and estimates that the new machine
will produce income at the rate R (t) = 10,000 + 200t. What is the present value of this
income stream, again assuming interest at 9% compounded continuously and a lifetime of 8
years?
Solution:

.
= ∫ (10,000 + 200 )

Let us modify the problem in the above example in another way by assuming that the
machine will last indefinitely. More generally, let us ask for the present value PV of a
perpetual (meaning infinitely long) income stream which produces income at an annual rate
R(t), assuming that interest is at an annual rate r compounded continuously. The result in this
case is
= ∫ ()
Here, we face a new kind of integral, one with an infinite limit. Such integrals are called
improper integrals and must be given a clear definition. We do this by defining

( ) = lim ( )
→

5.4.5. Properties of Definite Integrals

In this section of the chapter we will be discussing about the various properties of definite
integrals.

Property1
The interchange of the limits of integration changes the sign of the definite integral. That is
a b
 f ( x)dx    f ( x)dx
b a

b
Suppose you have the integral  f ( x)dx . Evaluating this integral, we get
a

b
f ( x)dx  F ( x)a  F (b)  F (a )
b

a

156
If you interchange the limits of integration and evaluate the resulting integral, you get
a
f ( x)dx  F ( x)b  F (a)  F (b)  F (a)  F )  (b)
a
b

Therefore,
a b
 f ( x)dx    f ( x)dx
b a

Property 2
If the two limits of integration are identical, then the definite integral will have a value of
zero. That is
a
 f ( x)dx  F (a )  F (a )  0
a

Property 3
A definite integral can expressed as a sum of a finite number of definite sub integrals i.e.
d b c d
 f ( x)dx   f ( x)dx   f ( x)dx   f ( x)dx (where a  b  c  d )
a a b c

This property is sometimes referred to as the additive property and it can be extended to the
case of n sub integrals.

Property 4
b b
  f ( x)dx    f ( x)dx
a a

Property 5
b b
 kf ( x)dx  k  f ( x)dx
a a

Property 6
b b b
  f ( x)  g ( x)dx  
a a
f ( x)dx   g ( x)dx
a

You should note that the last three properties of the definite integral are also applicable to
indefinite integrals.

157
 5.4.6. Improper Integrals

Here, you will study integrals that are referred to as improper.

a) Infinite Limits of Integration
Consider the following definite integrals:
 b
 f ( x )dx and  f ( x)dx
a 

In both cases, one of the limits of integration is infinite. Such integrals are referred to as
improper integrals. What does this imply? This implies that it is not possible to evaluate the
integrals as
F ( )  F ( a ) and F (b)  F ( a )
Since  is not a number, it cannot be substituted for x in the function F (x) . What shall you
do? Once again, you have to resort to the concept of a limit. Therefore, the first of improper
integral above can be defined to be the limit of another (proper) integral as its upper limit of
integration tends to  . Thus,
 b
 f ( x)dx  Lim  f ( x)dx
a b  a

Similarly, the second improper integral can be defined to be the limit of anthor (proper)
integral as its lower limit of integration tends to   . Hence,
b b
 f ( x)dx  Lim  f ( x)dx
 a  a


What about if both limits of integration are infinite? That is  f ( x)dx . In that case, a direct


extension of the above cases will gives

 b
 f ( x)dx  Lim  f ( x)dx
 b  a
a  

An improper integral is said to be convergent and the limiting process yields the value of the
integral if the limit exists. On the other hand, if the limit does not exist, then the improper
integral is referred to as divergent and it is meaningless.

Example 5.28
 1
Evaluate the integral  dx .
2 x2
Solution

158
 Since it is the above limit of integration that is infinite, you can write the improper
integral as
 1 b 1
 2 x 2
dx  Lim  2 dx
b 2 x

Therefore, the definite integral is

b
b 1 1 1 1
 2
dx      
2 x x2 b 2
Then
 1 b 1  1 1 1
 2
dx  Lim  2 dx  Lim     
2 x b  2 x b 
 b 2 2
1
Therefore, the improper integral in this case converges and it has a value .
2

Example 5.29
 1
Evaluate the integral  dx .
1 x
Solution
It is the above limit of integration which is infinite and hence, you have
 1 b 1
 dx  Lim  dx
1 x b  1 x

b 1
dx  ln x 1  ln( b)  ln 1  ln( b)
b
Since  1 x
 1 b 1
Thus,  dx  Lim  dx  LimLn (b )   
1 x b 1 x b

As a result, the improper integral is divergent.

b) Infinite Integrand
You have seen that an integral is said to be improper when either one of or both of the limits
integrations are infinite. But, an integral can still be improper even with finite limits of
integration if the integrand becomes infinite somewhere in the interval of integration a, b .
Once again, the concept of a limit is used to evaluate such an integral.

159
 1 1
Consider the integral  dx . This integral is improper as the integrand is infinite at the lower
0 x
1
limits of integration (that is when x  0  , then   ). Here, you need to find the
x
following integral first.
1 1
dx  ln x a  ln 1  ln( a )   ln( a )
1
 (for a  0 )
a x
Then, evaluate its limit as a  0  . Thus,
1 1 1
 f ( x) dx  Lim  dx  Lim(  ln a )
0 a0 a x a0

As a  0  , ln a   . Thus, the limit does not exist and hence the integral is divergent.
You should note that you can follow exactly the same procedure when the integrand becomes
infinite at the upper limit of integration.

Example 5.30
16 1
Evaluate the integral  1
.
0
2
x
Solution
1
As x approaches 0 from the right ( x  0  ), the integrand 1
becomes infinite and
2
x
hence the integral is improper. Thus, you need to find the following integral.
1 16 1 1
16 1     
 2
  2 
  2 
 a 1
dx 2 x   2(16)   2( a )  82 a
x 2  a    

Taking the limit of the above result as x  0  ,

Lim(8  2 a )  8
a 0 

As a result, the given integral is said to be convergent.

Example 5.31
0 1
Evaluate the integral  .
2 x 2

Solution

160
 As x approaches 0 from the left ( x  0  ), the integrand becomes infinite. Therefore,
you need to find the following integral.
b
b1 1  1  1 1 1
2 x 2   x  2    b     2    b  2
Taking the limit of this result,
 1 1 1
Lim     
x0  b 2 2
Hence, the given integral is convergent.
Exercise 4
 1
a) Evaluate the integral  1
and determine whether if it converges.
1
2
x
3
b) Evaluate the integral  ( x 2  2 x) and examine if it converges.


2 1
c) Examine whether the integral  converges.
0 x3

5.5. Economic Applications of Integral Calculus

This section introduces you the application of the concept integration in economics. Among
others, you will study examples on how to use integral calculus in order to find consumer and
surplus. After your study on the examples below, you will be able to use the integral calculus
on solving economic problems.

Example 5.32
Suppose the marginal revenue function of a firm is given b MR  0.2Q 2  12Q  40 Find the
firm’s total revenue function.
Solution

From the examples on the application of the derivative in previous Units, you studied that the
marginal revenue function is obtained by differentiating the total revenue function. In order to
obtain the total revenue function from the marginal revenue function, you need to do the

161
opposite of differentiation and that is integration. So integrating the marginal revenue
function gives the total revenue function. That is
R(Q)   R(Q) dQ   (3Q 2  12Q  40) dQ  Q 3  6Q 2  40Q  c (where c is a

constant)

Example 5.33
Suppose the marginal cost function of a firm is given by MC  9Q 2  10Q  12 . If the fixed

cost is given by C F  200 , find the total cost function.

Solution
Similar to the example above, you need to use the concept of integration. Hence, you have
C (Q )   C (Q ) dQ   (9Q 2  10Q  12) dQ  3Q 3  5Q 2  12Q  c (where c is a constant)

In this particular example, you can find the specific value of c . How? Here is the answer.
From your microeconomics, you know that when there is no production i.e., Q  0 , the total
cost and the fixed cost are equal. At output level zero, the total cost function is given by
C (Q )  c . Then equating the total cost function with the fixed cost, you have
c  CF
c  200
It follows that the total cost function is written as
C (Q)  3Q 3  5Q 2  12Q  200

Example 5.34
Given the price-supply function p  S ( x)  10  0.05 x , find the producers’ surplus at the
price p  12 .
Solution

From your microeconomics, producers’ surplus is the additional money producer gain when
they actually sell at a price higher than they are willing to sell. In mathematical form, the
producers; surplus is given by
x x
PS  px   S ( x)dx (where  S ( x)dx is the sale producers are willing to
0 0

accept and px is the actual sale)

162
Graphically, the figure below shows the producers’ surplus.

p
PS

x
x

First, find x for price p  12 . Substituting p  12 into p  S ( x)  10  0.05 x , you get x  40.
You can find the producers’ surplus. Thus,
x
PS  px   S ( x)dx
0

40
40 0.05 2
PS  (12)(40)   (10 0.05x)dx  480 (10x  x  480 10(40)  0.025(40)  79
0 2 0
Therefore, the producers’ gain, who are willing to supply at a lower price, is 79.

Example 5.35
Find the consumer’s surplus for price p  3 if the price-demand equation for commodity x is
1
given by p  D ( x )  6  x .
3
Solution

Once again, you need to go back to your microeconomics course. If you recall, the
consumers’ surplus id the difference between the total amount consumers are willing to spend
and the actual amount they spend on a commodity. Mathematically, it can be written as
_
x x
CS   D ( x)dx  px (where  D( x)dx is the total willingness to pay and px is
0 0

what is actually paid)

Graphically, the figure below illustrates consumers’ surplus.

163
 P

CS
p

x
x

As you can see the area shaded is the consumers’ surplus. Consumers are willing to pay more
than p but they are able to buy the product for p .
1
Now, first find x at p  3 . Substituting p  3 into p  D ( x )  6  x , you get x  9 . Thus,
3
you can now find the consumer surplus.
_
x
CS   D ( x)dx  px
0

_ 9
9 1 1  1 
CS   (6  x)dx  (3)(9)  6 x  x  27   6(9)  (9)   27  24
0 3 6 0  3 
Therefore, the total amount of savings to consumers’ willing to pay a higher price is birr 24.

Example 5.36

Suppose that the demand and supply function are respectively given by p  D ( x)  24  2 x
and p  S ( x)  4  8 x . Assuming a perfectly competitive market, calculate the consumers’
and the producers’ surplus at the equilibrium price.
Solution
At equilibrium, demand equals supply. That is
24  2 x  4  8 x
Solving for x , you get x  2 . Then, you can find the equilibrium price by substituting the
equilibrium quantity x  2 into either demand or supply equations. Hence, you get p  20 .
The consumer’s and producer’s surplus are
_
x 2 2

0 0 0
 
CS   D ( x)dx  px   (24  2 x)dx  (20)(2)  24 x  x 2  40  24(2)  2 2  40  4
x 2 2
PS  px   S ( x)dx  (20)(2)   (4  8 x)dx 40  (4 x  4 x 2
0 0 0
 
 40  4(2)  4(2) 2  16

164
Additional Exercises
2.
1. Suppose that the marginal profit for a company is MP=100+50X-3X Find the total
profit earned from the sale of three additional units if 5 units are currently being
produced.
2. For a number of years the annual worldwide rate of oil consumption was growing
exponentially with a growth constant of about 0.07. At the beginning 1970, the rate
was about 16.1 million barrels of oil/year. Let R(t) denote the rate of oil consumption
at time (t) where t is the number of years since the beginning of 1970. Then a
reasonable model of R(t) is given by
0.07t
R (t) =16.1e
How much oil was consumed between 1975 and 1980?
The answers are $888 and 0.465 for the first and second questions
respectively.

3. Find the area bounded by f(x) = – 1 with in the internal 1 < x < 2
4. Find the area bounded by f (t) = (4 + 1) within the interval 0 < t < 1

5. Find the area of the region under the carve Y = X from X = x to X = 2

7. Compute the area under the curve Y = -3x+5 from
a) X = 3 to x = 4
b) X = 1 to x = 4
8. Find the area of the region between Y= 2 –4x + 6 and Y = - +2X+1 from X=1 to X=2
9. Find the area of the region between Y= and Y= -4x+4 from X=0 to X=3
10. Find the area bounded by Y = + 2x + 3 and Y = 2x+4

11. Find the consumer’s surplus at price of $8 if the demand function is given by P = 20 -

12. Find the producer’s surplus at price level of $ 20 if the supply function is given by =

2+

13. If demand and supply functions are given below, find

165
 a) Consumers’ surplus
b) Producers’ surplus
c) Social welfare assuming the economy is two-sector Warlasian economy.

P= 20 - =2+
14. Given the marginal cost MC= 32.0.004x and it costs $50 to produce the first unit of
output, find the total cost of producing 200 units of output.

Exercise 5
a) Given the marginal revenue function MR  4Q 2  16Q  48 , find the total revenue
function.
b) Suppose that the demand and supply function are respectively given by
p  D ( x)  32  0.02 x and p  S ( x)  12  0.1x . Assuming a perfectly competitive market,
calculate the consumers’ and the producers’ surplus at the equilibrium price.
c) Find the consumer’s surplus for price p  4 if the price-demand equation for commodity x
is given by p  D ( x)  20  0.025 x .
1
d) Suppose the marginal cost function of a firm is given by MC  2
 Q 3 . If the fixed cost
Q

is given by C F  200 , find the total cost function.

e) The marginal revenue function of a firm is given by MR=240-4x. Find total revenue
function and the demand function. At what level of output is total revenue maximum? Find
maximum total revenue.
a
f) If the elasticity of demand is given by  1, where a and b are positive constants, find the
bx
demand function.

166
Summary
Dear student! You have been studying the concept integral calculus. In particular, you have
learnt the following points:
 Integration or integral calculus is concerned with the process of uncovering a primitive
function from a given derivative function.
 If F (x) is a primitive function and f (x) is its derivative, then integral calculus provides
tools for getting the primitive function from its derivative. In a sense, integration is the
exact opposite of differentiation.
 Symbolically, integration of f (x) is expressed as  f ( x)dx and the part f (x) is known as

the integrand.
 Integration of f (x) with respect to x yields an infinite number of primitive functions, and

hence it is written as  f ( x)dx  F ( x )  c .

 Because the integral  f ( x)dx does not have a definite numerical value (its value varies

with the value of x since it equals to F ( x)  c ), it is known as the indefinite integral.

 In contrast to the indefinite integral, a definite integral has a numerical value and it is
b
 f (x)dx F(x)
b
expressed as a  F(b)  F(a) where a and b are respectively the lower
a

and upper limits of integration.

 The concept definite integral can be used to determine the area under a curve over some
specified interval.
 Interchanging the limits of integration changes the sign of the integral.
 Identical limits of integration will mean the integral is equal to zero.
 A definite integral can be expressed as a sum of a finite number of definite sub integrals.
 An integral whose either or both limits of integration are infinite is termed as improper
integral. Such an integral can be defined to be the limit of another integral as its either or
both limits of integration tend to  . If the limit exists, then that improper integral is said
to be convergent. If not, it is called divergent.

167
 CHAPTER SIX
6. INTRODUCTION TO DYNAMIC OPTIMIZATION

Dear learners, many of the topics studied by economists can be characterized as decisions
taken in one period that have consequences in some other period. Current savings finance
future consumption. Investment this year increases the potentials for production next year.
Assets purchased today rewards investors with pay off tomorrow. A monopolist setting her
price today must consider the potential for the subsequent entry by other firms.

Each of these activities can only be properly addressed in the context of dynamic analysis
that includes an explicit role for events occurring at different moments in time. In the present
study, we will study one type of dynamic analysis called Discrete Time Analysis. Discrete
time analysis treats time as a series of distinct periods that are identified by integer value.
Periods can be represented by any arbitrary length of time, such as a day, a month, or a year.
The important characteristic of a period is that any variable takes only one value during any
single period.

A central tool of discrete time analysis is a Difference Equation. A difference equation links
the value of endogenous variable in one period to its value in one or more other periods, as
well as to the value of other variables. In the present section, we will show how to solve
linear difference equations.

Other closely related approaches to dynamic analysis treats time as continuous series of
moments rather than as a set of discrete periods. The main tool of continuous time dynamic
analysis is an equation that contains a derivative with respect to time. An equation of this
type is called Differential Equation. In the second section of the present chapter, we continue
our study of dynamic analysis with the study of differential equations of the type that are
frequently used in fields of economics such as finance, macroeconomics, growth theory and
international economics.

The theme of dynamic analysis is the same in both difference equations and differential
equations. In each case we are interested in finding a solution that expresses the value of the
dependent variable at some moment in time as a function of independent variables, of time

168
itself, and of given values of the dependent variable at one or more moments in time.
Solutions to differential equation, like those to difference equations, specify the time path of
the variable, if exists, its steady state value.

Chapter Objectives:
After going through this chapter, students are expected to
 Explain the difference between static analysis and dynamic analysis
 Distinguish between the continuous time analysis and discrete time analysis
 Explain the forms and concepts of linear differential and difference equation
including understanding their general forms and finding their general and definite
solutions.
 Explain about the application of linear differential and difference equations in
economics.
 Familiarize yourselves with the basic knowledge of cobweb model and its application
in economics

Chapter Contents:
Dear students, this chapter covers the following major sub-topics
 Introduction
 Definitions and concepts on static and dynamic analysis.
 Discrete time, differential, and difference equations
 First order linear differential equations
 First order linear difference equations
 Cobweb Model and its application in economics
 Economic applications of dynamic optimization using linear difference and
differential equations

6.1. Introduction

Dear student, what is the difference between static analysis and dynamic analysis in
Economics? Write your answer on the space provided below.

169
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
__________________________________.
Good! Compare your answer with the definition and explanation given below.
In static analysis, an economic variable (Y) is assumed to be a function of another variable
(X) in the same time period. For instance, this year consumption (C) is a function of this year
income (Y) of a consumer. In similar vein, supply is the function of price for the same time
period.
But, in economics, current savings finance future consumption. Investment this year increases
the potentials for production next year. Assets purchased today rewards investors with pay off
tomorrow. A monopolist setting her price today must consider the potential for the
subsequent entry by other firms. This means that decisions taken in one period have
consequences in some other period. Therefore, dynamic analysis introduces the explicit
consideration of time in to the picture. For instance, quantity supplied in one period may
depend on the price of the previous period. A good example is agricultural food supply.

However, the time paths of variables can be studied in two ways. First, time can be
considered as a discrete variable, in which case the variable undergoes a change only once
within a period of time. This utilizes the methods of difference equations. Second, time can
be considered as a continuous variable, in which case something is happening to the variable
at each point of time. Here, integral calculus and differential equations are used.

6.2. The Concept of Difference Equations

A central tool of discrete time analysis is a Difference Equation. A difference equation links
the value of endogenous variable in one period to its value in one or more other periods, as
well as to the value of other variables. In the present section, we will show how to solve
linear difference equations.

6.3. Introduction to First –Order Difference Equations

170
Dynamic analysis provides explicit solutions for the values of the dependent variable over
time. These values are represented in discrete time analysis as a sequence. A sequence is a set
of values of some variable such as x1, x2, x3, x4…., where each term of the sequence, xn, is
indexed by an integer that, in this context, represents a particular time period. The basic
building block of discrete time analysis is the Difference Equation. A difference equation
relates the value of a dependent variable in one period to its value in one or more adjacent
periods, as well as to the value of one or more independent variables. An example f
difference equation is
+ 7.1
First order linear difference equations are used to analyze changes with respect to time when
what happens in one period depends up on what happened in the previous period. A
difference equation expresses a relationship between a dependent variable and a lagged
independent variable which changes at discrete intervals of time. Example: consumption in
one period depends on the previous income.
The order of a difference equation is determined by the greatest number of periods lagged. A
first order difference equation expresses a time lag of one period; second order difference
equation a two period time lag and so on.

In the above equation, the sequence the dependant variable is represented by { }, the
sequence of the independent variable is represented by { }, and a is an exogenous parameter.
This is called the First –Order Difference Equation since it includes and its lagged
value . The difference between the largest and the smallest time period indexing the
sequence of the dependent variables in the second –order difference equation such as
+ + 7.2
equals 2 (that is, t-t-2). Both of these equations are linear difference equations since is
a linear function of other variables. But, this section only focuses on the first –order
difference equations and higher order difference equations can be discussed in mathematical
economics.

A solution to the difference equation (7.1) is the representation of the entire sequence of as
a function of time itself and of the sequence of the independent variable. The solution will
also depend on one given value of the dependent variable. Typically, there is a specification
of an initial value of the dependent variable, that is, its value in the beginning of the

171
sequence. Sometimes, a model will provide, instead, the endogenous variable’s terminal
value, which represents the last term in its sequence.

6.4. The Concept of Monotonic and Oscillatory Dynamics

We will introduce the analysis of difference equation by solving the for the consecutive
values of a sequence generated by a linear first –order difference equation of the form
+
through repeated substitution. We first introduce the following first –order linear difference
equation.
+300 (7.3)

We assume that = 400. The sequence of can be determined by repeated use of the
difference equation (7.3).
= 400 (given)

+y = ½ (400) +300 = 500

+y = ½ (500) +300 = 550

+y = ½ (550) +300 = 575

+y = ½ (575) +300 = 587

And so on. The dynamics generated by this difference equation are monotonic since the sign
of ( ) is the same for any t.
Let us find the sequence of consistent with the following difference equation.
− +300 (7.4)

Assume again that = 400. The sequence of can be determined by repeated use of the
difference equation (7.4).

= 400 (given)

− +y = -½ (400) +300 = 100

− +y = -½ (100) +300 = 250

− +y = -½ (250) +300 = 175

− +y = -½ (175) +300 = 212

172
The dynamics generated by this difference equation are oscillatory rather than monotonic
since the sign of ( ) alternates from one period to the next.
= -300
= 150
= -75 and so on. This two specific examples point to more general results for a linear
first –order difference equation like (7.1).

Monotonic: The difference between adjacent terms in the sequence generated by the
difference equation
+
that is, ( ), will be of the same sign if a>0. In this case the dynamics generated by
this equation are monotonic.
Oscillatory: The difference between adjacent terms in the sequence generated by the
difference equation
+
that is, ( ), will alternate in sign if a< 0. In this case the dynamics generated by this
equation are oscillatory.

6.5. The Concept of Steady State Value in Dynamic Analysis

One part of the solution of difference equation is the steady state value of the endogenous
variable for a given value of the exogenous variable. This steady state value is also called the
equilibrium value, the stationary value or the long run value. We introduce the analysis of the
steady state here by first focusing on the case where the independent variable is constant over
all time periods. Subsequently, we will introduce the steady state analysis where the
independent variable is time-varying.
Consider the following linear first –order difference equation with constant independent
variable.
+ (7.5)
The steady state value, which we denote as , exists if the sequence converges. The
sequence will converge to if
lim → =

173
We can think of the steady state value as the long run value of the variable after all the
dynamic adjustments has taken place. If there is no unique real number , then the
sequence diverges.
Thus,
lim → = lim → =

If this is the case, lim → = lim → + )

=a +y
= ( )

The steady state is not well defined for the special case of a =1. Therefore, the steady state
value for the linear difference equation given in (7.3) is
= (300) = 600

Similarly, the steady state value for the linear difference equation given in (7.4) is
= (300) = 200
( )

In both cases, |( ) |, decreases with an increase in time and this are characteristics of
stable difference equations.
A difference equation that generates a sequence ( ) for which
lim → = ∞ or lim → = −∞ is unstable.
Example
2 - 300 (7.5)
Assume again that = 400. The steady state value of can be determined as follows
= (−300) = 300

This linear first –order difference equation is unstable since |( ) | increases with the
passage of time. It is an example of monotonic divergence.
−2 + 900 (7.6)
Assume again that = 400. The steady state value of can be determined as follows

= ( )
(900) = 300

This linear first –order difference equation is unstable since |( ) | increases with the
passage of time. It is an example of oscillatory divergence.
Notice:
1. The sequence generated by the difference equation

174
 x ax +y diverges if a> 1 or a< 1 and if the initial value x , does not
equal to (y). In this case the equilibrium solution is Unstable.

2. The sequence generated by the difference equation

x ax +y converges to the steady state value (y) regardless of the

initial value x if -1<a<1. In this case the equilibrium solution is stable.

Special cases of a = 1 and a = -1

The strict inequalities in the results given previously do not cover the case of a = 1 or a = -1.
Let a = 1 and examine the property of the following linear first order difference equation
+
Assume that the initial condition = k and explicitly solve for its sequence over a number
of periods and then drawing some conclusions.
=k (given)
+
( + )+ = +2
( +2 )+ = +3
( +3 )+ = +4
⋮
+ ty
This linear first order difference equation generates a sequence that approaches positive
infinitive if y>0 or negative infinitive if y <0. But, if y=0, then in each period.
Thus, except for the special case of y =0, the sequence generated by this difference equation
diverges monotonically from its initial value.
There are also some special properties of the difference equation
− +
Assume again that the initial condition = k and explicitly solve for its sequence over a
number of periods and then drawing some conclusions.
=k (given)
− +
− (− + ) + =

175
 −( )+ =− +
− (− + ) + =
Thus, k, for even value of n and -k + y for odd value of n

=( ( ))
= , steady state value.

Therefore, unless = = ( ))
= , this difference equation generates sequence
(

that oscillates between two values.

6.6. The General and Particular Solutions to Difference Equations

We will end this section with other methods of obtaining a general solution. A general
solution to the difference equation
+
Can be obtained by first solving the homogenous equation
− =0
A solution to this homogenous equation takes the form
=
Where A and K are to be determined. We can immediately determine the value of k noting
that, at time t-1, the solution will become
=
Substituting this solution to the homogenous equation, we have
-a =0
Which implies that a = k. The solution to the homogenous equation is
=
Where A is a constant to be determined.
The general solution to the difference equation is the sum of the solution to the homogenous
equation and the particular solution, that is
= +( )
y

We can determine the value of A if we are given the initial value in the sequence of the
endogenous variable, . At t =0, the value of this general solution is
= + y
( )

= +( )
y

176
 = + y
( )

= ( + y) + y
( ) ( )

= + y

Numerical Example
Solve the first order difference equation −5 = 1, ( = 7 4).
Solution: Using the definite solution formula ( ≠ 1)

= − +
1− 1−

1 1
Since = 5, =1⇒ = 7 4− (5) −
1−5 4
1
= 2(5) −
4
6.7. The Concept of Differential Equations

The analysis in the above section showed the importance of dynamic analysis in economics.
The analysis in that section focused on difference equations which treats time as a sequence
of discrete periods. Another closely related approach to dynamic analysis treats time as a
continuous series of moments rather than a set of discrete periods. The main tool of
continuous time dynamics is an equation that contains a derivative with respect to time. An
equation of this type is called Differential Equation. Differential equations are equations
involving derivatives (differentials). They express the rates of change of continuous functions
over time. The objective in working with differential equations is to find a function, without a
derivative (differential) which satisfies the differential equation. Such a function is called the
solution or integral of the equation.

The order of a differential equation is the order of the highest derivative in the equation. The
degree of a differential equation is the highest power to which the derivative of the highest
order is raised.

6.8. Single Differential Equations/ First Order Differential Equations

177
In this section, we will deal with ordinary differential equations, that is, equations that
include ordinary derivatives (rather than partial derivatives). The focus of this section is on
the first order differential equations.
( )
= ( )+ ( ) (7.7)

Where ( ) is the dependent variable and ( ) is an independent variable. The time

( )
derivative is frequently written as ( ̇ ), and we can use these two types of notations
interchangeably in this section. The derivative with respect to time implies that time is
measured as continous variable and can equal any real number. The adjective first order
means that the equation contains first derivatives.
A. The steady State Value

Let take the following first order differential equation and find the steady state value or the
equilibrium value.
( )
= ( )+ (7.8)

One part of the solution of differential equation is the steady state value of the endogenous
variable for a given value of the exogenous variable. This steady state value is also called the
equilibrium value, the stationary value or the long run value. We introduce the analysis of the
steady state here by first focusing on the case where the independent variable is constant over
all time periods. Subsequently, we will introduce the steady state analysis where the
independent variable is time-varying.
We can find the steady state value or the long run equilibrium value of equation (7.8) which
( )
is denoted by , simply by setting equals zero and solving for ( ).

6.9. Solutions of homogenous and non homogenous differential equations

A. Homogenous Case

( )
This occurs when ( ) = 0. That is = ( ) which is reduced to the general solution

( )=
Let’s directly solve this equation

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 =

∫ =∫ ∫ = a∫

ln = at + c
log = at + c
= = .
= .A
( )= , this is called the complementary solution and
From the solution, it can be seen that the objective and solution of solving differential
equation is not numeric value rather t is the time path of ( ).

B. Non-homogenous Case

( )
This is the case when the differential equation is given by = ( ) + , where b is

constant and different from zero. The solution to such an equation is consists of the sum of
two terms namely the complimentary function ( ) and the particular integral ( ). Each
has its own economic interpretation as will be clear latter.
 is the solution had “b” been Zero (the homogenous case)
 is any particular Solutions

( )= , this the complementary solution ( )

= ( )= , this the particular solution ( )

The general solution will be

( )= -

At = 0, our equation will be reduced to

(0) = -

(0) + =

Therefore, we finally come up with ( )= -

( )= ( )+ −

Numerical Example

a. Determine the solution of the differential equation, = −4 , at (0) = 1

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( ) = Ae = (1) =
b. Solve the following differential equation,

= −2 +6 at (0) = 10

(t) = x(0) + e − =7 +3

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Exercise
1. Given the difference equation = −7 + 16 and = 5, find the time path of
the dependent variable x.

2. Given a difference equation − = 6 (where = 1)

(a) Solve the difference equation.

(b) Check the answer using = 0 and = 1, an
(c) Comment on the nature of the time path.

3. Find the general solution for a differential equation + 4 = 12

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References
1. *Michael R, Ziegler, Applied Mathematics for Business and Economics, Life Science
and Social Science (3rd Edition).
2. *Taro Yamane, Mathematics for Economists (Second Edition).
3. *Alpha C.Chiang, Fundamental Methods of Mathematical Economics.
4. *V.K.Kapoor, Introductory Mathematics for Business and Economics

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