COMPARATIVE STATICS AND THE

CONCEPT OF DERIVATIVE

Chapter 6
Alpha Chiang, Fundamental Methods
of Mathematical Economics
3
rd
edition
Nature of Comparative Statics
concerned with the comparison of different equilibrium
states that are associated with different sets of values of
parameters and exogenous variables.
we always start by assuming a given initial equilibrium
state. Then ask how would the new equilibrium compare
with old.
can either be qualitative (direction) or quantitative
(magnitude)
problem under consideration is essentially one of finding
rate of change
concept of derivative takes significance differential
calculus
Rate of Change and the Derivative
0 0
( )
( ) ( )
y f x
f x x f x y
x x
=
+ A A
=
A A
0 0
0 0
lim lim(6 3 ) 6
x x
y
x x x
x
A A
A
= + A =
A
Difference quotient:

Derivative: y = f(x) = 3x
2
-4


Notation: f(x), f
Skipped Topics
The Derivative and Slope of the Curve
The Concept of Limit
Digression on Inequalities and Absolute Values
Limit Theorems
Continuity and Differentiability of a function
RULES OF DIFFERENTIATION
AND THEIR USE IN COMPARATIVE STATICS
Chapter 7
Alpha Chiang, Fundamental Methods
of Mathematical Economics
3
rd
edition

Rules of Differentiation for a
Function of One Variable
( )
0 0 '( ) 0
y f x k
dy dk
f x
dx dx
= =
= = =
1
( )
n
n n
y f x x
d
x nx
dx

= =
=
1
( )
n
n n
y f x cx
d
cx cnx
dx

= =
=
Constant Function Rule:
Power Function Rule:
Generalized Power Function Rule
RULES OF DIFFERENTIATION INVOLVING
TWO OR MORE FUNCTIONS OF THE SAME VARIABLE
[ ( ) ( )] '( ) '( )
d
f x g x f x g x
dx
=
[ ( ) ( )] ( ) '( ) ( ) '( )
d
f x g x f x g x g x f x
dx
= +
2
( ) '( ) ( ) ( ) '( )
[ ]
( ) ( )
d f x f x g x f x g x
dx g x g x

=
Sum-Difference Rule
Product Rule
Quotient Rule
Relationship between Marginal Cost and
Average Cost Functions
2
( )
( )
, 0
( ) [ '( ) ( ) 1 1 ( )
'( )
0
( ) ( )
0 '( )
C C Q
C Q
AC Q
Q
d C Q C Q Q C Q C Q
C Q
dQ Q Q Q Q
for Q
d C Q C Q
iff C Q
dQ Q Q
> >
s s
=
>
(
= =
(

>
= =
Book example:
3 2
12 60 C Q Q Q = +
RULES OF DIFFERENTIATION INVOLVING
FUNCTIONS OF DIFFERENT VARIABLES
'( ) '( )
via g via f
dz dz dy
f y g y
dx dy dx
x y z
z y z
y x x
= =
A A A
A A A
=
A A A
Chain Rule: If we have a function z=f(y) where y is in turn a function of
another variable x, say y=g(x) then the derivative of z with respect to x is
equal to the derivative of z with respect to y, time the derivative of y with
respect to x:


Examples of Chain Rule
2
Example 1: If 3 , where 2 5, then
6 (2) 12 12(2 5)
z y y x
dz dz dy
y y x
dx dy dx
= = +
= = = = +
3
2 2
Example 2: If - 3, where , then
1(3 ) 3
z y y x
dz
x x
dx
= =
= =
Examples of Chain Rule
2 17
2
17 2
16 2 16
Example 4:
( 3 2)
3 2
3 2
17 (2 3) 17( 3 2) (2 3)
z x x
y x x
z y and y x x
dz dz dy
y x x x x
dx dy dx
= +
= +
= = +
= = + = + +
Examples of Chain Rule
'( ) '( )
L L
dR dR dQ
f Q g L
dL dQ dL
MRP MR MPP
= =
=
Example 4: Given a total revenue function of a firm R=f(Q)
where output Q is a function of labor input L, or Q = g(L),
derive the marginal revenue product of labor

Inverse Function Rule
If a function y = f(x) represents a one-to-one mapping, i.e. if the function is such that
a different value of x will always yield a different value of y, the function f will have an
inverse function x = f
-1
(y).

This means that a given value of x yields a unique value of y, but also a given value
of y yields a unique value of x.

The function is said to be monotonically increasing: if 1 2 1 2
( ) ( ) x x f x f x > >
Practical way of ascertaining monotonicity: if the derivative f(x) always adheres
to the same algebraic sign.

Examples:
1 1
5 5
5 25 5
5 /
1
y x dy dx
x y dx dy
dx
dy dy dx
= + =
= =
=
5 4
4
5 1
1 1
5 1
y x x dy dx x
dx
dy dy dx x
= + = +
= =
+
PARTIAL DIFFERENTIATION


1
1 2
1 1 2 1 2
1 1
1
0
1 1
( , ,..., )
( , ,..., ) ( , ,..., )
lim
n
n n
x
y f x x x
f x x x x f x x x y
x x
y y
f
x x
A
=
+ A A
=
A A
c A

c A
PARTIAL DIFFERENTIATION
Techniques of Partial Differentiation: Just hold (n-1)
independent variables constant while allowing one variable to
vary.
2 2
1 2 1 1 2 2
1 1 2
1
2 1 2
2
( , ) 3 4
6
8
y f x x x x x x
y
f x x
x
y
f x x
x
= = + +
c
= +
c
c
= +
c
Example 1
Example 2
2
( , ) ( 4)(3 2 )
(3 2 ) /( 3 )
y f u v u u v
y u v u v
= = + +
= +
Applications To Comparative-static
Analysis: Market Model
( , 0) [ ]
( , 0) [ ]
Q a bP a b demand
Q c dP c d Supply
a c
P
b d
ad bc
Q
b d
= >
= + >
+
=
+

=
+
Applications To Comparative-static
Analysis: Market Model
2
2
1 ( )
( )
1 ( )
( )
P P a c
a b d b b d
P P a c
c b d a b d
c c +
= =
c + c +
c c +
= =
c + c +
Four partial derivatives:
0 0
P P P P
and
a c b d
c c c c
= > = <
c c c c
Conclusion:
Applications To Comparative-static
Analysis: National Income Model
0 0
0 0
( ) ( 0; 0 1)
( 0; 0 1)
Solution :
1
Y C I G
C Y T
T Y
I G
Y
o | o |
o o
o |
| |o
= + +
= + > < <
= + > < <
+ +
=
+
Applications To Comparative-static
Analysis: National Income Model
0 0
Solution :
1
I G
Y
o |
| |o
+ +
=
+
0
0 0
2
Government expenditure multiplier:
1
0
1
Non-income-tax multiplier:
0
1
Income tax rate multiplier:
( )
0
(1 ) 1
Y
G
Y
I G Y Y
| |o
|
| |o
| o | |
o | |o | |o
c
= >
c +
c
= <
c +
+ + c
= = <
c + +