Calculus For Economists

HU Economics Department Lecture Note
Calculus for Economists
Course Number- Econ 1011
CALCULUS AND ITS ECONOMIC APPLICATION
Prepared by Amare Mabrie Page 1

UNIT-ONE: INTRODUCTION
1.1 Mathematical vs. Non Mathematical Economics
Since mathematical economics is merely an approach to economic analysis it should 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 assumptions or postulates
via a process of reasoning. The major difference between mathematical and theoretical economics
lies principally in the fact that, in the former, the assumptions and conclusions are stated in
mathematical symbols than words and in equations than sentences; moreover, in place of literary
logic, use is made of mathematical theorems. The choice between mathematical logic and
theoretical logic, again, is little import, but mathematics has the advantage of forcing analysis to
make there assumptions explicit at every stages of reasoning.
Mathematical economics has claim to the following advantages

1. the language used is more concise and precise
2. there exists a wealthy of mathematical theorems at our services
3. In forcing us to state explicitly all assumptions as prerequisite to the uses of mathematical
theorems and it allow us to treat the general n-variable cases.
In sum, we can link the mathematical approach to “a mode of transportation” that takes us from the
set of postulates (assumptions) to set of conclusions (destination) at a good speed.
The term mathematical economics is sometimes confused with econometrics. As the metric mart of
the second term implies econometrics is mainly concerned with the measurement of economic data.
Hence it deals with the study of empirical observations using statistical methods of estimation and
hypothesis testing.
Indeed, empirical studies and theoretical analysis are often complementary and mutually
reinforcing. On one hand theories must be tested against empirical data for validity before they can
be applied with confidence. On the other hand, statistical works needs economic theory as a guide,
in order to determine the most relevant and fruitful direction of research.

1.2 Functions
The function concept is one of the most important concepts that frequently occur in many real world
situations. The idea of corresponds plays a central role in its formulations. We have already had
experiences with corresponds in everyday life. For example, to each person there corresponds an
annual income; to each item in a super market there corresponds a price; for the manufacturer of x
there corresponds a cost; to each square there corresponds an area.
One of the most important aspects of any science (managerial, economical, life, social, physical,
etc) is the establishment of correspondence among various types of phenomena. Once a
correspondence is known, predictions can be made. The application of calculus to practical
problems depends on expressing physical quantities in terms of functions. Therefore, in order to
analyze the relationship between different phenomena in general and to use calculus in particular
we must understand the basic ideas of functions.
A function can be defined either in rule form or in set form
Definition in Rule form
A function is a rule (process or method) that produces a correspondence between one set of
elements, called the domain, and a second set of elements, called the range, such that to each
element in the domain there corresponds one and only one element in the range
Definition in Set form
A function is a set of ordered pairs with the property that no two ordered pairs have the same first
element and different second element. The set of all first elements in a function is called the domain
of the function, and the set of all second components is called the range.

Example: Consider the following three tables of the cube, square and square root
Table 1 Table 2 Table 3
Domain Range Domain Range Domain Range (Number)

(cube) (Number) (Square) (Number) (Square root)
-2 -8 -2 4 0 0
-1 -1 -1 1 1
0 0 0 1 -1
1 1 1 4 2
2 8 2 0 -2
9 3
-3
Table 1 and 2 are functions, since to each domain values there correspond exactly one range value
(for example, the cube of -2 is -8 and no other number). On the other hand, Table 3 is not a
function, since to at least one domain value there corresponds more than one range value( for
example to the domain value 9 there corresponds -3 and 3, both square roots of 9).
Since in a function element in the range are paired with elements in the domain by some rule or
process, this correspondence (pairing) can be illustrated by pairs of ordered pairs. For example, if
we list the ordered pairs in Table 1 and 2, we have the followings:
Function 1= {(-2,-8), (-1,-1), (0,0),(1, 1), (2, 8),}
Function 2={(-2,-4),(-1,1),(0,0),(1,1),(2,4)}
In either cases, notice that no two ordered pairs have the same first component and different second
components.
On the other hand, if we list the ordered pairs determined by Table 3, we have
A= {(0, 0), (1, 1), (1,-1),(4, 2), (4,-2) (9, 3), (9,-3)}

In this case, there are ordered pairs with the same first component and different second component
(for example, (1, 1) and (1,-1)) which indicates once again that Table 3 is not a function.
Example
A) The set S={(-2,4).(-1,3 ),(0,1),(1,3),(2,4)} defines a function since no two ordered pairs
have the same first component and different second components. The domain and range are
Domain = {-2,-1, 0, 1, 2} and Range = {1, 3, 4}
B) The set T={(2,1),(1,3),(2,3),(1,4)} does not define a function since there are ordered pairs with
the same first component and different second components for example (1,3)and (1,4)
Exercise
1. A) Define a function?
B) Give an example of a function both in a set form and in a rule form
2. Determine whether each set defines a function. If it does, then state the domain and range.
A). S = {(1, 2), (2, 4), (3, 6), (2, 8), (1, 10)}
B). T = {(-3, 1), (-1, 2), (3, 2) (5, 1)}
Functions specified by Equations
An equation is a mathematical statement which involves the symbol”=”. It sets two algebraic
x
expressions equal to each other .3x+2= -5 and 4y-5 = 8y are equations in one variable and Y=2x-5
3
is an equation in two variables, x and y.
Since most variables in applied science like economics are by their nature restricted to real numbers
the rules associating range values with domain values usually expressed in equations forms. The
input values are domain values, and the output values are range values. The equations (a rule)
assign each domain value x a range value y.
For an equation in two variables, if there it correspond exactly one values of the output to each
value of the input, then the equation specifies a function. If there is any value of the input which
correspond more than one value of the output, then the equation does not specify a function.

Example
Determine which of the following equations specify functions with input x
a) 4y-3x=8 b) y2 -x2 =9, x  R
a) Solving for the output y, we have
4y-3x = 8
4y = 8 + 3x
3
y=2+ x
4
Since each input value x corresponds to exactly one output value this equation specifies a function.
b) Solving for the output y we have
y2 – x2 = 9
y2 = 9 + x2
y=  9  x2
Since 9 + x2 is always a positive real number for any real number x and since each positive real
number has two square roots, to each input value x there corresponds two output values ( y =
9  x 2 and y = - 9  x 2 ) . For example, if x = 4, then equation in (b) is satisfied for y = 5 and y

= -5. Thus, an equation in (b) does not specify function.
Agreement on Domain and Ranges
If a function is specified by an equation and the domain is not indicated, then we assumed that the
domain is set of all input values x for which an equation can be evaluated and the range is the set of
all output values y corresponding to input values x.
Example
Find the domain and range of the function specified by the equation Y= x  4 . Since we cannot
have a negative number inside the square root, the domain is all real number greater than or equal to
-4, i.e., x > -4. The range is all real number‟s greater than or equal to 0, i.e., X > 0.

Example
The total cost C of a firm per day is expressed in terms of its daily out Q by the equation
C = 200 + 4Q. The firm has a capacity limit of 100 units of output per day. What are the domain
and the range of the cost equation?
Since we cannot have a negative quantity of output and the maximum output limit is 100, the
domain is the set of values 0 < Q < 100 or more formally, Domain = {Q / 0 < Q < 100}
As for the range, the minimum cost C value is 200 (when Q = 0) and the maximum C value is 600
(when Q = 100). Thus, Range = {C / 200 < C < 600}
Exercise
1. Determine which of the following equations specify functions with input X
a) y2 – x4 = 9, X  R b) 3y – 2x =3, x  R
2. Find the domain and range of the following equations (functions)
a) Y = 5x + 2 b) x2 – y = 1
5x  1
c) Y = 2  x d) y =
2x  3
1.2.1 Type of Functions
1. Polynomial is a continuous function with a general form of;
f(x) = a0 + a1 x + a2 x2 + ………+an xn
In which each form contains a coefficient as well as a non-negative –integer power of the
variable x. the superscript indicators of the power of x are called exponents. The highest power
involved, i.e., the value of n (when an  0), is often called the degree of the polynomial
function. Depending on the value of the integer n (i.e., the degree), polynomial function is
further divided into the following sub-classes.
1.1 Constant function is a polynomial with degree zero (n = 0).
Its graph is a horizontal line and its slope is zero. It has a general form of Y = f(x) = k,
where k is any constant number

1
For instance, f(x) = 5 and g(x) = are constant functions
2
1.2 Linear function is a polynomial with degree one (n=1).
Its graph is a straight line and it has a constant slope. It has a general form of
F(x) = a0 + a1 x, a1 x, a1  0, where a6 and a7 are constants,
For instance, f(x) = 2+5x is a linear function.
1.3 Quadratic function is a polynomial with degree two (n = 2).
Its graph is either upward or downward parabola. Its slope is different at different points. It
has a general form of: F(x) = a0 +a1 x + a1 x2 , a0  0, where a0 , a1 and a2 are constants
1.4 Cubic function is a polynomial with degree three (n =3)
Polynomials of higher degree are known by the degree as polynomial of degree 4, 5 and so on.
2. Rational function is a function in which y or f(x) is expressed as a ratio of two polynomial

functions. It is a discontinuous function; it is undefined at points where the denominator is equal
to zero. Notice that any polynomial function is by itself a rational function, because it can
always be expressed as a ratio of one.
p ( x)
If p(x) and Q(x) are polynomials, then R(x) = is a rational function
Q) x )
A special rational function that has interesting applications in economics is the function
a
Y= or xy = a, where a is any constant
x
The graph of this function is a rectangular hyperbola.
3. Exponential functions ;are functions which generally denoted by bn =b*b*b*…*b n times
4. Logarithmic Functions: are the inverses of exponential functions.
Given f(x) =bn then logbf ( x )  n

1.2.2 Multivariate Functions
Uni-variate function is a function which has only single independent variable. The word “uni”
means “one” and “variate” means “variables (independent)”. It is also known as function of one
independent variable or univariable function. It is of the form Y = f(x)
The law of demand, for example, is a univariate functions. It can be writer as Q d = f (P), cetirus
paribus, where Q d stands for quantity demand of commodity and P for price of the commodity.
Multivariate Functions is a function which has two or more independent variables. It is also
known as a function of several independent variables or multivariable function.
A function of the form Z = f(x, y) is a function of two in dependent variables if a given pairs of x
and y values uniquely determined a value of the dependent variable Z. We have many occasions to
use functions of this type in economic models. For instance, if the output (Q) is determined by the
amount of labor (L) and capital (K) employed; then we can write the production function in general
form of Q = f(L, K).
Similarly the function of the form W =f(x, y, z) is a function of three independent variables.
Generally a function with n independent variables can be written as.
Y = (x1 , x2 , ……… xn )
Note that for economic applications, most functions of several independent variables restricted to a
function of one independent variable by using a common assumption of cetris paribus.
For example, the quantity demand for a good (Q d) depends on not only on its own price (p 0 ) but also
the price of related good (p1 ), on consumers‟ income(y),on the consumers‟ taste and preferences
(T), on the amount of advertising (A) and on other factors. This demand function for a particular
good might be of the form
Q d = f (P0 , P1 , Y, T, A, …)
To derive a law of demand, with the help of Cetris paribus (i.e. all factors except own price kept
constant), this function can be changed to a univariate function of the form

Qd = f (Po /P1, Y, A...) The vertical line (bar) means that all dependent variable after it are assumed
to be constant. Usually this univariate function is written as Q d = f (P0 ), Cetris paribus
1.2.3 Explicit Versus Implicit Functions
From the point of view of economic applications, it is worth to differentiate function as explicit
functions and implicit functions. The aim of this section is to illustrate the difference and the
functional form of these two types of functions.
Explicit function is a function in which the independent and dependent variables are explicitly
(clearly) defined. Whenever the cause and effect relationship is clear and when the objective is to
show that relationship, it is imperative to use explicit functions. An explicit function of one
independent variable can be represented as Y = f(x).
The law of supply for example, is an explicit function of one independent variable. It can be written
as Q s = f (P0 ), where Q s stands for quantity supplied of a commodity and P 0 price or the commodity.
This law asserts that it is the price of the commodity that determines the quantity supplied, if all
other factors kept constant. Note that Q s = f(P) and P = f(Q s) do not have the same interpretive
meanings.
An explicit function of two independent variables can be represented by Z = f (X ,Y). The

production function, Q = f (L, K) is an explicit function. It tells that the output (Q) is determined by
two independent variables, labor (L) and capital (K).
Implicit Function: is a function in which the independent and dependent variables are not
explicitly (clearly) defined. Whenever the cause and effect relationship is not clear or when the
objective is not to show that relationship, it is better to use implicit functions.
 An implicit function of one independent variable can be represented by f(x, y) = 0.
 An implicit function of two independent variable can be written as f(x, y, z) = 0
The budget formula M = Px X+Py Y, Cetris paribus, is an implicit function.
Where M is the budget (money), Px is price of commodity x and Py is price of Y.

In this case neither X or Y is a cause or an effect; there may or may not be any cause and effect
relationship between them.
Note that an explicit function can always be transformed in to an implicit function by simply
transposing the left hand side expression to the right side of the equal sign, but the converse is not
always possible.
Example
Y = f(x) = 3x-2 is an explicit function. It equivalent implicit function (form) will be
Y-3x+2 = 0 and it is the general form of f(x, y) =0
Example
x2 1
Write the implicit form of the function Y= .
x3
x2 1 x2 1 Y ( x  3)  ( x 2  1)
By transposing the to the right hand side, we have Y- = 0 = 0
x3 x 3 x 3
Y(x-3)-(x2 -1) = 0 Yx-3y-x2 +1= 0
Distinguishing between explicit and implicit functions is sometimes very important in managerial
and economics model. For example, the following two demand functions may be taken as
equivalent form from mathematical point of view, but they do not the same economic meaning.
1
1. Qd = 20-2p 2. P = 10- Qd
2
Exercise
1. Explain the difference between explicit functions and implicit functions.
2. Write the implicit form of the following explicit functions
2
a). Y = f(x)= x-5 b). Y = f(x) = x  4
3
1.2.4 Exponential and Logarithmic Functions

Reading assignments (take lecture note and read reference books)

1.2.5 Monotonic and Homogeneous functions

A. Monotonicity
The basic property of a function which has significant importance in economic relationships is
whether it is increasing or decreasing. A monotonic function is a function which is either strictly
increasing or strictly decreasing in its domain. In your elementary mathematics courses, you learned
non-calculus (i,e, graphical and algebraic) approaches to determine whether a function is monotonic
or not. In this subsection, we will see how the sign of the first derivative can easily tell us whether a
function is strictly (monotonic) increasing or strictly (monotonic) decreasing on a given interval.
Definitions
1. A function y  f (x) is strictly (or monotonic) increasing on the interval (a b) if its graph
moves up word from left to right on that interval. More precisely, a function f is strictly increasing
on (a b) if f ( x1 )  f ( x2 ) whenever x1  x2 on (a b) look figure a.
2. A function y  f (x) is strictly (or monotonic) decreasing on the interval (a, b) if its graph
moves down word from left to right on that interval. More precisely, a function f is strictly
decreasing on (a b) if f ( x1 )  f ( x2 ) wheneverx1  x2 on (a b) look figure b.
A function y  f (x) is neither monotonic increasing nor monotonic decreasing if it is strictly

increasing on one interval and strictly decreasing on other interval in its domain, example look
figure 1.1(c) it is strictly increasing on interval (0 b) and strictly decreasing on interval (b ) ).
Y Y Y
X X 0 b X
Figure (a) Figure (b) Figure (c)

B. Homogeneous Functions
Homogeneous functions arise naturally throughout economics. For instance, profit functions and
cost functions that are derived from production functions, and demand functions that are derived
from utility functions are homogeneous.
Now, let us start from non-calculus definition of homogeneous function and we will develop the
differential calculus approach.
Definition:
A function y  f ( x1, x2 ,...xn ) is homogeneous with degree K if
f (Sx1 , Sx2 ,...Sxn )  S k f ( x1 , x2 ,...xn )  S k y
A function f is homogeneous with degree K if it satisfies the property that when all the independent
variables are changes by same proportion or amount S, the dependent variable y changes by S K.
Example Show that the following are homogeneous or not. If so, find the degree
a) y  f ( x1 , x2 )  x13  3x12 x2  3x1 x22  x23

Solution
f ( Sx1 , Sx2 , )  (Sx1 ) 3  3( Sx1 ) 2 (Sx2 )  3(Sx1 )(Sx2 ) 2  (Sx2 ) 3
 S 3 x13  S13 3x12 x2  S 3 3x1 x22  S 3 x23
 S 3 ( x13  3x12 x2  3x1 x22  x23 )
 S 3 f ( x1 , x2 )
Thus, from the above definition f is homogeneous with degree 3
b) y  f ( x1 , x2 )  2 x 2  7 x1 x2  6 x22
solution
f (Sx1 , Sx2 )  2(Sx1 ) 2  7(Sx1 )(Sx2 )  6(Sx3 ) 2
 S 2 (2 x12  7 x1 x2  6 x22 )
 S 2 2 x12  7 x1 x2  6 x22 )
 S f ( x1 , x2 )

Thus, f is homogeneous with degree 1
A function f which is homogeneous with degree 1 is said to be linearly homogeneous function
c) y  f ( x1 , x2 )  3x12  6 x2
solution
f ( Sx1 , Sx2 )  3( Sx1 ) 2  6( Sx2 )
 3S 2 x12  6Sx2  S (3Sx12  6 x2 )
Thus, since “S” cannot completely factor out, f is not homogeneous.
Remark
One can usually tell whether a specific function is homogeneous just by looking the degree of each
term in its formula. A function f is homogeneous with degree K if the degrees of each term are
equal to K. For instance, the function in part (a) of example above is homogeneous with degree 3
since the degree of each term is 3, and the function in part (c) of this example is not homogeneous
since the degree of the first term is 2 and that of the second term is one.
Homogeneity is useful in many applications in economics; one of the most useful applications is in
production theory because of the relationship between homogeneity and return to scale. In
particular, if a production function y  f ( x1 , x2 ,  xn ) is homogeneous of degree k, then the
production function exhibits
i) Increasing return to scale (or IRS) if K>1
ii) Constant return to scale (CRS) if K=1
iii) Decreasing return to scale (DRS) if K<1.
Example Show that the Cobb Douglas production function is homogeneous
Q  f(L,K)  ALα Kβ , A  0,0  α, β  1and α  β  1 exhibts CRS.
Solution
f(SL,SK)  A(SL) α (SK)β

 AS L S K 
 Sαβ AL K 
 SAL K  sinceα  β  1
 SQ
Thus, Cobb Douglas function is homogeneous with degree one & it display constant return to scale.
Exercise: Show the following functions are homogeneous and comment on its returns to scale
a. Q  7KL2
b. Q  50K 1/ 4 L3 / 4 /
1.2.6 Applications of Functions in Economics

A. Linear Function
The graph of each linear function is a straight line, and conversely every straight line is the graph of
a linear function. Knowing that the graph of a linear function is a line makes it quite easy to sketch
the graph of the linear function. It is sufficient to find two points at which the graph crosses the
axes. These two points are called intercepts.
 The point where the graph crosses the x-axis is called the x-intercept and it occurs when y=0, and
 The point where the graph crosses the y-axis is called the y-intercept and it occurs when x = 0
The slope of a line through two points (x1 , y1 ) and (x2 , y2 ) on the line is given by a formula
y y y
Slope (m) =  2 1
x x2  x1
Example Plot the graph of Y = 3 + 4 x
The y-intercept at x=0 is 3 or (0, 3)
The x- intercept at y=o is -3/4 or 3 4 ,0

We locate the two points on the plane and then draw the line connecting the two points

x
-3/4
Notice that the slope (m) is 4 which is positive
 To define the equation of line whose slope (m) and one point (x,y) are given use the formula
Y-Y1 =m (x-x1 )
Example : Write equation of the line whose slope ½ and passes through (-4,3)
y-y1 = m (x-x1 ) = ½ (x-(-4)) = ½ (x+4)= ½ x+2 →y = ½ x + 5
 To derive the equation of a line when two points, (x1 ,y1 ) and (x2 , y2 ), are given use the formula:
y2  y1
y-y1 = ( x  x1 )
x2  x1
Example Derive equation of the line that passes through (1,7) and (6,-3)
y2  y1
Y-y1 = x  x1  =  3  7 ( x  1) = -2(x-1) = -2x+2 → y = -2x+9
x2  x1 6 1
Exercise
1. Plot the graph of each of the following
a) Y=2x-3 b) y+3x=5
2. Find an equation of the line (y = a+bx), given the information in each problem.
a) Line passes through (6,-2) with slope 2/3
b) Line passes through (2,-3) and (4,3)

Some Common Linear Models (Functions) In Economics
A. Demand Function
Demand function shows the relationship between quantity demanded of a commodity (x) and those
factors a affecting its demand like its own price (P x ), consumer‟s income (I), price of other related
commodities (Po ), tastes and preferences (T), number of consumers (N), consumers expectation
about future price and income (E) etc.
Mathematically, demand function is expressed as
QDx  f  px , I , Po ,T , N, E
The demand function and its curve can only be specified if all the above factors except its own price
(Px ) are kept as constant. This means that demand function shows the relationship between quantity
demanded of a commodity x and its own price (P x ), other factors remain constant. Mathematically,
demand function for a commodity X can be written as
Qdx  f (Px ), Cetris Paribus
The normal or usual demand function is monotonic decreasing i.e as Px increases, Q x decreases and
vice – versa. Then the linear demand function or curve is given by
Qdx  a  b p x (a, b  0), where Q dx = quantity demand for x and Px = price of x
Example
For a given commodity x suppose that when its price is 20 Birr per unit, 10 Units if x are demanded
by the consumers and when its price becomes 10 per unit, consumer demands 40 units of x. Derive
a linear demand function for commodity x.
Since the graph of linear demand function is a line and the points (P 1 , Q 1 ) = (20, 10) and (P2 Q2 ) = (
10, 40) lie on this line, the equation of the line can be obtained using the formula.
Q2  Q1
Q  Q1  P  P1 
P2  P1
40 10
Q  10   P  20
10  20

30
Q 10   P  20
10
Q 10   3 p  20
Q 10  3 p  60
Q  70  3 p
The demand function for commodity X is Q dx = 70 -3px
B. Supply Function
Supply function describes that quantity supplies of a commodity x depends on factors like price of
the same commodity (px ), price of inputs or cost of in puts (c), technology (T) number of producers
(N), government policies (G), producers expectation about future price (E), whether (W), price of
other goods (PQ) and so on. Mathematically, this supply function has a form of
QSx  f Px , C,T , N, G, E,W , Po 
The usual or normal supply function describes Q s as a function of Px , holding other factors constant.
This function in the normal condition is monotonic increasing, i.e, as P x increases Q x increases and
vice- versa. Mathematically, it has a form of
Qsx  f  Px  , cetris paribus
A linear supply function or model is given by
Qsx   C  dpx C, d  0
For example Qs   20  3 p is a linear supply function.
C. Cost Function
Cost function describes the relationship between total cost (C) and out put (Q) other factors remain
constant. Mathematically it can be expressed as.
C = f (Q), cetris paribus
In short run, costs are divided into fixed and variable costs.

Fixed costs are those costs involved in the absence of any production i.e. those costs which are
independent of the quantity of output produced.
Variable costs are those costs involved in the actual manufacturing process, i.e., those costs which
are dependent on the quantity of output produced.
A linear cost function (model) is given by
C = F + VQ
Where F is fixed cost
V is variable cost per unit of output Q
VQ is total variable cost, C is total cost
Q is quantity produced
For example, in a linear cost function C = 500 + 12 Q, 500 Birr is fixed cost, per unit variable cost
is 12 Birr and 12Q Birr is total variable cost.
Example Establish a linear relationship for the total cost function if the variable cost is 6 Birr per
unit and the fixed cost is 150 Birr.
C = F + VQ
C = 150 + 6 Q
D. Revenue Function
R = PQ s
Where R is total revenue, p is price and Q s is the amount of quantity sold. For example, R = 6Q
E. Budget function (line)
M = Px is price of commodity x
Where M is the amount of money allotted to purchase commodity x and y
Px is price of commodity x and Py is price of commodity y
For example, 100 = 5 x + 10 Y

F. Consumption function
C = a + by, a>0, 0 < b<1
Where C is total consumption
a is autonomous consumption which is independent of y (GNP)
b is marginal propensity to consume from the GNP,
Y is Gross National product (GNP).
Exercise
1.When the output is 100 units a company would have to charge a price 100 Birr per unit; for an
output of 300 units the corresponding price would be 70 Birr. Derive a linear supply function for
a company.
2.A firm makes a cabinet. The selling price is 160 Birr per unit. The variable cost cabinet is 60 birr
and the fixed cost for the period is 12, 000 Birr. Find
a. a linear cost function of a firm, and
b. a linear net revenue or profit function of a firm.
Basic Economic Applications of Linear Functions

Market-equilibrium analysis
Market- equilibrium analysis involves in price determination of a particular commodity in an
isolated market. It helps us in identifying the level of the price of the product at which the demand
and the supply for the product are equal or the market is cleared. This level of price is called
equilibrium price. or market clearing price. The equilibrium price together with its correspondence
equilibrium quantity is said to be (market) equilibrium - point. Above this point there is shortage
and bellow it there is surplus.
Q a = a -bp (a,b>0) ---------- (1)
Q s = - C+dP (c,d >0) ------ (2)

At the equilibrium point:
Qd = Qs -------- (3)
a-bp = - c+dp by substituting (1) and (2) in (3),we get
- bp- dp = - c-a
(b+d) p = a+c
ac
P= ………. (4)
bd
By inserting (4) in to (1) we get the equilibrium quantity as follows:
Qd = a-bp
 
Q = a  bP

 ac
Q  a  b 
bd 
 a(b  d )  b(a  c)
Q ……. (5)
bd

Notice that we get the same result for Q by substituting (4) in (2)
Example Suppose that the market demand for a particular product is given by Q d = 500-0.5 P and
its market supply is given by the equation Q S = -100 +2P
a) What will be the equilibrium price and equilibrium quantity?
b) Determine whether there is shortage or surplus when the price is 200 birr.
Solution
a) Q d = 500-0.5P Qs = -100+2P a = 500, b=0.5 c =100, d=2
 aC  ad  bc
P and Q 
bd bd
- 500+(100) 500(2)-0.5(+100)
P= and Q=
0.5+2 0.5+2

- 600 950
P= = 240birr and Q = = 380 unit
2.5 2.5
b) At P = 200 birr
Qd = 500-0.5 P Qs = -100 + 2P
= 500-0.5 (200) = -100 + 2(200)
= 400 units = 300 units
Since Q d > Qs, there is a surplus in the market
Break - even analysis

The basic problem of break-even analysis is to determine how many units of a product that the
company or firm will have to produce in order to break-even, i.e, in order to get neither a profit nor
a loss. This level of output or product is called break - even output and at this level of output the
firm earns zero profit. Break-even analysis is a useful planning tool to commence or expand a
business or introduce a new product.
R = PQ --------------------- (1) and C = F + VQ ---------------- (2)
At break - even point the total revenue from sales will be equal to the total costs of producing and
selling Q units. Thus, at break - even point:
F
R = C  PQ = F + VQ PQ - VQ = F Q (P-V) = F Q =
P V
F
Then using a unique symbol Q e for break - even quantity we get Qe 
P V
P-V (Price - unit variable cost) is termed as the contribution per unit of product as it is the net
revenue received by producing and selling each extra unit of Q. Thus, equivalently, we have 0
Fixed cost
Qe 
Contribution per unit of product
Example
Suppose that the total production cost of a firm is given by C = 33+2Q

a) At what level of output Q a firm will break - even if the price is fixed at birr 13 per unit?
b) What would be the net revenue at an output of 15 units?
Solution
a) C = 33+2Q b) R = PQ = 13 Q
F = 33, V = 2, P=13 Net revenue = R-C
F
Qe = = 13Q - (33+2Q)
P V
33
= =11Q - 33
13  2
33
= = 11(15) - 33
11
= 3 units = 165 - 33=132 unit
Exercise
1. Demand and supply functions for sugar are estimated as Q d =1-P and Q s = P respectively,find
the equilibrium price and equilibrium quantity.
2. The production cost, in Birr, of manufacturing Q units of an item is given by C = 4 Q + 200

and the selling price is Birr 9 per unit find
a) The net contribution per unit of the item?
b) The break-even quantity
c) The break - even sales
B. Quadratic Functions
Quadratic function is a function that can be reduced to the form f(x) = ax2 +bx+c, where a, b and c
are fixed numbers and a ≠ 0. A solution or root of a quadratic equation is a value of the unknown
variable x which satisfies the equation, namely, a value of x which makes the equation ax2 +bx+c =
0 a true statement. There are many ways of solving or finding the solution of a quadratic equation.
But the most general method is using the general quadratic formula

 b  b2  4ac
X=
2a
And if the discriminant b2 -4ac is
 greater than zero, then equation has two distinct real roots
 equal to zero, then the equation has one real root.
 less than zero, then the equation has as real root.
Example 13 Find the solution of
a) 3x2 + 10x+3=0 b) 4x2 +12x+9 = 0
Solutions
a. 3x2 +10x+3 since b2 -4ac = 102 -4x3x3 = 64>0, the equation has two solutions and then by
substituting a =3, b=10 and c=3 in the quadratic formula, we get
 b  b2  4ac  10  64  10  8
X= = = X= 1
3 or X  3
2a 6 6
b. 4 X2 +12X+9 =0
Since b2 -4ac =122 - 4 (4) 9 = 0, the equation has one solution and by substituting a = 4, b=12 and
12  (12)2  4(4)9  12  0  12  3

c=9 in the quadratic formula use get X = = = =
2(4) 8 8 2
The graph of the Quadratic function f(x) = ax2 +bx+c with a ≠0 is called a parabola.
I) If a>0 (positive), then the graph is a parabola opens upward
The vertex or the turning point of the parabola is the minimum
  b 4ac  b2  x
point of the graph of f and it is given by  
 2a, 4a 
  b 4ac  b2 
 
 2a, 4a 

II) If a < 0 (negative) then Vertex
  b 4ac  b 2 
. The graph is opens downward  
 2a, 4 a 
Example Find the maximum or minimum value of the following quadratic functions and indicate
the nature of their graph
a) f(x) = -2x2 -2x+4 or
b) f(x) = x2 -3x+2
Solution
a. f(x) = -2x2 - 2x+4 a= -2 b=-2 and c=4
b
Since a= -2 <0, it is a parabola opens down ward and the function has a maximum value at x =
2a
-b -(-2) 2  -1 
Again since x  , the maximum value of f is f   = -2  -1 2  -2  -1 2  + 4 = 9 2
2
= = = -1
2
2a 2(-2) -4 2
b) f(x) = x2 -3x+2 a= 1,b= -3 and c=2
 b  (3) 3
Since a =1>0, it is upward parabola and the function has a minimum value at X =  
2a 2(1) 2
1
2
 3  3  3
Hence, the minimum value of f is f       3    2 
 2  2  2 4
Exercise
1. Find the solutions (s), if exists, for the following
a) x2 +x-2 =0 b) x2 -2x +1=0 c) x2 -4x+5 = 0

2. Sketch the graph of each of the following functions & determine its optimum value.
a) Y=x2 - 10x+25 b) Y = - x2 + 4x-3
Economic Applications of Quadratic Functions
Our knowledge on the quadratic functions can be used in finding the maximum or minimum value
of an economic function which usually takes a quadratic form. We can also extend market
equilibrium and break - even analysis for the case when there is one or more quadratic functions. In
this sub-section we will illustrate these applications with the help of examples
Example
Suppose that the firm's inverse demand function for a product is given by P = 100-0.1Q
a) How many units of a product the firm should produce to get maximum total revenue?
b) Find the maximum possible total revenue of the firm?
Solution
a. The firm's total revenue R is given by R = PQ then by substituting the inverse demand equation
P = 100-0.1Q in this equation, we get R = (100-0.1Q)Q = 100Q - 0.1Q2 .
Thus the revenue R is a quadratic function in Q with a = -0.1, b = 100 and c = 0.
b  100 1000
Since a = - 0.1<0, R will attained it maximum at Q =    500units
2a 2(0.1) 2
Hence the firm should produce 500 units of a product to maximize its total revenue.
b. The maximum R can be obtained by substituting Q = 500 units in the R function.
R(500) = 100 (500) -0.1 (500)2 = 50000 - 25,000 = 25,000
Example
The supply and the demand functions for a product are given by Q s = 2P +P2 and Q d= 40-P2 , where
P is the price of the product in Birr. Find the equilibrium price and equilibrium quantity.
Solution
At market - equilibrium point, we have
Qd = Qs 40-P2 = 2P+P2  2P+P2 = 40-P2  2P2 +2P-40 =0 P2 +P-20 = 0

But P2 +P-20 =0 is a quadratic equation with a = 1, b =1 and c=-20, so its solutions can be found as
 b  b2  4ac 1  12  4(1)(20)  1 81 1  9 1  9
P= = = P= and P 
2a 2(1) 2 2 2
8 10
P and P   P = 4 and P = -5
2 2
Since there is no negative price of a product, the equilibrium price is equal to P = 4 birr.

To get the equilibrium quantity, we substitute P a = 4 in the demand equation and we get
 2
Q  40  P = 40-42 =40-16 = 24 unit
C. Exponential and Logarithmic Functions
Example: an economy is forecasted to grow continuously, so that the GNP in billions of dollars,
after t years is given by GNP  80e0.02t . After how many years is the GNP is forecast to be Birr 88
billion?
Solution: for simplicity we cancelled billion on both sides
88  80e 0.02t      diviedbothby80

1.1  e 0.02t      takelog ofbothside
log1.1  log e 0.02t
log1.1  0.02t log e  applyinglog rule
log1.1  0.02t     sin ce log e  1
log1.1
 t      dividingbothby0.02
0.02
0.09531
 t  4.77    sin ce log1.1  0.09531
0.02
Therefore the economy will be 88 billion Birr after 4.77 years
Exercise
1. Supposed that the cost of producing a product is given by the cost function c= 20+5Q and the
total revenue obtained by selling the product is given by the revenue function
R = 100 Q-0.5Q 2 where Q is the level of a product
a) Find the net revenue or profit function
b) Find the level of output Q which gives maximum profit
c) Find the break-even level of out put

UNIT TWO
LIMITS AND CONTINUITY

2.1 The concept of limit
A. Definition of Limit
Many problems in algebra involve the behavior of functions at particular number (i.e, finding the
value of the function f at x = c). But in various situations, the main interest is usually on the
behavior of the function f near x = c rather than at x=c. The behavior of f(x) when x is close to but
not equal to a particular value c will be investigated with the help of the concept of limit. Before
defining the concept of limit, it may be worth full to explain it institutively either numerically or
graphically through the examples illustrated below.
Example (numerical method)

x2  4
Consider the function f(x) = . What happens to the values f(x) as x gets closer and closer to 2?
x2
Solution
One way of investigating this question is through finding the values of f(x) for values of x which are
very near to 2 from either side of 2 (i.e, from both left and right side of 2).
X approaches 2 from the  2 X approaches 2 from the right
?
X 1.8 1.9 1.999 1.999   2.001 2.01 2.1 2.2
f(x) 3.8 3.9 3.99 3.999   4.001 4.01 4.1 4.2
From this table one can easily observe the followings:
i, The values of f(x) approaches 4 as x approaches 2 (x  2) from either side of 2, and
ii. As x becomes closer enough to 2, the corresponding values of f(x) will be closer enough to 4.
Statements i and ii are usually expressed mathematically by saying that "The limit of f(x) as x
approaches 2 is the number 4" and can be written symbolically as

x2  4
lim f(x) = 4 or lim 4
x2 x 2 x2
Notice that f(x) is not defined at x = 2 since the denominator is 0 at x = 2 and division by 0 is not
permitted or meaning less. But f(x) has a limit (=4) as x approaches 2.
Example (Graphical method)
Given f(x) = x2 =2, find lim f(x) with the help of its graph.
x2
As you remember from section 1.7, the graph of f is a parabola opening up words with vertex (0,2)
as shown in the figure below.
f(x) = x2 +2
1 1
For each number x, the functional value f(x) represents the vertical distance from the x-axis to the
point (x, f(x) ) on the graph of f. If x becomes closer and closer to 1, the vertical distance will be
closer and closer to 3 (the vertical distance from the x-axis to the point (1,3). Thus, it is possible to
conclude that f(x) approaches 3 as x approaches 1 from both side of 1. In other words the number 3
is the limit of f(x) as x approaches 1 and written as
lim f(x) = 3 or lim f(x) x2 +2 =3

x 1 x 1
Definition: The real number L is said to be "the limit of f(x) as x approaches C" and written as lim
x c
f(x) = L, if the functional values of a function f become closer and closer to the single real number L
whenever x gets closer and closer but not equal to a real number c from both side of c.

Exercise
1. What do we mean by lim f(x) = 5?

x2
2. Find a reasonable estimate for each of the following limits numerically.
x2 x2  2x  1 x3  1
a. lim b. lim c. lim
x 1 x2  4 x 1 x 1 x  1 x 1
3. Find each of the following limits with the help of the graph.
a lim 2x+1 b. lim (2x2  3) c. lim x 2  8x  2

x2 x 5 x 1
Properties (Rules) of Limits
Rule 1 (constant Rule)
If f(x) = K where K is a constant, then
lim f(x) = lim K =K

xc xc
Remember that f(x) = K is said to be a constant function.
Example
a) Given f(x) = 5, find lim f(x) b) Evaluate lim 9 c) Find lim b, b is a constant
x2 x  4 x 3
Solutions
a) lim f(x) = lim 5 =5 b) lim 9 = 9 c) lim b = b since b is a constant.

x2 x2 x  4 x 3
Rule -2 (Identity Rule)
If f(x) = x (an identity function), then lim f(x) = lim f(x) x = C

xc xc
Example
a) Given f(x) = x, find lim f(x)? b) Evaluate i) lim x ii) lim x

x4 x2 x b
Solutions
a) lim f(x) = lim x = 4

x4 x4

b) i) lim x = 2
x4
ii) lim x = b
xb
Rule -3 (Constant multiplication Rule)
If f(x} is a function with lim f(x) = L and k is a constant, then

xc
lim Kf(x)  K lim f(x)  KL

x c x c
Example
a) Given f(x) = 5x. find lim f(x)?

x 3
b) Evaluate lim 6x
x  2
Solutions
a) lim f(x) = lim 5x

x 3 x 3
= 5 lim x (Rule 3)
x3
= 5(3) (Rule 2)
= 15
b) lim 6x = 6 lim x (Rule -3)

x  2 x  2
= 6(-2) =12 (Rule-2)
Rule-4 (Power Rule)
If lim f(x) =L and n is any real number, then

xc
x c

lim f(x)n = lim f(x)  Ln
x c
n
Notice that x should be restricted to avoid even roots of negative numbers.
Example
Evaluate each of the followings

1
a) lim x3 b) lim c) lim 3
x2 d) lim f(x) given f(x) =6x4
x2 x 3 x 2 x  3 x  1
Solutions
a) lim x3 = lim x
x2
 
x2
3
(Rule 4)
= (2)3 =8 (Rule 2)
1
b) lim 2
= lim x-2 (Exponent rule)
x3 x x 3
= lim 
x 3
2
(Rule4))
= 3 -2 (Rule 2)
1 1
= 
32 9
3
c) lim x2 lim x2/3 (Exponent Rule)
x  3 x  3

= lim x 2/3
x  3
 (Rule 4)
= (-3)2/3 (Rule 2)
= 3
(3)2  3 9
d) lim f(x)  lim 6x4  6 lim x 4 (Rule3)

x 1 x 1 x 1
= 6 (lim x) 4 (Rule 4)
x1
= 6(1)4 (Rule 2)
= 6(1) =6
Rule- 5 (Sum and Difference Rule)
Given lim f(x)  L and lim g(x)  M

x c x c

Rule 5.1 (Sum Rule)
lim f(x)  g(x)  lim f(x)  lim g(x)  L  M

x c x c x c
Rule 5.2 (Difference Rule)
lim f(x)  g(x)  lim f(x)  lim g(x)  L  M

Notice that the sum and difference rules can be extended for three or more functions. For examples,
lim f(x)  g(x)  h(x) lim f(x)  lim g(x)  lim h(x)
x c x c x x c
Example
Evaluate each of the followings
a) lim (x3 -2x+3) b) lim (x2 +2 x ) c) lim x 2  4

x2 x 9 x 4
Solutions
a) lim (x3 -2x+3

x2
= lim x3  lim2x  lim 3 (Rule5) )

x 2 x 2 x 2
 
= lim x  2 lim x  lim 3
x 2
3
x 2 x 2
(Rule 3 and 4)
= 23 - 2(2) + 3= 7
b) lim (x2 +2 x ) = lim x 2  lim 2 x (Rule 5)

x 9 x 9 x 9
2
 
= lim x   2 lim x (Rule3 and 4)
 x9  x 9
= 92 + 2 9 (Rule2)
= 87

c) lim ( x2  4)
x 4
= lim(x 2  4) (Rule 4)
x 4
= lim x 2  lim 4 (Rule 5)

x 4 x 4
= 42  4 ( Rule1,2 and4)
= 12  2 3
Rule- 6 (Product Rule)
If lim f(x) = L and lim g(x) = M, then

xc x c
limf(x).g(x)  lim f(x) . lim g(x)  LM

Notice that this product rule can be extended to three or more functions.
Example
a) Evaluate lim (x+1)3 (2x-1)2

x2
Solution
lim(x  1)3 (2x 1)2  lim(x  1)3 . lim (2x 1)2 (Rule 6)
x 2 x 2 x 2
 
3
 
= lim (x  1) . lim(2x  1)
2
(Rule 4)
 x2  x 2
= (2+1)3 (2(2)-1)2 (Rule 1,2,3 and 5)
= 33 . (32 ) = 243
Rule- 7 (Quotient Rule)
If lim f(x)  L and lim g(x)  M where M  0, then

x c x c
lim f(x)
f(x) x c L
lim = 
xc g(x) lim g(x) M
x c

Notice that this rule works whenever the limit of the function in the denominator is different from
zero (i.e lim g(x)  0)
x c
Example
2x  5
Evaluate lim
x 4 3x  7
Solution
lim 3x-7 = 3 lim x  lim 7  3(4)  7  5  0.

x4 x 4 x 4
So,the quotient rule can be applied since the limit of the denominator is different from zero. Thus
2x  5 lim (2x  5)
lim  x4 (Rule 7)
x 4 3x  7 lim(3x  7)
x 4
lim 2x  lim5
x 4 x 4
= (Rule5)
lim3x  lim 7
x 4 x 4
2(4) 5
= (Rule1,2,and 3)
2(4) 7
13
=
5
Exercise
1. Evaluate each of the following limit
a) lim (2x2  3) b) lim (x3 -8x+2) c) lim x3  6 x 2  7 x

x 5 x 1 x 1
5x
d) lim e) lim (x+2)2 (2X-4)3
x 2 2  x2 x 1
3. Given lim f(x) = 4 and lim g(x) = 2, find the following limits.
x 3 x3

lim f(x)  g(x) b) lim f(x).g(x)

3
x 3 x 3
a) f(x) 5g(x)
c) lim d) lim
x 3 g(x) x 3 f(x)  g(x)
B. Basic Techniques for Evaluating Limits
I. Limits of Polynomial Functions
Recall from unit one that a polynomial function is a function which can be expressed as
f(x) = a0 +a1 x+a2 x2 + ----+an xn
Where the coefficients a0 ,a1 ,a2 ----an are real numbers and n is non-negative integer.
If f(x) is a polynomial function and c is any real number, then
lim f(x)  f(c)

x c
Example
Evaluate lim (5x4 +2x3 +x3 +3x2 -x+1)

x  2
Solution
Since f(x) = 5x4 +2x3 +3x2 -x+5 is a polynomial function, its limit can be obtained as
lim f(x) = f (-2) = 5(-2)4 +2(-2)3 +3(-2)2 -(-2) +1 = 89

x2
II. Limits of Rational Functions
From unit one you recall that a rational function is a quotient of two polynomial functions. In other
words, R(x) is a rational function if it can be expressed as
P(x)
R(x) = where P(x) and Q(x) are polynomials functions and Q(x)  0.
Q(x)
Remember that the Quotient rule can be applied only if the limit of the denominator is different
from zero (i.e, lim Q( x)  0. In other words, the limit of R(x) cannot be calculated by Quotient
x c
Rule if lim Q( x)  0. So, the basic question is that how can one find lim R(x) if lim Q( x)  0 ?
x c xc x c

At this point it may be better to re-emphasize the theorem described below since it is a base to
answer the above question.
2.2 The Limit Theorems
Limit theorem 1; If f and g are functions that have limits as x approaches c and f(x) = g(x) for all x
 c, then lim f(x)  lim g(x)
x c x c
You can use the above limit theorem and some algebraic methods of simplification (like factoring
and canceling, rationalization and so on) to evaluate the limit of a rational function whose limit of
the denominator is zero as it is illustrated in the following examples.
Example
Evaluate the following limits
x2  x  6 x 3
a) lim b) lim
x 3 x 3 x 9 x 9
Solutions
x2  x  6 (x  3)(x  2)
a) lim  lim  lim (x  2)  5
x 3 x 3 x 3 (x  3) x 3
x 3 ( x 3 ( x 3
b) lim  lim .
x 9 x  9 x 9 (x  9 ( x  3
lim 1
(x  9) 1 1 1 1
= lim = lim = x 9
  
x 9 (x  9) ( x  3 x9 x  3 lim x  3 9 3 33 6
x 9
Exercise Evaluate each of the following limits
x 2  3x x 2  25 x2  x  6
a) lim b) lim c) lim
x 0 x x 5 x 5 x 2 x2
5 x x-2
e) lim d) lim
x 25 x  25 x 4 x4

Non Existence of Limits: Limit of a function f as x approaches c do not exist means that there is no
any real number L that makes the statement ' ' lim f(x)  L" true.
x c
One - Sided Limits
Consider the function whose graph is shown below. It is defined for all values of x except X = 0
-3 -2 -1 -1 -2 -3
Observe from the above graph of f(x) that f(x) <-1 whenever x is negative and f(x)> 1 when ever x
is positive or zero. So, as x takes values near 0 on both sides if 0, the corresponding values of f(x)
cannot get closer and closer to the same real number.
However, as you see the right half of the above graph, as x takes values closer and closer to 0 from
the right side, the corresponding values of f(x) get closer and closer to 1. In this case it is possible to
say that "the number 1 is the limit of f(x) as x approaches 0 from the right” and written as
lim f(x)  1 (Right - hand limit)

x 0 
Similarly, from the left half of the above graph, it is clear that as x takes values closer and closer to
0 from the left side of it, the corresponding values of f(x) get closer and closer to -1. In this case, it
is possible to say that “the limit of f(x) as approaches to 0 from the left is -1” and written as
lim f(x)  1 (Left-hand limit)

x 0 

Definitions
Right-Hand Limit: The number L is said to be “the limit of f(x) as x approaches c from the right”
and written as lim f(x)  L if the values of f(x) get closer and closer to the number L whenever x
x c 
takes values closer and closer (but not equal) to c on the right side of c.
Left-Hand Limit; The number L is said to be “the limit of f(x) as x approaches c from the left” and
written as lim f(x)  L if the values of f(x) get closer and closer to the number L whenever x takes
x C
values closer and closer (but not equal) to c on the left side of c.
Remarks
1. One side limits of a function means either its left-hand limit or right hand limit or both.
2. All rules and theorem of limit remain valid and“ lim ” is replaced either “ lim ” or “ lim f(x) ”.
x C x C x C
3. One sided limits are usually important in investigating the behavior of a piece-wise defined
function f near at end points for different ranges of x in its domain.
Example
1  x, if x  1
Given f(x)   Find a) lim f(x) b) lim f(x)
x  1, if x  1 x 1 x 1
Solutions
a. Finding lim f(x) means finding the limit of f(x) as x approaches 1 from the left (that is,
x 1
assuming x < 1). To do this use 1 + x for f(x). Thus, lim f(x)  lim 1  x 1  x  2
x 1 x 1
b. To get lim f(x), take the expression of f(x) for x≥1 from the given function (f(x)). In other
x 1
words, use f(x) = x-1. Thus, lim f(x)  lim x  1  1  1  0

x 1 x 1
Limit Theorems 2 (Two Side)
Let f be a function and let c and L be real numbers, then lim f(x)  L iff lim f(x)  L = lim f(x) .
Notice that from the above theorem, one can easily observe the following facts.

i) If lim f(x)  L , then lim f(x) = lim f(x)  L . That is, if a function f has two-sided limit L at x =
c, then it necessarily has L as both its left-hand and right-hand limit at x = c.
ii) If lim f(x) = lim f(x)  L , then lim f(x)  L . That is, if a function f has the same number L
as left-hand and right-hand limit at x = c, then the number L must be a two sided limit.
iii) Two sided limit of a function f does not exist whenever its left-hand and right-hand limits
are different. That is, lim f(x) does not exist if lim f(x)  lim f(x) .
xC x C x C
Infinite Limits
Infinite limits refers to the situation where the values of f(x) become larger and larger without bound
() or become smaller and smaller without bound (-) as x approaches c from both side of c.
Example
1
Find lim f(x)for f(x)  .
X0 x2
Solution
By evaluating the values of f(x) for some values of x near to 0 from both sides, you can construct
the following table of values.
X approaches 0 from left  x approaches 0 from right
X -0.04 -0.005 -0.0001 0 0.0001 0.001 0.01
f(x) 625 40,00 100,000,000 ? 100,000,000 1,000,000 10,000
As you see from the above table, as x takes values closer and closer to 0 from both sides, the
corresponding values of f(x) become larger and larger without bound.
Algebraically, you can guess that as x gets closer and closer to 0, x2 also gets closer and closer to 0.
1 1
But the smaller x2 means the larger 2
. Thus, as x approaches 0 from both sides, 2 becomes
x x
larger and larger without bound.

Therefore, from the table and algebraic analysis, it is possible to say that “the limit of f(x) as x
1
approaches 0 is infinity” and can be written as lim f(x)  lim 
X0 X0 x2
Definition
1.If the values of f(x) get larger and larger without bound as x takes values closer and closer to c
from both side of c, then lim f(x)   and read as “the limit of f(x), as x approaches C, is infinity”
X c
2.If the values of f(x) get smaller and smaller without bound as x takes values closer and closer to c
from both side of c, then lim f(x)   and read as “ limit of f(x), as x approaches C, is negative
X c
infinity,”
The limit of a function f as x approaches c (i.e, lim f(x) ) may fail to exist if:
Xc
1. Both left-hand and right-side limits of f(x) exist and have different values. or,
2. Either left-hand or right-hand limit of f(x) is  or -.,
3. Both left-hand and right hand limit of f(x) is  or - so that two sided limit of f(x) is  or -.,
Example
Determine whether the limit exists or not for each of the following.
x 1 x 2 1
a) lim f(x) for f(x)  b) lim f(x) for f(x)  c) lim f(x) for f(x) 
X0 x X1 x 1 X1 x 1
Solutions
a. Since the numerator of the function f(x) is the absolute value expression  x  which can be
expressed as
x for x  0
x  f(x) can be further expressed as
 x for x  0
x x
 x  x  1, x 0

f(x)  
 x  x  1, x0
 x  x

Since f(x) is piecewise function, calculate the one – sided limits as
x
lim f(x)  lim  lim 1  1, and
X0 X0 x X0
x
lim f(x)  lim  lim  1  1
X0 X0 x X0
Thus, lim f(x) does not exist since lim f(x)  lim f(x)
X0 X 0 X0
b. As x becomes closer and closer to -1 from the left , x + 1 gets closer and closer to 0 from the left
1
(x + 10-) and then gets smaller and smaller without bound. That is,
x 1
1
lim f(x)  lim   . Similarly, as x becomes closer and closer -1 from the right, x+1
X1 X1 x 1
1
gets closer and closer to 0 from the right(x+10+) and then gets larger and larger without
x 1
bound. That is, lim f(x)   . Thus, lim f(x) does not exist.
X1 X 1
c. lim f(x)  lim

x 2 1
 lim
x 1x  1  lim x  1  2 and
X1 X1 x 1 X1 x 1 X1
lim f(x)  lim

x 2 1
 lim
x 1x 1  lim x 1  2
X1 X1 x 1 X1 x 1 X1
Thus, lim f(x) exists and equal to 2.

X1
Exercise
1. Give an institutive meaning for each of the followings.
a) lim f(x)  L b) lim f(x)  L c) lim f(x)  

X c Xc x c
2. Write two situations where Lim f (x) may fail to exist.

X c
3. For each of the following functions find each limit if it exists.
i. f(x) = -x + 1 if x≤1
x2 + 1 if x > 1

a) lim f ( x) b) lim f(x)

X 0 X1
ii) 2- x if x ≤ -1
x2 - 1 if -1 < x < 1
3 if x≥1
a) lim f(x) b) lim f(x) c) lim f(x)

X 1 X0 X1
4. For each of the following find the limit if it exists.
x2
b) lim 2x  1
1
a) lim c) lim
X0 x X1 X 2 x2
x2 4x2  25 x 1
d) lim e) lim f) lim
X 2 x  2 X 5 2 2x  5 X 1 x 1
C. Limits at Infinity
In some types of economic functions, the main interest may be to determine the behavior the
function (x) as x assumes large positive and large negative values.
Example 5-15
2x2
Consider the function f(x) = .What happens to the functional value of f(x) as x assumes larger
1  x2
and larger positive values?
Solution
To make the idea simple and clear investigate the values of f(x) for increasingly large positive
values of x by constructing table of values as given below.
X assumes larger and larger +ve values
X 0 5 10 50 100 500 1000
f(x) 0 1.92 1.98 1.9992 1.9998 1.999992 1.9999998

As it can be seen from the above table, as the values of x continue to increase, the value of f(x)
approaches the number 2.
Definition
Furthermore, it is possible to make the value of f(x) very close to 2 by taking a sufficiently large
value of x. Then by using the symbol “ x   ” to indicate that x assumes larger and larger postive
2x2
values, it is possible to write the behavior of f(x) as lim f(x)  lim 2
X X 1  x 2
The real number L is said to be “the limit of f(x) as x approaches to ” and written as lim f(x)  L if
X 
the functional value f(x) is close to the single number L whenever x is a very large positive number.
Similarly, lim f(x)  L if the functional value f(x) is close to the single number L whenever x is a
X 
very small negative number (i.e, x is a negative number with very large absolute value).
Remarks
All properties of limits discussed above are valid (true) if the “ lim ” replaced with either “ lim ” or
X c X 
“ lim ”. These limits properties together with the theorem given below can be used to evaluate
X  
limits at infinity for many functions without resorting the use of tables and graphs.
Limit Theorem 3
1 1
For any positive real number P, lim P
 0 and lim P  0
X x X  x
Provided that x restricted to avoid even roots of negative numbers,
x  2x 2
Example Evaluate a) lim (
x  x2
)
Solutions
x  2x 2 x 2x 2
lim ( ) = lim (  2 ) =0+2=2
x  x2 x  x2 x

Remarks
1. For any polynomial function f(x), lim f(x)  (or  ) and lim f(x)  (or  )
x  x 
p ( x)
2. The limits at infinity for a rational function R(x) = can be calculated by dividing both the
Q( x)
numerator and denominator by the highest power of x that occurs either in the numerator or the
denominator and applying the above theorem on the simplified function.
Example Evaluate each of the following limits
5x  4
a) lim
x  2 X  3
4 x 2  3x  2
b) lim
x  2 x3  5
Solutions
a) since the highest power of x is x1 divide both the denominator and numerator by x as
5x  4 4 4
5 lim 5  lim
lim
5x  4
= lim x = lim x = x  x  x = 5  0  5
x  2X  3 x 2 x  3 x   3 3 20 2
2 lim 2  lim
x x x   x   x
b) Divide both the numerator and denominator by x3 since it is the highest power as
4x 2  3x  2 4 3 2
 2  3
4x 2  3x  2 x  000  0
lim  lim x  lim x x
x  2x  5
3 x  2x  5
3 x  5 20
2 3
x x
Given a rational function R(x)
P(x) a n x n  a n 1x n 1  ...  a 0

R(x)   , then
Q(x) b n x n  b n 1x n 1  ...  b0
0 if n  m

a
lim   n if n  m
x  (  ) b
 n
does not exit if n  m

Exercise
1. Write an institutive definition for
a) lim f(x)=L b) lim f(x)+L

x  x 
2. Evaluate each of the following limits if it exists.
5x 2  3
a) lim (
x  3x 2  4
)
2 x 5  3x
b) lim (
x  6x 3  4
)
5x 4  9
c) lim ( )
x  8 x6  3
2.3 Continuity
In the previous sections you learned the concepts of limit and different ways of evaluating limits of
functions. In this section you will use the limit concept to learn an important property of functions
called continuity. The concept of continuity and the properties of continuous functions are
essentials for understanding many key concepts in calculus.
Definition of continuity (continuous function)
Intuitively speaking, the function f is said to be continuous at x = c if you can draw the graph of f
at and near the point(c, f(c)) without lifting your pencil from the paper. On the other hand, the
function f is said to be discontinuous (not continuous) at x = c if its graph is disconnected (i,e, if it
has a break ,gap, hole or jump at x=c).
Identifying the points of discontinuity will be easy if the graph of a function is known in advance.
But for some complicated functions it may be difficult or impossible to know their graph in
advance. Thus, it is necessarily to have method of identifying the points of discontinuity without
looking the graph of a function.
Definition: A function f is continuous at the point x = c if
1. f (c) exists. That is, if f is defined at x=C

2. lim f ( x)exists.Thatis, lim f ( x)and

x  x 
3. lim F ( X )  f (c) 
x 
Notice that if one or more of the three conditions in the definition fails, then a function is
discontinuous at x= c.
Example
Determine the continuity of each of the following functions at the indicated value of c.
x2  4 
atc  1andc  2 x ifx  0
2
a) f(x) = x  2 b) f ( x)   atc  1
1ifx  0 

Solutions
12  4
3
a) Since f(x) is defined for all points except x = 2, f(1) is defined and f(1) = 1  2
x2  4 (x - 2)(x  2)
Moreover, lim = lim  lim( x  2)  3 and lim f ( x)  f (1)  3
x 1 x  2 x 1 x2 x 1 x 1
Thus, f is continuous at x = 1 since all the three conditions in the definition are satisfied.
But f(x) is not continuous at x = 2 since f (2) is not defined
b) f (1) = 1 and thus f(1) is defined.
lim f(x) exits and equal to 1 , because lim f(x)  lim f(x)  1 .
x1 x 1 x 1
Furthermore lim f(x)  1  f(1)  1 , the f is continuous at x=1.

x 1
Remarks
1. A function f is continuous from the right at x =a if lim f(x)  f(a) and

x a
A function f is continuous from the left at x=b if lim f(x)  f(b)

x b
2. A function f is said to be continuous on an open interval (a b) if f is continuous at every

number in the interval.

3. A function f is continuous on a closed interval [a b] if f is continuous from the right at x =a ,

continuous from the left at x = b, and continuous at every number in the open interval (a b).
For example, f(x) = x  2 is defined for x 2 or on the interval [2, ). Moreover f(x) is continuous
from the right x = 2 since f (2) = 2  2  0 and lim f(x)  lim x - 2  0  f(2) , and also
x 2 x 2
continuous at every number on open interval (2 ). Thus, f(x) is continuous on the interval [2, ).
Properties of continuous functions
Using the formal definition of continuity may not always be the most convenient way to determine
the continuity of a function, particularly on a given interval. Thus, it is better to use the properties of
continuous functions which described below in determining interval of continuity of a function.
These properties are extremely useful in investigating the continuity nature for large classes of
functions without looking at their graphs or the three conditions in the definition.
1. A constant function f(x) = k, is continuous for all value of x.
2. Polynomial functions are continuous for all values of x.
3. Rational functions are continuous for all values of x except those that make a denominator 0.
4. If f(x) and g(x) are both continuous functions, then
a. f(x) + g(x) is continuous
b. f(x) – g(x) is continuous
c. f(x).g(x) is continuous
f ( x)
d. ,when g ( x)  0 is continuous
g ( x)
e. The absolute value of f(x), ( i.e, |f(x)|) is continuous.
5. If f(x) is continuous, then n f ( x) is continuous for all values of x when n is an odd positive
integer greater than 1.
6. If f(x) is continuous and non-negative, then n f ( x) is continuous when n is an even positive

integer.

Example
Determine whether each of the following function is continuous or not
x
a) f(x) = 2x3 – x2 +3x+1 b) f(x) =
( x  2)( x  3)
c) f(x) = f ( x)  3 x2  4 d) f(x) = 3 x
Solutions
a) Since f is a polynomial function, it is continuous for all values of x.
b) Since f is a rational function, it is continuous for all x except –2 and 3 (values of x that make the
denominator o). Using interval rotation, f is continuous on (- -2), (-2 3), and (3 ).
c) The polynomial function x2 -4 is continuous for all x. Since n=3 is odd, f is continuous for all x.
d) The polynomial function 3-x is continuous for all x and non-negative for x 3. Since n=2 is even,
f is continuous for x 3 or on the interval (- 3].
Exercise: Determine whether each of the following function is continuous or not at indicated values
x2  1  x if x  0
a) f(x) = at c = -1 and c= 1 b) f(x)   at c  0 at c = 0
x 1 2  x if x  0
x2 x 2 if x  2
c) f(x) = at c = 0 d) f(x)   at x=2
x 2x if x  2
2.4 Economic Application of Limit and Continuous Functions
Example 1: As advancement in technology results in increasing in powerful and compact

calculators, the rice of calculator currently in the market decrease. Suppose that x months from now,
30
the price of a certain model will be P( x)  40  Birr. Based on the information given calculate:
x 1
a. what will be the price after 5 months
b. what happen to the price in the long-run (as X become very large)
Solution:

30 30
a. P( x)  40   40   40  5  45
X 1 5 1
30 30
b. lim f ( x)  lim(40  )  lim 40 lim  40  0  40Birr
x  x 1 x x  x  1
X 
Example 2 : a manufacturer can sale a certain product for Birr 80 per unit and it incurs an
overhead cost Birr 4,500 and per unit production cost of Birr 50, then
a. How many units of the manufacturer product to break-even
b. what is the manufacturer„s profit or loss if 200 units are sold.
Solution: a. at beak-even P=AC i.e.80=450/Q+50
450 450
 80  50   30   30Q  450  Q  15
Q Q
Lim  Lim(TR  TC )  Lim (80Q  [50Q  4500])  Lim 30Q  Lim4500

Q200 Q200 Q200 Q200 Q200
..........  6000 4500  1500Birr
Example 3: A manufacturer is capable of producing 500 units per day. To do so he incurred Birr
1500 per day and a variable cost of Birr 2 per unit produced then, sketch the graph of the cost
function. Is the cost function continuous? If no, where does it discontinuous?
Solution:
First let us find the function of cost: C (Q) =TFC+TVC=1500+2Q
The X-intercept at C=0, Q=750 and Y-intercept is at C=150. Then the graph will be given as
1500
C C(Q)=1500+2Q
As we can observe from the cost function, it is a linear function which is continuous.
Therefore C(Q) is continuous for all real numbers for which 0≤Q≤500

HU Department of Economics Lecture Note
UNIT THREE
THE DERIVATIVES
In this section you will learn how the ideas and techniques of limits developed in the previous unit
can be used to define one of the fundamental concepts of calculus, the derivative, and two related
concepts; rates of change and the slope of tangent line.
3.1 Rates of Change and Slope of Tangent Line
I. Rates of Change
Let a function be defined as y = f(x), if the independent variable x changes from x0 to x1, then the
dependent variable y will change from y0 = f(x0 ) to y1 = f(x1 ). In this case,
 The change in x is said to be an increment in x and denoted as x (read as “delta x”). That is,,
an increment in x from x0 to x1 can be represented as x = x1 -xo or x1 = xo + x.
 The corresponding change in y is said to be an increment in y and denoted by y. That is, an
increment in y from y0 to y1 can be represented as y = y1 -y0 = f(x1 ) – f(x0 )= f(x0 +x) – f(x0 )
Definitions
Given y = f(x)
1. The average rate of change (ARC) of y with respect to x is the change in y resulted from
some change in x. the average rate of change of y between x=x0 and x=x1 is given by
Δy f(x 0 +Δx)-f(x 0 )
ARC = =
Δx Δx
It is also termed as the difference quotient of the function
2. The instantaneous rate of change of y with respect to x is a change in y as a result of an

instant change in x. It represents a change in y at a given point of x and given by .
y f ( x0  x) - f ( x0 )
Instantaneous rate = lim  lim
x0 x x 0 x
It is also termed as marginal rate of change of y at x= x0

Example
Given the function y = f(x) = 3x2 . Find
a) Average rate of change of y for x changes from 1 to 4
b) Instantaneous rate of change of y at x = 1
Solutions
a) x0 = 1 and x1 = 4, and thus x = x1 -x0 = 4-1 = 3
Moreover, y = y1 -y0 = f(x1 ) – f(x0 ) = f (4) – f(1) = 3(42 ) – 3(12 ) = 48 –3 = 45
y 45
Thus, average rate of change =   15
x 3
b) by making x0 = 1 calculate the instantaneous rate of change as
f ( x0  x) - f ( x0 )
lim
x 0 x
f (1  x) - f (1)
 lim
x 0 x
3(1  x)2 - 3(1)2
 lim
x 0 x
3 1  2x  (x)2  - 3
 lim
x 0 x
6x  3(x)2
 lim
x 0 x
x
 lim (6  x)
x 0 x
 lim (6  x)  lim 6  lim x  6  3(0)  6

x 0 x 0 x 0
II. Slope of a Tangent line
Suppose the figure given below be the graph of y = f(x)
A secant line is a straight line which passes through two points on the graph of y= f(x). For
instance, line L2 which passes through P and Q in the above graph is a secant line. The slope of the
secant line which passes through the point (x0 , f(x0 )) and (x0 + x , f(x0 +Δx) is given by
Δy f(x 0 +Δx)-f(x 0 )
= .
Δx Δx

A tangent line is a straight line which touches (but not crosses) the graph of y=f(x) at a given point.
For instances, line L1 in the above graph is a tangent line.
Y L2
Q L1
As it can be seen from the above graph, as x becomes closer and closer to o (as x 0), the point
Q approaches to point P. In other words, as x 0 the secant line L2 will approaches to line L1 and
its slope will approaches to the slope of L1 . This leads to the following formal definition of a
tangent line.
Definition
Given the graph of Y =f(x), the tangent line at (x0 , f(x0 )) is a line that passes through this point
f ( x0  x) - f ( x0 )
whose slope is given by tangent line slope = lim if the limit exists.
x0 x
Remarks
1. The slope of the tangent line at (x0 , f(x0 )) is always equal to the slope of the graph or the
function y = f(x) at (x0 , f(x0 )).
f ( x0  x) - f ( x0 )
2. If lim = 0, then the graph of f has a horizontal tangent line at (x0 , f(x0 )).
x0 x
f ( x0  x) - f ( x0 )
3. If lim =  (or -), then graph of f has a vertical tangent line at (x0 , f(x0 )).
x0 x

Exercise
1. Given y=f (x) write the formula to calculate
a) average rate of change of y with respect to x,
b) instantaneous rate of change f y with respect to x
2. Find each of the following for y = f(x) = x2 +x
a) the average rage of change of y for x changes from 1 to 3
b) the simplified form of the average rage of change of y for changes from x to x + x.
c) the slope of the secant line joining ( 1f(1) and ( 3,f(3))
3.2 Definition of the Derivative
f ( x0  x) - f ( x0 )
In the previous subsection, you learned the special limit lim if it exists, gives the
x0 x
slope of the tangent line to the graph of y= f(x) at (x0 ,f(x0 )). It also gives the instantaneous rate of
change of y at x =x0
dy
Definition Given a function Y = f(x), the derivative of the function f at x, denoted as f ' (x) or , is
dx
dy f ( x  x)  f ( x)
defined as or f '( x)  lim .
dx x 0 x
Remarks
dy
1. f ' (x) is read as “ f prime of x “ and is read as “ the derivative of y with respect to x”
dx
dy
Both f ' (x) and will be used interchangeably to denote the derivative of function f at x.
dx
2. The derivative of a function f at x, f ' (x) , is a function known as a derived function.
The original function f(x) is known as primitive function.
3. The process of finding the derivative of a function f at x is called differentiation.
That is, f‟(x), is obtained by differentiating the primitive function f(x).

Example
Find, f ' (x) , for f(x) = 4x-x2
Solution
Using the above definition, is obtained as
dy f ( x  x)  f ( x)
or f '( x)  lim .
dx x0 x
To make the computation easier, you can use the following two-step process.
y f ( x  x)  f ( x)
Step1 find  and simplify.
x x
f(x+x)-f(x)
Δx
4(x+x)-(x+x)2  -(4x-x 2 )

Δx
4x+4x-x  2 xx  (x)2 -4x+x 2
2

Δx
4x  2 xx  (x)2

Δx
x
 (4  2 x  x)  4  2 x  x
x
Step 2 find the limit of the simplified result in steps to get f(x)
f ( x  x)  f ( x)
f '( x)  lim
x 0 x
 lim (4  2 x  x)
x 0
 4  2x
If our interest is to find the derivative of y=f(x) at a particular point (say at x = x0 ), denoted as
f ' ( x0 ) you can do either of the following
i) First find f ' ( x0 ) , the derivative of f at x, using the above definition and then substitute x0 in
place of x in the resulted expression of f(x), or

f ( x0  x)  f ( x0 )
ii) Find f ' ( x0 ) , directly as f '( x0 )  lim if the limit exists.
x0 x
Notice that the limit expression for f ' ( x0 ) is the same as the one that is used to get the slope of the
tangent line to the graph of f at (x0 ,f(x0 )) and the instantaneous rate if change if y at x = x0 . Thus, the
relationship between the three concepts can be summarized as follows.
f ( x0  x)  f ( x0 )
1) f '( x0 )  lim if the limit exists, measures
x0 x
 The slope of the tangent line to the graph of f(x) at (x0 ,f(x0 ), or
 The instantaneous rate of change of y at x = x 0
 The instantaneous rate of change of y at x=x0
dy f ( x  x)  f ( x)
2) or f '( x)  lim if the limit exists , measure
dx x 0 x
 The slope of the tangent line to the graph of f at any point on the graph or
 The slope of the graph of f at any point of ( x ,f(x), or
 The instantaneous rate of change of y at any point x in its domain.
Example
Given f(x) = x2 + 3, find
a) f ' (2) b) the slope of the tangent line at x = 2
Solutions
a) f ' (2) can be obtained as

f (2  x)  f (2)
f '(2)  lim
x 0 x
(2  x)2  3   22  3
 lim
x 0 x
4  4x  4 x)2  3  7
 lim
x 0 x
4x  (x)2
 lim
x 0 x
x
 lim (4  x)
x 0 x
 lim 4  4 x  lim 4  lim x  4

x 0 x0 x0
b) The slope of the tangent line at x=2 can be measured by f ' (2) and f ' (2) = 4 (see part a)
Thus, the slope of the tangent line at x=2 is 4.
Exercise
1- Write the formula to find the derivative of y = f(x)
a) at x = x 0 b) at any point x in its domain.
2- Find f ' (2) for each of the following functions by using the definition of the derivative
a) f(x) = 2x -3 b) f(x) = 6x –x2
1
c) f ( x)  x -3 d)f(x)=
x
3- Given y = f(x) = 8x-2x2 , find
a) the slopes of the graph of f at x = 1 and x = 2
b) the equations of the tangent lines at x = 1
3.3 Continuity and Differentiability of a Function
In the previews section, you learned how the derivative of a function y = f(x) can be calculated at a
single point of x, specifically, you learned that the derivative of f at x=x0 can be obtained as
f ( x0  x)  f ( x0 )
f '( x0 )  lim if the limit exists.
x0 x

However, there are many situations when this limit can fail to exist and thus the function f do not
have a derivative at x=x0 . In this section you will see some common situations where the above
limit for f ' ( x0 ) can fail to exist.
f ( x0  x)  f ( x0 )
Given y=f(x) if lim exists, then the function f is said to be differentiable at x =
x 0 x
x 0 or f ' ( x0 ) exists. If the limit does not exist, then f is said to be non-differentiable at x = x 0 or
f ' ( x0 ) does not exist.
Conditions for Non Differentiability
I. a function f is not differentiable at x=x0 if f is not continuous at x=x0 . In other words, to be

differentiable at x= x0 , a function must be continuous at x=x0 .
Example
2 x if x  2
Given f ( x)   , determine whether f is differentiable or not at x=2.
4  x if x  2
Solution
First check whether or not the three conditions in the continuity definition are satisfied.
f(2)=4-2=2, thus f(2) is defined.
lim f ( x)  lim 2 x  4 and lim f ( x)  lim 4  x  2 .this means that f is not continuous at x=2,
x 2 x 2 x 2 x 2
and thus f is not differentiable at x=2.
Notice that if the function f is differentiable at x = x0 , then f must be continuous at x=x0 . But the
converse is not always true. That is, there are functions which are continuous at x =x0 but are
not differentiable at x=x0 .
II. The function f is not differentiable at x=x0 if
f ( x0  x)  f ( x0 ) f ( x0  x)  f ( x0 )
lim  lim
x0 x x0 x

Example
Determine whether the function f(x) = x is differentiable or not at x=0.
Solution
From the definition of absolute value function x , f(x) can be rewritten as
 x if x  0
f(x) = x = 
 x if x  0
Then evaluate the one- sided limits as follows
f ( x0  x)  f ( x0 ) ( x  x)  ( x)
lim  lim
x0 x 4 x0 x
 x  x  x
= lim
x 0 x
x
= lim  lim  1   1and
x 0 x 0
f ( x0  x)  f ( x0 ) ( x  x)  x
lim  lim
x 0 x x 0 x
x
= lim  lim 1  1
x0 x x0
Thus, f is not differentiable at x=0 since the left -hand and right-hand limits are not the same.
But you can check that f(x) = x is continuous at x=0 and it can be considered as an example to
show that continuity does not guarantee differentiability.
Notice also that the graph of f(x) = x has a sharp corner at x=x0 . It is generally true that if the
graph of f has a sharp corner at x = x0 , then f is not differentiable at x=x0 .
III. The function f is not differentiable at x=x0 if
f ( x0  x)  f ( x) f ( x0  x)  f ( x)
lim   or lim  
x0 x x0 x
Geometrically, f(x) is not differentiable at x=x0 if graph of f (x) has vertical tangent line at x=x0 .

Remarks
1. A function f is said to be differentiable on the interval (a b) if it is differentiable at each

point between a and b.
2. If a function f is differentiable at each number in its domain, then f is said to be a

differentiable function. Thus the graph of a differentiable function is continuous curve with
no sharp corners and no vertical tersest lines.
Exercise
1. Write the three possible situations where a function f is non differentiable at x=x0 .
2. Explain why continuity of a function of at x=x0 is a necessary but not a sufficient condition
for differentiability of f at x=x0 .
3. For each of the following function determine whether f is differentiable or not at indicated
value of x
x 1 2 x if x  2
a) f ( x)  , at x  2 b) f ( x)   , at x  2
x2 6 x if x  2
c) f ( x)  x  x at x=0 d) f(x) =x-1/3 at x=0
3.4 Rules of Differentiation
dy
Given y=f(x), then f ' ( x) , , or y' all represents the derivative of f at x.
dx
Rule 1 Constant Function Rule
dy
If y=f(x) = K, where k is any constant, then f ' ( x) = 0 or =0
dx
That is, the derivative of a constant or a constant function is zero.
Rule 2 The Power Rule

dy
If y =f(x) = xn , where n is any real number, then f ' ( x) or = nxn-1
dx

Example
Find the derivative of the following functions
1
a) f(x) = x3 b) f(x) = c) f(x) = x
x2
Solutions
a) for f(x) = x3 , f ' ( x) = 3x3-1 = 3x2
1 d 2
b) f(x) = 2
= x-2 (by exponent rule) then, f ' ( x) = ( x  2 )   2 x  2 1   2 x 3  3
x dx x
d d 1 1 1 1
1 f ' ( x)  ( x)  ( x 2 )  x 2
dx dx 2
c) f(x) = x  x 2 (by exponent rule), then
1 1 1 1
 x 2  12 
2 2x 2 x
Rule - 3 Constant Times a function Rule
If g(x) = K f(x) where k is any constant, then g'(x) = kf'(x)
That is, the derivative of constant times a function is a constant times a derivative of a function.
Example
Find the derivative of f(x) = 3x2 .
Solution
d d
f '( x)  (3x2 )  3 ( x2 ) ( Rule 3)
dx dx
 3(2 x21 ) ( Rule1)
 2(2 x)
 6x
Rule - 4 the Sum and Difference Rule
Given two functions f(x) and g(x) with both f '( x) and g '( x) exist,
If h( x)  f ( x)  g ( x) then h '( x)  f '( x)  g '( x) ), and
If h( x)  f ( x)  g ( x) then h '( x)  f '( x)  g '( x)

In other words, the derivative of a sum (or difference) of two differentiable functions is the sum (or
difference) of the individual function derivatives. That is,
d d d
dx
 f ( x)  g ( x )  
dx
f ( x) 
dx
g ( x)  f '( x)  g '( x)

Example
Find the derivatives of the following functions
a) f(x) = 3x2 + 2x b) y  3 x  3x2
Solutions
d
a) f ' ( x) = (3x 2  x)
dx
d d
 (3x 2 )  (2 x) ( Rule  4)
dx dx
d d
 3 ( x 2 )  2 ( x) ( Rule  3)
dx dx
 3(2 x )  2(1x11 )
2 1
( Rule  2)
 3( x)  2( x )
0
 6x  2 (sihce x0  1)
d 3
f '( x)  ( x  3x 2 )
dx
d d
 3 x  (3x 2 ) ( Rule  4)
dx dx
d 1 d
 ( x 3 )  3 ( x2 ) ( Rule  3)
dx dx
b)
1 1 1
 x 3  3(2 x 21 ) ( Rule  2)
3
1 2
 x 3  3(2 x)
3
1
  6x
3 3 x2
Remarks; The sum and difference rule can be generalized for any three or more differentiable
functions. For instances, for four differentiable functions f(x), g(x), r(x) and s(x), the sum and
difference rule can be extended as

d d d d d
( f ( x)  g ( x)  r ( x)  s( x))  f ( x)  g ( x )  r ( x )  s ( x )
dx dx dx dx dx
Example
Find the derivatives of the following functions
a) f(x) = 3x4 -2x3 +x2 -5x+7
5 2 x2
b) y   
3x 2 x 4 9
Solutions
dy d
a)  (3x 4  2 x3  x 2  5x  7)
dx dx
d d d d d
 (3x 4 )  (2 x3 )  x 2  (5 x)  (7) ( Rule  4)
dx dx dx dx dx
d d d d d
 3 x 4  2 x3  x 2  5 ( x)  (7) ( Rule  3)
dx dx dx dx dx
 3(4 x )  2(3x )  2 x  5(1)  0
3 2
( Rules 1 and 2)
12 x3  6 x 2  2 x  5
dy d  5 2 x2 
b)   2  4  
dx dx  3x x 9
d  5x2 4 x2 
   2x   ( ExponenentRule)
dx  3 9
d  5 2  d 4 d  x2 
     ( Rule  4)
dx  3  dx
x (2 x )
dx  9 
5 d 2 d 1 d 2
=  ( x )  2 ( x 4 )  (x ) ( Rule  3)
3 dx dx 9 dx
5 1
 (2 x3 )  2(4 x 5 )  (2 x) ( Rule  2
3 9
10 8 2 x
 3 5
3x x 9
Remark; The value of the derivative of y= f(x) at any specified value of x (say at x=a), denoted as
dy
f '(a)or can be obtained trough the following steps.
dx xa

dy
Step. 1. Find f '(a)or by applying the necessary rules of differential.
dx xa
dy
Step. 2 evaluate f '(a) by substituting a in place of x in the result of f '(a)or from step 1
dx xa
Exercise
1. Find the derivatives of the following functions by using the above rules of differentiations.
-4
a)f(x)= - 3 b)f(x)=x c) Y=
x5
1
d)f(x)=3x 3 -5 x e)Y=5x 4 +6x-3
2. Find f '(a) for
a) f(x)=3x-4 at a = 8 b) f(x) =5 at a=1 c) f ( x)  2 x3  3 x  4 at a  2
3. Give f(x) =x3 -32 +2, then find
a) the slope of f(x) at x=2
b) the equation of the tersest line to the graph at x=2
Rule-5 The Product Rule
If both the derivatives of f(x), f '( x) and the derivative of g(x), g '( x) , exist, then
d d d
dx
 f ( x).g ( x)  f ( x). g ( x)  g ( x)
dx dx
f ( x)
 f ( x).g '( x)  g ( x) f '( x)
That is, the derivative of the product of two differentiable functions, f(x)
and g(x), is equal to the first function, f(x), times the derivative of the second function, g '( x) , plus
the second function, g(x), times the derivative of the first function f '( x) ,.
Example
Find the derivative for a) y =2x2 (3x4 -2) b) f(x) = (x2 +4) (5x4 -5)
Solution
Let f(x) = 2x2 and g(x) = 3x4 -2 then f '( x) = 4x and g '( x) = 12x3

dy
To get use Rule-5 and substitute the above values as
dx
dy

d
 f ( x).g ( x = f(x) g '( x) + g(x) f '( x) = 2x2 (12x3) + (3x4-2) (4x)
dx dx
= 24x5 +12x5 -8x = 36x5 -8x
Notice that you can also differentiate y = 2x2 (3x4 -2) by first multiplying the two expressions
and then applying the previous rules on the simplified single expression. For instances,
Y = 2x 2 (3x 4 -2) = 6x 6 -4x 2
dy d
then = (6x 6 -4x 2 )
dx dx
d d
=6 x 6 -4 (x 2 ) (Rule3and4)
dx dx
5
=6(6x )-4(2x) (Rule-2)
=36x5 -8x
b) Let y = f(x)=(x2 +4) (5x4 -5), then
dy
dx
 f ' ( x) 
d 2
dx

( x  4)(5x 4  5) 
d d
 ( x 2  4) (5x 4  5)  (5x 4  5) ( x 2  4) ( Rule  5)
dx dx
 ( x  4)(20x )  (5x  5)(2 x)
2 3 4
( Rule 1, 2, 3 and 4)
 20x  80x  10x  10x
5 3 5
 30x5  80x3  10x
Remark
The product rule can be extended for more than two differentiable functions. For instances, if
dy
y = f(x).g(x).h(x), then  f ' ( x) g ( x)h( x)  g ' ( x) f ( x)h( x)  h' ( x) f ( x).g ( x)
dx
Rule - 6 The Quotient Rule
f(x)
If y  r ( x)  with g(x)  0and both f'(x)and g'(x) exis t, then
g(x)

dy d  f(x) 
r ' (x)= =  g(x) 
dx dx  
d d
(f(x)).g(x)-f(x). g(x)
= dx dx
g(x) 2
f ' (x).g(x)-f(x).g' (x)


g(x)2
Notice that since subtraction is not commutative, interchanging the numerator in the quotient rule as
f(x).g' (x)-f ' (x).g(x) will leads to a wrong result.
Example
Find the derivatives for the following functions
x2 x2  x
a) y  b) f ( x)  3
2x 1 x 1
Solutions
a) Let f(x) =x2 and g(x) = 2x-1, here f '( x) = 2x and g '( x) =2 then
dy f ' ( x) g ( x)  f ( x) g ' ( x)

dx g ( x)2
(2 x)(2 x  1)  x 2 (2)

(2 x  1) 2
4x2  2x  2x2

(2 x  1) 2
2x2  2x

(2 x  1) 2
x2  x
, then
b) Let y = f(x) = x3  1
d 2  d 
( x3  1) ( x  x)  ( x 2  x) ( x3  1)
dy

dx  dx 
dx ( x  1)
3 2

( x3  1)(2 x  1)  ( x 2  x)(3x 2 ) 


( x3  1)2
2 x 4  x3  2 x  1  (3x 4  3x3 )

( x3  1)2
 x 4  2 x3  2 x  1

( x3  1)2
Notice that it may sometimes advantageous to check whether or not an expression can be simplified
algebraically before blindly using the quotient rule.
Example
2x 4  x 3 2x 4 x3
Find f'(x) for f(x) = f ( x)     2x 2  x
x2 x2 x2
Solution
d
Apply the necessary rules of differentiation to get f'(x) as f ' ( x)  ( 2 x 2  x)  4 x  1
dx
Exercise
1. Differentiate the following functions by using product rule or quotient rule
x2  1
a) f(x)=2x3 (x2 -2) b) f(x) = (3x+2)(4x-5) c) f(x) = (x2 +1) (5x-1) (3x2 ) d)f(x)
2x  3
2. Find and simplify each of the followings
a) f ' ( x) for f(x) = (2x+1) (x2 -3x)
x
b) f'(2) for f(x) =
x 1
2
dy x
c) forY 
x x0 x 1
2

Rule 7: The Inverse Function Rule
Definition
The function y=f(x) has an inverse provided that there is a function g such that the domain of g is
the range of f and y=f(x) if and only if x = f(y). If y=f(x) has an inverse function, then its inverse
function is denoted as f 1 ( x) (read as “f inverse”).
dx
The interest of this sub section is to find for y=f(x). That is, finding the derivative of the
dy
dx
inverse function for y =f(x). One possible way of getting for y = f(x) is that first finding a
dy
formula for the inverse function, f 1 ( x) , and then computing its derivative. But finding a formula
for f 1 ( x) may be tedious or impossible for many types of functions. Thus, for such and other
cases you can use the following general rule to74{ find the derivative of inverse function.
dx 1
If y = f(x) has the inverse function, f 1 ( x) , and f 1 ( x)  0 , then  .
dy dy
dx
The derivative of inverse function is the reciprocal of the derivative of the original function.
Example
dx
Find for y=5x 2 +4x 3
dy
Solution
dy dx
Since =10x+12x 2 , can be obtained as
dx dy
dx 1 1
= =
dy dy 10x+12x 2
dx

3.5 Derivative of Logarithmic and Exponential Function Rule
3.5.1 Derivative of Logarithmic Function Rule
The function y  f ( x)  loga x with a  0 and a  1 is said to be the logarithmic function. The
number a is called the base of the logarithm
dy 1
If y = f(x) y  f ( x)  logax m, then  f '( x)  logea
dx x
Where e is an irrational number approximately equals to 2.718281
dy 1
For instances, If y = log 2x then  f '( x)  loge2
dx x
Natural Logarithmic function Rule
The logarithmic function with base e, i,e, f ( x)  logex  ln x is called natural logarithm function.
If y  f ( x)  ln x, then
dy d
 f '( x)  (ln x)
dx dx
d
= (logex )
dx
1
= logee
x
1
= since logee  1
x
d(lnx) 1
Thus, =
dx x
Example
Find f‟(x) for f(x) =2x4 + 3lnx
Solution
Let Y = f(x) = 2x4 + 3lnx, then

dy d
f ' ( x)   (2 x 4  3ln x)
dx dx
d d
 2 ( x4 )  3 (ln x)
dx dx
1 3
 8x3  3( )  8 x3 
x x
3.5.2 Derivative of Exponential Function Rule
A function y=f(x) =ax with a>0,and and a  1 is said to be an exponential function with base a
If y=f(x)=a x ,then
dy
f'(x)= =a x logae =a x lna
dx
For example,
dy
If y=3x ,then =3x ln3
dx
Natural Exponential Function Rule
The exponential function with base e, i.e, f(x) = ex is said to be natural exponential function.
If y= f(x) = ex ,then
dy
=f'(x)=ex lne
dx
=ex logee
= ex
d x x
Thus, (e )=e
dx

Example 6-17
dy
Giveny=x 3 +2ex -5x, find
dx x=a
solution
dy d 2
= (x +2ex -5x)
dx dx
d d d
= (x 2 )+ (2ex )- (5x)
dx dx dx
d
=2x+2 (ex )-5
dx
=2x+2ex -5
dy
Thys, =2(0)+2e0 -5=5
dx x=0
Exercise
1-Differentiate each of the following functions.
2+ex
a) f ( x)  log5 x b) f(x) = 4(3x ) c) y=
1-2x
3.6 Higher order Derivatives
In the previous sections, you learned the definition and different ways of computing f ' ( x) called the
first derivative for y=f(x). In this section, you will learn the concept of second derivative, third
derivative and so on.
dy
The derivative of a function y = f(x), denoted as f 1 ( x) or , is said to be the first derivative of
dx
the function f.
Since the first derivative, f 1 ( x) , is a function, you can find its derivative. The derivative of the
first derivative is said to be the second derivative of the function f and denoted by
d2y
f '' ( x) or
dx2

Since the second derivative is again a function, you can find its derivative. The derivative of the
second derivative is said to be the third derivative of the function f and denoted by
d3y
f ''' ( x) or f 3 ( x) or
dx3 t o indicate that f(x) has differentiated three times with respect to x.
This process may continue to get the fourth derivative denoted as
4 d4 y 5 d5 y
f (x) or 4 , the fifth derivative, denoted as f (x) or 5 and so on.
dx dx
dny
Generally, the nth-derivative of the function f is denoted by f n ( x)or to indicate that this
dxn
function is found by n successive operations of differentiations, starting with the function f
Example
Find the first, second and third derivative of the function f(x) = 2x3 -4x2 +6x =5
Solution
The first derivative is f ' ( x) = 6x2 -8x+6,
d
The second derivative if f '' ( x) = (6 x2  8x  6)  12 x  8,
dx
d
The third derivative is f ' (x)  f 3 (x)  (12 x  
8) 12
dx
Example
Find the first five derivatives of f(x) = 2x4 -6
f ' ( x) = 8x3
f '' ( x) =24x2
f ''' ( x) =48x
f 4 ( x) =48
f 5 ( x) =0

Exercise
1. Find the first and the second derivatives of the following functions.
A) f(x) = x 3 -2x2 -1 b)f(x)= 2x5 -3
1 1)
c) f ( x )  e) f(x) = ln(3x 2  1)
2
d) f(x) =e(2x
x
3.7 Relative Maximum and Minimum
A relative maximum of a function is a peak, a point on the graph of the function that is higher than
any neighboring point on the graph. A relative minimum is the bottom of a valley, a point on the
graph that is lower than any neighboring point. The relative maxima and minima of a function are
collectively termed as relative extrema.
C Y=f(x)
The above graph shows the relative maxima and minima of a function. The function has a relative
maximum point A and C and a relative minimum at points B and D. Each of these points represents
an extreme in the immediate neighborhood of the point only.
3.7.1 First Order Derivative Test for Relative Extreme
Given y=f(x) which is continuous and possess a continuous derivative, then the first derivative,
f ' (x) plays a major role in our search of its extreme values.
Definition; The values of x where the first derivative f ' (x) =0 are called critical points and the
corresponding values of f(x) are called critical values.

The value of the function at the critical value, f(x0 ), will be
a) a relative maximum if the derivative f ' (x) changes its sign from positive to negative from
the immediate left of the point x0 to its immediate right.
b) a relative minimum if f ' (x) changes its sign from negative to positive from the immediate
left of x0 to its immediate right.
c) neither a relative maximum nor a relative minimum if f ' (x) has the same sign on both the
immediate left and right of point x0 .
+-
a) -+
0 x1 x2
b) Y
y=f(x)
0 x1
In (a) the value of the function at x1 , f(x1 ), is a relative minimum because the sign of the first
derivative changes f ' (x) its sign from negative to positive. The value of the function at x2 , f(x2 ), is a
relative maximum because the sign of the first derivative f ' (x) changes its sign from positive to
negative. In (b) the value of the first derivative at x1 , f ' (x1 ) is zero, the derivative does not change
its sign from one side of x=x1 , to the other side. Point A is called an inflection point.

The point (x1 ,f(x1 )) and (x2 ,f(x2 ) in both (a) and (b) are called stationary points. The value of the
function f(x) at these stationary points (i,e, f(x1 ) and f(x2 ) ) are called stationary values of y.
Note that a relative extremum must be a stationary value, but a stationary value may be associated
with either a relative extremum or an inflection point.
Example Find the relative extrema of the function f(x) = x2 -4x+5
Solution
First find the first derivative of the function; f ' (x) =2x-4, then equate f ' (x) to zero
f ' (x) = 2x-4=0 2x =4x=2 is the only critical value.
Now check the sign of f ' (x) by taking numbers from the immediate left and right of x=2
Let's take 1.9 from the left and 2.1 from the right.
At x=1.9  f ' (x) =2(1.9)-4=3.8-4=-0.2<0
At x=2.1  f ' (x) =2(2.1)-4=4.2-4=0.2>0
Therefore, the sign of f ' (x) changes from negative to positive, hence f(2) = 1 is a relative minimum.
Example: Find the relative exterma for f(x)=x3 -12x2 +36x+8.
Solution
The first derivative of f(x) is f ' (x) =3x2 -24x+36 equating this to zero,
3x2 -24x+36=0
x1 =2 and x2 = 6 are the critical values.
Next check the signs of f ' (x) by taking numbers from the left and right of x = 2 and x = 6
For x=2 take x=1.9 and x=2.1
At x = 1.9, f ' (x) = 3(1.9)2 -24(1.9) +36 = 1.23

At x = 2.1, f ' (x) = 3(2.1)2 -24(2.1) + 36 = -1.17
Since the sign of f ' (x) changes from positive to negative, f (20) = 40 is a relative maximum.
For x = 6 take x = 5.9 and x = 6.1
At x =5.9, f ' (x) =3(5.9)2 -24(5.9)+36 = -1.17
At x=6.1, f ' (x) = 3(6.1)2 -24(6.1) + 36 = 1.23
Since f ' (x) changes its sign from negative to positive, f (6) =8 is a relative minimum.
Example
Find the relative exterma for f(x) = (x3 -1)4
Solution
The critical values of the function obtained as
f ' (x) = 4(x3 -1)3 (3x2) = 0
(x3 -1)3 = 0 or 3x2 = 0
x3 =1 or x=0  x = 1 or x = 0 are the critical values.
Take numbers to the immediate right and left of x = 1, for example, x = 0.8 and x = 1.1
f ' (0.8)= 4 (0.8)3-1)3 (3(0.8)2) = -0.8925<0
f ' (1.1)=4 (1.1)3-1)3 (3(1.1)2 ) = 0.52656>0
Therefore, since the sign of f ' (x) changes from negative to positive, f(1) =0 is a relative minimum.
For x = 0, take numbers from the immediate right and left of x =0, say x = -0.1 and x = 0.1
f ' (-0.1) =4(-0.1)3-1)3 (3(-0.1)2) = -0.12
f ' (0.1)=4((0.1)3 -1)3 (3(0.1)2) = -0.119
Since f ' (x) does not change its sign, f (0) = 1 is neither a relative maximum not a relative minimum.
It is an inflection point.

Exercise
1. Define a) an inflection point b) Stationary point
2. For the following functions Find i) the critical values of f
ii) the relative extremum by using first order test
a) f(x) =x3 -6x2 +9x+1 b) f(x=2x2 -x4 c) f(x)=2x3 +4
3.7.2 Second Order Derivative Test for Relative Extremum
The second derivative can be used to find the relative maxima or relative minima of a function. This
test is more convenient than the first derivative test, because it does not require you to check the
derivative sign to both the left and the right of x0.
If first derivative of a function f at x =x0 is f ' (x) = 0, then the value of function at x0 , f(x0 ), will be
i) a relative maximum if the second derivative value at x0 is negative. That is, if f '' (x) < 0.
ii) a relative minimum if the second derivative value at x0 is positive. That is, if f '' (x) > 0.
But if f '' (x0 ) =0, the stationary value f(x0 ) can be either a relative maximum, or a relative minimum,
or even an inflection value. In this case we must revert to the first derivative test, or to another test.:
Example
Find the relative extremum of the function f(x) = 4x2 -x by using the second derivative test.
Solution
First find the first derivative of the function and then the critical value
f ' (x) = 8x-1and thus x=1/8 is the critical value.
Then find the second derivative f '' (x) = 8 and check its sign at the critical value  f '' (1 8) = 8 >0
Therefore, f (1/8) = -1/16 is the relative minimum

Example
Find the relative exterma for y=g(x)=x3 -3x2 +2 using the second derivative test.
Solution
First derivative of the function is g' (x) =3x2 -6x, equate this to zero to get
3x2 -6x = 0  x (3x-6) =0  x=0 or x=2 are critical values
Stationary values are g (0) =2 and g (2) = -2
To check whether these are the relative maximum or minimum values, find the second derivative
g"(x) =6x-6 and check its sign at x = 0 and x = 2 as
g" (0) =6(0)-6 = -6<0 and g" (2) = 6(2)-6 = 6>0
Hence g(0) =2 is a relative maximum and g(2) =-2 is a relative minimum.
Steps for finding a minimum or a maximum value by suing second derivative test;
Step 1 Find the first derivative, f ' (x) for the given function y=f(x)
Step 2 Find the critical values of the function (values of x that make f ' (x) = 0
d2y
Step 3 Find the second derivative, f '' (x) or of the function y = f(x)
dx2
Step 4 Put x = x0 in step 3 (i.e. evaluate f '' (x) at x0 ).
From step 4, if f '' (x0 ) > 0, f(x0 ) is a relative minimum.
if f '' (x0 ) < 0, f(x0 ) is a relative maximum.
Example
Find the relative extrema of the function f(x) = x4 + 2x3 -3x2 - 4x + 4
Solution
Follow the above steps

Step 1: f ' (x) = 4x-3 + 6x2 - 6x - 4
Step 2: solve f ' (x) = 4x3 + 6x2 -6x – 4 =0 to get
x0 = 1,x0 = -1/2 and x0 =-2 as the critical values.
Step 3: f '' (x) = 12x2 + 12x - 6
Step 4: at x0 =1. f '' (1) = 12 + 12 – 6 =18 > 0
at x0 = -1/2, f '' (-1 2) =12(1/4) + 12(-1/2) -6 = -9 < 0
at x0 = -2, f '' (-2)= 12(-2)2 + 12(-2) - 6=18 > 0
Therefore, f(x) has a relative minimum at x = 1, f(1) = 0and x=-2, f(-2) = 0. It has a relative
maximum at x =-1/2, f (-1/2) = 81/16
Exercise; Use the second derivative test to find the relative extrema of the following functions.
16 x2 4
a) f(x) =5x2 - 2x +1 b) f(x) = -x3 + 3x2 - 3x + 3 c) f(x) =x+ d) f(x) = 
x 4 x
3.8 Economic Applications of Derivatives
In this section you see the importance of derivative in solving some standard economic problems
like deriving marginal function from the total function and calculating point-price elasticity of
demand or supply for a good.
3.8.1 Marginal Analysis
You learned, in the previous sections, that the derivative gives the instantaneous or marginal rate of
change of the dependent variable, y, at a given point of x. Much of economics in fact is concerned
with just this sort of analysis. For example, the major concern of theory of firms is to study how a
change in firm‟s output level affects its costs and revenues. Thus, using derivatives one can perform
what economists refers as marginal analysis, which is of central importance in economics.
Given a total function y= f(x) (which may be total cost function, total revenue function, total
product function etc),

f ( x)
i) Its average value function can be obtained as A( x) 
x
dy
ii) Its marginal value function can be obtained as mf ( x)  f ' ( x) 
dx
I. Relationship between Total, Average, and Marginal Cost Functions
C dC
Given C= f(x) as total cost function, AC  and MC 
Q dQ
Example
Suppose that the short-run total cost function of a given firm is given as
C  Q3  3Q2 15Q 7 , Then find
a) Average cost function
b) Marginal cost function
c) The rate of change of average variable cost(AVC) with respect to change in output level
Solutions
a) AC  Q  Q2  3Q  15  27
C Q
dC
b) MC   3Q2  6Q  15
dQ
TVC
c) First calculate average variable cost using the formula AVC 
Q
TVC Q3  3Q2  15Q

That is, AVC    Q2  3Q  15
Q Q
d(AVC) d
Then rate of change of AVC with respect to Q as  (Q2  3Q  15)  2Q  3
Q dQ
Example
Given the total cost function as C= f(Q), describe the relationship between MC and AC by finding
the rate of change of AC with respect to Q.

Solution
C f(Q)
Since AC   , its rate of change can be calculated through quotient rule as
Q Q
d
Qf ' (Q)  (Q)f(Q)
d(AC) d f(Q) dQ
 ( )
dQ dQ Q Q2
Qf ' (Q)  f(Q) d
 since (Q)  1
Q2 dQ
f ' (Q) f(Q)
  2
Q Q
1 ' f(Q) 1
 f (Q)   MC  AC
Q Q  Q
 MC  AC and this result leads to the following important relationships between
d(AC) 1
Thus,
dQ Q
MC and AC.
i) When AC is declining, MC< AC. That is, when AC falls, MC is below AC.
ii) When AC is constant, MC=AC.
iii) When AC is rising, MC> AC. That is, when AC rises, MC is above AC.
II. Relationship between Total, Average, and Marginal Revenue Functions
The total revenue (TR) of either a competitive firm or a simple monopolist is the unit price of its
output (P) times the quantity it produce or sell (Q). That is, total revenue for any type of firm can be
obtained as TR= P.Q
TR
Moreover, average revenue is given by AR  and marginal revenue (MR), which represents the
Q
dTR
change in total revenue for each additional unit of sales (Q) can be obtained as MR 
dQ
A competitive firm treats the price as constant value, equal to the market price ( P ). Thus, in a
competitive firm TR  P.QandAR  MR  P .

But a monopolist is the only firm in the industry and so recognizes that the amount it can sell is
determined by the price it sets according to the market demand function, Q= d (P). Thus, to get the
total revenue of a monopolist firm, first write its inverse demand function as P  D1 (Q)  f(Q) and
then multiply by the level of output Q. That is, the monopolist total revenue function can be
obtained as
TR= PQ= f (Q).Q
TR PQ
Since, AR    P  f(Q) ,the average revenue function (AR) of a monopolist firm always
Q Q
equal to its inverse demand function (P).
Again since TR is the product two functions, f(Q) and Q, the marginal revenue function can be
further simplified through the product rule a follows.
dTR d
MR   (f(Q).Q)
dQ dQ
d d
 Q. (f(Q)) f(Q) (Q)
dQ dQ
 Q.f ' (Q)  f(Q)
 Q.f ' (Q)  AR since f(Q)  P  AR
Thus, in a monopolist firm the relationship between MR and AR can be expressed as

MR  Q.f ' (Q)  AR .moreover, under the usual assumption of negatively slopped demand curve
(i.e, f ' (Q)  0 ), the term Qf ' (Q) will be negative and thus MR<AR. In other words, when the
monopolist‟s demand curve is downward slopping, MR is always lies below AR.
Example
Suppose that the demand function of a monopolist firm is given by Q=20-0.5P, then find MR.
Solution
First find the inverse demand function in terms of Q as Q= 20-0.5P  0.5P= 20-Q  P= 40-2Q
TR as TR= PQ= (40-2Q).Q = 40Q- 2Q 2 , and then calculate MR as
dTR d
MR   (40Q 2Q2 )  40  4Q .
dQ dQ

3.8.2 Point-Price Elasticity of Demand
In your microeconomics course you learned the concept of price elasticity of demand. Price
elasticity of demand measures the responsiveness of buyer(s) to changes in price of a good. In this
sub section you will see how derivative helps in computing price elasticity of demand for any type
of demand function.
Given a demand function as Q = f(P), the price elasticity of demand between two points on the
demand curve can be obtained as
ΔQ P P
εd   (slope) and it is termed as average or arc Price elasticity of demand.
ΔP Q Q
The point-price elasticity of demand measures price elasticity of demand at particular level of P or
at a point on the demand curve. Since the derivative measures the slope a function at a given point,
dQ ΔQ
the derivative can be used instead of to calculate point-price elasticity of demand.
dP ΔP
dQ P
Thus, the point-price elasticity of demand can be obtained as ε d 
dP Q
Example
Find the price elasticity of demand at P = 4 for demand function of Q = 25- 4P + P2 .
Solution
dQ
First find and evaluate its value at P = 4 as
dP
dQ d dQ
 (25  4P  P 2 )  4  2P and  4  2(4)  4 .
dP dP dP p4
Then find the value of Q at P= 4 as Q(4)  25  4(4) 42 . Finally, compute ε d as
dQ P 4
εd  .  4( )  0.64 .
dP P4 Q(4) 25

Exercise
1. Suppose that the total cost function of a given firm is given by
C  2Q3  Q2  4Q, Then find
a) the AC function b) the marginal cost function c) the slope AC
2. Suppose that the demand function of a monopolist firm is given by Q=125-0.5P, then find
a) the average revenue function
b) the marginal revenue function
c) the values of AC and MR at Q=25 and compare the results.
3. Find the price elasticity of demand and state the nature of demand for the following demand
function at the indicated values of P.
a) Q  10  P at P  4
20
b) Q  at P  3
P 1
3.8 Optimization: Unconstrained and constrained
Example (unconstrained)
Find the relative extreme of the average cost function by using the first derivative test
AC = f (Q) = Q 2 - 5Q + 8 where Q is the level of output
Solution
The first derivative of the function is f ' (Q) = 2Q – 5 and equating this to zero gives the critical
number 2Q-5 = 0, Q = 5/2 = 2.5
Taking numbers from the immediate left and right of Q = 2.5, say Q = 2.4 and Q =2.6.
f ' (2.4)= 2(2.4 – 5 = 4.8 – 5 = -0.2<0
f ' (2.6)= 2(2.6) - 5 = 5.2 - 5 = 0.2>0
Therefore, since f ' (Q) changes its sign from negative to positive AC at Q = 2.5 (i,e, f(2.5)) is a
relative minimum
Example
Let the R (Q) and C (Q) be the revenue and cost functions respectively and
R (Q) = 1200Q – 2Q2 and C(Q) = Q3 – 61.25Q 2 + 1528.5 Q + 2000
Then find
a) the profit maximizing level of output
b) the maximum profit
Solutions
There are two ways to solve this problem
i) by using the second derivative test or
ii) by using the marginal revenue=-marginal cost approach.
You can solve the problem by using (i) as follows.
a) Profit =Total Revenue – Total Cost= Q3  59.25Q2  328.5Q  2000
Next find the critical values from the profit function by finding the first derivative of the profit
function and equating to zero.
'
π , (Q)  3Q2  118.5Q 328.5  0 Q  3 and Q  36.5 are the criticalvalues
Then check the sign of the second derivative  at Q=3 and Q=36.5
d2π
π'' (Q)   6Q  118.5
dQ 2
d2π
At Q  3,  6(3) 118.5  100.5  0
dQ 2
d2π
At Q  36.5,  6(36.5) 118.5  100.5  0
dQ 2
Therefore Q = 36.5 is the profit maximizing level of output.
b) The maximum profit can be found by directly substituting Q= 36.5 in to the profit function as
  (36.5)3  59.25(36.5)2  328.5(36.5)  2000  16318.44

Remark The above problem can also be solved by MR- MC Approach (ii). This requires equating
MR and MC and solving for Q (the profit maximizing level of output) the result will be the same.
Example (constrained for all values of q >0)
Suppose the total cost of producing a certain commodity is given by C (q) =3q2 + q + 48
a) Find the level of output at the smallest value of the average cost.
b) Find the level of output, which equates the average cost and marginal cost.
Solutions
C(q) 3q2  q  48 48
a) AC=A(q)=   3q  1 
q q q
48 3q2  48 3(q2 16) 3(q  4)(q  4)

A (q)  3  2 
'
  ,q  0
q q2 q2 q2
By equating the first derivative of the average cost function to zero, you get
3(q  4)(q  4)
 0  q  4 for q  0
q2
Then find the second derivative of the average cost function
96
A'' (q)  and it is positive at q = 4. Thus, AC will be minimal at Q= 4 units
q3
b) First find the average cost and marginal cost function of the total cost function and equate them.
C(q)  A(q)
48 48
6q  1  3q  1   3q 
q q
 q 2  16
 q  4 since q  0 which is the same as in(a)

Exercise
1. Suppose that the total cost of a firm is given by
1
C  100  2Q  Q , Then find
10
a) the level of output Q at which the average cost(AC) is minimal
b) the minimum average cost
c) the level of output at which marginal cost is equal average cost
1
2. Suppose that the total cost of a firm is C  100  2Q  Q , and its demand function is
10
1
P  20  Q , Then find
5
a) the level of output (Q) and the price (P) required to maximize the total revenue (TR)
b) the maximum value of total revenue
c) the level of output (Q) and the price (P) required to maximize the profit
d) the maximum profit
e) the level of output which equates marginal revenue and marginal cost.

UNIT FOUR
Differential Calculus of Multivariable Functions

In the previous section you have discussed optimization with single independent variable give
mainly as Y  f x  Many economic activities, however involve functions of more than one
independent variables given in the form of Z  f x, y, ........ Thus, in this section you will discuss a
way of finding the extreme valves of a function that involves two or more choice variables.
Particularly, the discussion will concentrate on function with of two choice variables, z  f x, y  .
4.1 Partial Derivatives
Partial derivative is the derivative of functions of several variables. Let Z=f(x, y) be a function of
two independent variables. If the variable y is held fixed at a value of y=y0 the relation Z= f(x, y0 )
expresses Z as a function of one variable x.
So long as the curve of the function is smooth, there will be a tangent line in each point of the curve
and the slope of this tangent line can be calculated by differentiating z with respect to x from the
relation Z= f(x,y0 ). This derivative is found in usual way as a limit according to the following
expression:
df ( x, y0 ) f ( x  x, y0 )
 lim if the limit exists
dx x 0 x
Z
This limit is called the partial derivative of Z with respect to x and usually denoted by .
x
4.1.1 First Order Partial Derivatives
Definition: let Z=f(x,y) be a function of Z with x and y. Then
Z Z f ( x  x, y0 )
The partial derivative of Z with respect to x , denoted as , is defined as  lim
x x x0 x
Z Z f ( x0 , y  y)
The partial derivative of Z with respect to y, denoted as , is defined as  lim .
y y y0 y
Notice that calculating the partial derivative requires all other independent variables to be constant
except the variable in which the derivative is being carried out. For example, if Z= f(x, y, w, m) and

Z
if one wants to calculate , all the independent variables should be kept constant except variable
y
y and by doing this the response of the dependent variable Z only due to the change in variable y
can be measured.
Remarks
Partial derivatives can be evaluated using essentially the same techniques as those used for
evaluating ordinary derivative (i,e, derivative of y= f(x)). To compute the partial derivatives apply
any of the necessary techniques simply by treating all the independent variables except the one with
respect to which you are differentiating as constant. Therefore, you can use the power rule, product
and quotient rules, and chain rules in the usual way whenever necessary.
Z
Example: Calculate when Z  x 3  5xy2  2 y 3 .
y
Solution
Z
To finding , you should treat x as a constant and differentiate Z with respect to y.
y
Z
= 0+5x (2y) +2(3y2 )= 10xy+6y2
y
Z
Example: Calculate for Z  x 2  y 2 .
x
Solution
Z
Treat y as constant and use the chain rule to get as
x
Z ( x 2  y 2 ) 2 1 2
1
1 x
= = ( x  y 2 ) 2 ( 2 x) =
x x 2 x  y2
2
Exercise
Z Z
Calculate and for the following functions
x y
a) Z  3e 2 x  5 ln x  7 b) Z  xy2  x 2 y c) Z  x ln y  y 2 ln x d) Z  e 2 x3 y .

4.1.2 Higher-order partial Derivatives
Note that the partial derivative obtained from the original function y  f ( x1 , x2 ,    xn ) are said
to be first-order partial derivatives just to distinguish from higher – order partial derivatives.
Moreover, from the higher – order partial derivatives the ones which have significance importance
to describe various characteristics of economic functions are second-order partial derivatives. So,
due to this reason, we will confine our discussions on such type of partial derivatives.
Now, let us start our discussion for y  f ( x1 , x2 ) and we will generalize it for n-variable case latter.
As we discussed in the previous subsection, the function y  f ( x1 , x2 ) has two first-order partial
y y
derivatives which denoted as or f1 and or f 2 . Moreover, each of these partial derivatives are
x1 x2
a gain a function of x1 and x2 . So, we can continue differentiating each of them partially with
respect to x1 and x2 . We can get the following four possible second – order partial derivatives.
y
1. When is differentiated with respect to x, while holding x2 as a constant, we have
x1
  y  z y
  and denoted as 2 or f11
x1  x1  x1
y
2. When is differentiated with respect to x2 keeping x1 as a constant, we have
x1
  y  2 y
  and denoted as or f12 ;
x2  x1  x2 x1
y
3. When is differentiated partially with respect to x1 we have,
x2
  y  2 y
  and denoted as or f 21 and
x1  x2  x1x2
y
4. When is differentiated with respect to x 2 , holding x1 as a constant, we have
x2

  y  2 y
  and denoted as 2 or f 22
x2  x2  x2
i. To make the notations simple and clear, we will often use f 1 and f 2 to denote the first-order
partial derivatives with respect to x1 and x2 respectively and f11 , f12 , f 22 and f 22 to denote the
second-order partial derivatives.
ii. f11 and f 22 are called pure or own partial derivatives. f11 indicates that the given function
y  f ( x1 , x2 ) is first partially differentiated w.r.tx1 . f 22 indicates that y  f ( x1 , x2 ) is first
differentiated partially with respect to x2 .
iii. f12 and f 21 are called cross or mixed partial derivatives f12 indicates that y  f ( x1 , x2 ) is first
partially differentiated w.r.tx2 and then with respect to x1 .
Now, before defining the second-order partial derivatives for n-variable case, let us see how we
compute them for y  f ( x1 , x2 ) with the help of the following example.
Example
Find the second – order partial derivatives for 3x1  2x23  x13 x22
a) First, compute f1as
y 
f1   (3x1  2 x23  x13 x22 )  3  0  3x12 x22  3  3x12 x22
x1 x1
The differentiate f1 w.r.t.x1 to get f11 as
   
f11  ( f1 )  (3  3x12 x22 )  (3)  (3x12 x22 )  0  6 x1 x22  6 x1 x22
x1 x2 x1 x1
and also diffentiate f1 w.r.t x2 to get f12 as
y   
f12  ( f1 )  (3  3x12 x22 )  (3)  (3x12 x22  0  6 x12 x2  6 x12 x2 .
x2 x2 x2 x2
y 
Second, compute f 2 as f 2   (3x1  2 x23  x13 x22 )  6 x22  2 x13 x2
x2 x2

Then differentiate f 2 w.r.t x1 to get f 21 as
   
f 21  ( f2 )  (6 x22  2 x13 x2 )  (6 x22 )  (2 x13 x2 )  0  6 x12 x2  6 x12 x2 and
x1 x1 x1 x1
also differentiate f 2 w.r.t x2 to get f 22 as
   
f 22  ( f2 )  (6 x22  2 x13 x2 )  (6 x22 )  (2 x13 x2 )  12x2  2 x13
x2 x2 x2 x2
Therefore, the second-order partial derivatives for this function are
f11  6 x1 x22 f 21  6 x12 x2

f12  6 x12 x2 f 22  12x2  2 x13
Notice that the cross partial derivatives are equal. That is,
f12  f 21  6 x12 x2.
b) First compute the first-order partial derivatives as
y  3 2x2  3 2 x2
f1   ( x1 e )  ( x1 )e  3x12 e 2 x2 , and
x1 x1 x1
y   2 x2
f2   ( x13 e 2 x2 )  x13 (e )  x13 2e 2 x2  2 x13 e 2 x2
x2 x2 x2
Then obtain the second –order partials as follows: 3x12 e 2 x2
  
f11  ( f1 )  (3x12 e 2 x2 )  (3x12 )e 2 x2  6 x1e 2 x2 ;
x1 x1 x1
   2 x2
f12  ( f1 )  (3x12 e 2 x2 )  (e )3x12  2e 2 x2 (3x12 )  6 x12 e 2 x2 ;
x2 x2 x2
  
f 21  ( f2 )  (2 x13 e 2 x2 )  (2 x13 )e 2 x2  6 x12 (e 2 x2 )  6 x12 e 2 x2 ; and
x1 x1 x1
   2 x2
f 22  ( f2 )  (2 x13 e 2 x2 )  (e )2 x13  2e 2 x2 (2 x13 )  4 x13 e 2 x2
x2 x2 x2
Therefore, the second – order partial for the function are
f11  6 x1e 2 x2 f 21  6 x12 e 2 x2

f12  6 x12 e 2 x2 f 22  4 x13 e 2 x2

Again notice that the cross-partial derivatives are equal. That is,
f12  f 21  6x12 e 2 x2
Just as we have seen for Y  f ( x1 , x2 ), the second-order partial derivatives for n-variable function
can be defined analogously as follows:
Definition
The function y  f ( x1 , x2 , . . . xn ), has n first-order partial derivatives and n 2 second-order partial

derivatives each denoted as
2 y 
or f ij  ( fi )
x j xi x j
Where f ij is the second-order partial obtained first differentiating the function with respect to xi
and then differentiating the result f i with respect to x j for i, j  1, 2, . . . n.
The partial derivatives in form of fi i or f j j where i  j are called pure or own partial
derivatives and those in a form of f i j where i  j are called cross or mixed partial derivatives.
Example
Find the second-order partial derivatives for y  2x12  3x1 x2  x22  5x1 x3  4 x32
Solution for this function we have a group of 32  9 second-order partial derivatives which are
First order partials Second-order partials
f1 f11 f12 f13
f2 f 21 f 22 f 23
f3 f 31 f 32 f 33
Out of the nine second-order partials, f12, f 21 , f13 , f 31 , f 23 and f 32 are cross partial derivatives and
f12  f 21 , f13  f 31 and f 23  f 32

 
f11  ( f1 )  4 x1  3x2  5x3   4
x1 x1
 
f12  ( f1 )  4 x1  3x2  5x3   3  f 21
x2 x2
 
f13  ( f1 )  4 x1  3x2  5x3    5  f 31
x3 x3
 
f 22  ( f2 )  3x1  2 x2   2
x2 x2
 
f 23  ( f2 )  3x1  2 x2   0  f 32 and
x3 x3
 
f 33  ( f3 )   5x1  8x3   8
x3 x3
Exercises
1. List the first-order and second-order partial derivatives for a function having four independent
variables with their notations.
3. Find the second-order partial derivatives of each of the following functions
a) y  x1 x2 b) y  x1 x22  3x1  5x2 c) y  n3x1  x2 
 
d) y  Ax1 x2 , Where A, and  are constants. e) y  x1 x2 x3
2 4 5
4.1.3 Composite Function (The Chain Rule)

dy
Example: Find if y=2u2 +1 and u= 3x-1.
dx
Solution
dy du
First find and as
du dx
dy d du d
= (2u 2 +1)=4u and =  3x-1 =3
du du dx dx

dy dy dy du
Then apply the chain rule to get as  .  4u(3)  12u
dx dx du dx
dy
Since Y is regarded as a function of x, should be expressed interms of x.
dx
dy dy
To do this, substitute the value of u in =12u to get  12u  12((3x 1))  36 x 12
dx dx
The chain rule is particularly very useful to differentiate the following kinds of functions.
a) When y=[u(x)]n and multiplying u(x) n times becomes a tedious process. In this case, you can
dy dy
apply the power and chain rules to get as =n[u(x)]n-1u'(x) for any integer n.
dx dx
Example
dy
Find fory=(x 3 +4)7
dx
Solution
Let u(x)=x 3 +4,thenu'(x)=3x 2
dy
=n[u(x)]n-1u'(x)
dx
=7(x 3 +4)6 .(3x 2 )
=21x 2 (x 3 +4)6
dy
Or equivalently you can find as
dx
dy d 3 7
= (x +4)
dx dx
d
=7(x 3 +4)7-1. (x 3 +4)
dx
=7(x +4) .(3x 2 )
3 6
=21x 2 (x 3 +4)6
b) when y= n u(x)

1
dy
In this case by rewriting f(x) as f(x)= n u(x)=[u(x)]n and applying the power and chain rules,you can get as
dx
1
dy 1
=  u(x)n .u'(x)
-1
dx n
Example Find f ' (x) for f(x)= 3 (4x 2 -1)
Solution Let u(x)=4x2 -1 so that u' (x)= 8x
 
1
then since f(x) = 3 4x 2 -1= 4x 2 -1 3 =[u(x)]3 ,you can get f'(x) as
dy 1
f'(x) =  u(x) 
dx n
1
1 -1
= [4x 2 -1]3 .8x
3
-2
1 2
= (4x -1) 3 .8x
3
1 8x
= 2
.8x= 2
3(4x 2 -1) 3 3(4x 2 -1) 3
Or equivalently, you can getf'(x)as

dy d
f'(x)= = 3 4x 2 -1
dx dx
1
d 2
= (4x -1) 3
dx
=  4x 2 -1 3 . (4x 2 -1)
1
1 -1 d
3 dx
=  4x 2 -1 3 .(8x)
-2
1
3
8x
= 2
3(4x 2 -1) 3
c) When y=ln (u(x))
dy dy 1
In this case, apply the natural logarithmic function and chain rules to get as = .u'(x)
dx dx u(x)
Example

dy
Find for y = ln (7x2 -5x)
dx
Solution Let u(x)=7x2 -5x so that u‟(x)=14x-5
dy 1
 u '( x)
dy dx u( x)
Since Y = ln (7x2 -5x)=ln (u(x)), you can get as
dx 1 14 x  5
 (14 x  5)  2
(7 x  5x)
2
7 x  5x
dy
or equivalently you can find as
dx
dy d
= ln(7x 2 -5x)
dx dx
1 d
2
. (7x 2 -5x)
(7x -5x) dx
1 14x-5
= 2
(14x-5)= 2
(7x -5x) 7x -5x
d) When Y = eu(x)
In this case, you can apply natural exponential function and
dy
chain rules to get as
dx
dy u(x)
=e .u'(x)
dx
Example
4
+x 3 -2x)
Find f '( x) for f(x)=e(3x
Solution
4
+x3 -2x)
Let u(x)=3x 4 +x3 -2x, then u' (x) = 12x3 +3x 2 -2. More over, f(x)=e(3x =eu(x) ,thus you can get f '(x) as
f'(x)= eu(x) .u'(x)
4
+x3 -2x)
= e(3x . (12x3 +3x 2 -2)
4
+x3 -2x)
= (12x3 +3x 2 -2)e(3x

Remark
The chain rule can be extended for composition of three or more functions. For instance for case of
dy dy dy du dr
three functions with y = f(u), u=g(r) and r=h(x), can be obtained by  . .
dx dx du dr dx
Example
dy
Find for y=ln 1-x 2
dx
Solution
dy d
= (ln 1-x 2 )
dx dx
1 d d
= . 1-x 2 . (1-x 2 )
1-x 2 dx dx
1
1 1 -1
= . (1-x 2 ) 2 .(-2x)
1-x 2 2
-1
1 1 2) 2
= . (1-x .(-2x)
1-x 2 2
1 1
= . .(-2x)
2
1-x 2 1-x 2
-2x -2x -x
= = =
2 1-x . 1-x2 2 2(1-x ) (1-x 2 )
2
Exercise
1. Differentiate each of the following by using the chain rule
1
a) f ( x)  ( x 4  5)5 b) Y=
(x  4)2
2
4 2
5)
c) f(x) = d)Y =e(2x
x  3x
2 1
e) f(x) = ln(x 2  4 x  2)
2
f) Y = e1+lnx
2) Find the derivative of each of the following and simplify the result whenever it is possible.
1+x 2
a) f ( x) = 4x 2
x 1 2
b)f(x)=(x  1)ln( x  1)
2 2
c) y = ln ( )
1-x 2

4.2 Total Differencial and Derivatives

4.2.1 Total Differential
In the first part of this chapter we learned about partial derivative. Partial derivative indicates or
measures the change in the dependent variable, y, when there is an infinitesimal (or a very small)
change in one independent variable while others are kept as constant. The change in the dependent
variable may also come from a simultaneous change in all independent variables. Now the question
is how we find or measure the change in the dependent variable when all independent variables are
changes simultaneously?
In this section, therefore, we will address this problem with the concept known as total differential.
Now just as we did in the previous sections, let us first elaborate the concept for y  f ( x1 , x2 ) and
we will extend it for n-variable function.
y
Given y  f ( x1 , x2 ), we learned that or f 1 gives the change in y when there is a small change
x1
in x1 (x1  0) holding x2 as constant. Now if we suppose that x1 changes by some amount,
y
x1 , while x2 holding as constant, the change in y will be .x1 .
x1
y
Similarly, since or f 2 represents the change in y for a small change in x2 (x2  0), the change
x 2
y
in y as a result of change in x2 by some amount, x 2 will be .x2 .
x2
Therefore, the total change in y(say , y) due to small change in x1 and x2 will be:
y y
y  x1  x2
x1 x2
Notice that, when the change in x1 and x2 becomes infinitesimal (That is, as x1  0 and x2  0) ,
x1 becomes dx1 and x2 becomes dx2. Moreover, as x1  0 and x2  0, the corresponding
change in y becomes infinitesimal (i.e, y  0) and thus y becomes dy.

So, using these notational relationships and from the above formula for y, the total change in
y (dy) as a result of an infinitesimal change in both x1 and x2 (dx1 and dx2 ) will be equal to:
y y
dy  dx1  dx2 or dy  f1dx1  f 2 dx2.
x1 x2
In this formula,
y
. dx1 is called the partial differential of y  f ( x1 , x2 )w.r.t x1
x1
y
. dx2 is called the partial differential of y  f ( x1 , x2 )w.r.t x2 , and
x2
y y
. dy or dx1  dx2 is called the total differential of y  f ( x1 , x2 ).
x1 x2
The definition and interpretation of differentials can be extended in an analogous manner to

function of several variables as follows:
For a general function y  f ( x1 , x2 , . . . xn ) , the total differential in y is given by
dy  f1dx1  f 2 dx2  . . .  f n dxn
And it measures the total change in y when all variables x1 , x2 , . . .xn are changes simultaneously.
Remarks
1. In the process of finding total differentials, we assumed that all independent variables are
mutually exclusive (That is, each independent variable can change with out affecting or changing
the others).
2. There are two techniques or methods of finding the total differential of a function. These are:
i. Using partial derivative method
In this method, first we compute partial derivatives of the function and then we use the formula
given above for dy to get the total differential.

ii. Using rules of (total) differential
In this method, we consider each independent variable as a function and we apply the appropriate
rules of differentiation for univariate function like power rule, sum or difference rule, product rule,
quotient rule, chain rule and so on based on the way the variable or the combination of variables are
presented in a given function. In other words, in this method, we use the following rules of total
differential.
Rules of Total differential
Let k be a constant and u and v be each considered as a variable or a function. Then
Rule 1: Constant Rule: dk  0
According to this rule, the total differential of a constant is zero. For instance,
d (3)  0 d (500)  0, and dA  0 if A is considered as a constant.
 
Rule 2: Power Rule: d cu n  cnu n1du , where c is a constant.
   
For instance, d 5u 3  5 3u 2 du  15u 2 du
Notice that we can apply this rule for x1 and x2 if they are presented in power form. For example,
     
d x13  3x12 dx1 , d 4x25  4 5x24 dx2  20x24 dx2 , d x1   1dx1  dx1 and d x2   dx2 .
Rule 3: Sum or difference Rule: d u  v  du  dv
     
For instance, d u 2  5v 3  d u 2  d 5v 3  2udu  15v 2 dv
In terms of x1 and x 2 , this rule for example, can be applied as
       
d 3x12  4x23  d 3x13  d 4x23  6x1dx1  12x22 dx2 and d 5x13  6x2  15x12 dx1  6dx2 .
Rule 4: Product Rule: d uv  vdu  udv
     
For instance, d u 3v 2  d u 3 v  d v 2 u  3u 3vdu  2uvdv.
Note that this rule will help us to find the total differential of a term which contains x1 and x 2 in
their multiplicative form.
   
For example, d 3x12 x2  d x12 3x2  d x2 3x12 = 2x1 3x2 dx1  3x12 dx2 = 6x1 x2 dx1  3x12 dx2

 u  vdu  udv
Rule 5: Quotient Rule: d    , where v  0
v v2
 u 3  d (u 3 )v 2  d (v 2 )u 3 3u 2 v 2 du  2u 3vdv
For instance, d  2   
v   
v2
2
v4
Note also that we will use this rule when the function y  f x1 , x2  is given in quotient form or to
get the total differential of a term which contains x1 and x 2 in quotient form. For example,
d  1  
 
 3x 2  d 3x12 x2  d x2 3x12 6 x1 x2 dx1  3x12 dx2

 x2  x22 x22
Again notice that the exponential, the logarithmic and the chain rules will also applied to get the
total differential of a function y  f ( x1 , x2 ) or any of its terms if its form entails the necessity of
these rules.
 
For example, d e x1  e x1 dx1 , d nx2  
1
x2
  1
x1
 
1
x1
 3
dx2 and d nx13  3 d x13  3 3x12 dx1  dx1 .
x1

Remark
All the above rules of total differential can also applied in analogous manner to find total
differential of a function with more than two independent variables.
Now, let use see how we use the above two methods to find the total differential of multivariate
function with the help of the following example:
Example
Find the total differential of each of the following functions using the partial derivative method and
rules of total differential.
a) y  3x12  x12 x2  2x23 

b) y  n x12  3x2  c) y  x12 x2 x32 .
Solutions
a) Let us first use the partial derivative method, first we compute the partial derivatives as
f1  6 x1  2 x1 x2 and f 2  x12  6x22

Then using the formula for dy as given above, we have
dy  f1dx1  f 2 dx2 = 6x1  2x1 x2 dx1  x12  6x22 dx2 .  

The same result can be obtained using rules of total differential as follows:
    
dy  d 3x12  x12 x2  2x23 = d 3x12  d x12 x2  d 2x23   
 
= 6x1dx1  d x12 x2  d x2 x12  6x22 dx2 = 6x1dx1  2x1 x2 dx1  x12 dx2  6x22 dx2

= 6x1  2x1 x2 dx1  x12  6x22 dx2 . 
b) To apply the partial derivative method, first compute f1 and f 2 as
y  2
f1 
x1

n x12  3x2  2 
1
x1  3x2 x1
x1  3x2  2
1

x1  3x2

2x
(2 x1 )  2 1 , and
x1  3x2
y  2
f2 
x2
nx1  3x2   2
1
x1  3x2 x2
x1  3x2  2
1

x1  3x2
(3)  2
3
x1  3x2
.
Then use the formula for dy as
2 x1 3
dy  f1dx1  f 2 dx2 = dx1  2 dx2 .
x  3x 2
2
1 x1  3x2
The same result can be obtained using rules of total differential as
 
dy  d n x12  3x2  = 1
x  3x 2
2

d x12  3x2 = 2
1
x1  3x2
  
d x12  d 3x2 
1
=
1
2 x1dx1  3dx2  = 2 2x1 dx1  2 3 dx2 .
x  3x 2
2
1 x1  3x2 x1  3x2
c) Using partial derivative method, first we have
 2
f1 
x1
 
x1 x2 x32  2 x1 x2 x32 , f 2 
 2
x2
 
x1 x2 x32  x12 x32 , and f 3 
 2
x3
 
x1 x2 x32  2 x12 x2 x3
Then using the formula for dy , we have
dy  f1dx1  f 2 dx2  f 3 dx3 = 2x1 x2 x32 dx1  x12 x32 dx2  2x12 x2 x3 dx3 .

We can also get the same result using rules of total differential as
     
dy  d x12 x2 x32 = d x12 x2 x32  d x2 x12 x32  d x32 x12 x2
= 2 x1 x2 x32 dx1  x12 x32 dx2  2 x12 x2 x3 dx3
Remark
As we have seen in the above example, both methods give the same result for all functions.
Moreover, partial derivative method may be easier than using the rules of total differential in some
function and the latter may be easier in other types of functions. But since economic text books may
use either or both of the two methods to explain various concepts and to solve different problems, it
will be worth full to know the two methods.
Exercises
1. Write the formula to get the total differential of y  f x1 , x2  and give its interpretation.
2. Explain the two methods of finding the total differential and identify the one which is easier for
you.
3. Find the total differential of each of the following functions using both method.
a) y  x12  3x12 x2  6x1 x22  2x13 b) y  x15  x24  x14 x25
x1
c) y  d) y  n x12  x2 e) y  2 x12 x2  x1 x3  3x22 x32
x1  x2
4.2.2 Total Derivative
Under partial derivative and total differential, we assumed that all independent variables are
mutually exclusive. In other words, we use partial derivative or total differential to measure the
change in the dependent variable as far as the independent variables are not functionally related
with each other or with other external variable (or parameter).
But these may not always be happened in many economic functions or models. There are many
economic functions whose independent variables are functionally related either with each other or
with another external variable and thus we cannot use our previous techniques to measure the

change in dependent variable for such types of functions. So, our question is that is there a
technique which measures the change in the dependent variable for functions whose independent
variables are functionally related? The answer is “yes” as we will see in total derivative.
As we did in the previous sections, let us first introduce the technique for y  f ( x1 , x2 ) and we will
extend it in analogous manner for n-variable function.
In y  f ( x1 , x2 ), the independence between x1 and x2 may fail in the following three cases.
Case I: When y  f ( x1 , x2 ) and x1  g ( x2 )
In this case, x1 is functionally related with x2 which means that the dependent variable x1 in a
function g cannot change by itself. Moreover, x1 can change and brings a corresponding change in
y only x2 changes. So, y changes only x2 changes and for this reason we call x2 as an ultimate
source of change in y.
The change in y as a result of an infinitesimal change in x2 is said to be the total derivative of
dy
y with respect to x2 and denoted as .
dx2
dy
To get , we can use the following two step process.
dx2
First, we find the total differential of y as
dy  f1dx1  f 2 dx2
dy
Then, we divide both side of the above equation by dx2 to get as
dx2
dy dx dx dx
 f1 1  f 2 2  f1 1  f 2
dx2 dx2 dx2 dx2
dy dy dx
So, the total derivative, , in this case, can be obtained as  f1 1  f 2
dx2 dx2 dx2
In this formula,

dx1
 f1 is called an indirect effect of x2 on y or f ,
dx2
 f 2 is called a direct effect of x2 on y or f , and
dy
 is called a total effect or change of x2 on y.
dx2
Example; Find the total derivative given the function as y  5x12  3x2  1, where x1  2 x2 .
Solution
dy
The total derivative for this function is since x2 is the independent variable in the second
dx2
dy dx
function, x1  2x2 , and it is given by  f1 1  f 2
dx2 dx2
dx1
But is the derivative of x1 with respect to x2 in x1  2x2 and it is equal to 2. Moreover, from the
dx2
y y
first function, y  5x12  3x2  1, we have f1   10x1 and f 2   3 .
x1 x2
dy dy dx
Thus, we have as  f1 1  f 2  10x1 (2)  3  20x1  3 .
dx2 dx2 dx2
Case II : when y  f ( x1 , x2 ), x1  g (t ) and x2  h(t )
In this case, x1 and x2 are not functionally related but both are related with another external variable
t. So, both x1and x2 cannot change y by themselves. The only source of change for y is the change
in t and thus t is the ultimate source of change in y .
In this case also, we can use the two step process to get the total differential or change of y with
respect to t as
dy dx dx
 f1 1  f 2 2
dt dt dt

dx1 dx
Notice that, f1 and f 2 2 measure the indirect effect of t on y through x1 and x2 respectively.
dt dt
There is no direct effect of t on y since t is not given as independent variable in the function f .
Now, let us see how we compute the total derivative for such type of case with the help of the
following example;
Example
dy
Find the total derivative for y  3x1  2 x2 , where x1  2t 2 and x2  5t  1
dt
Solution
dy dx dx
Here we use the formula  f1 1  f 2 2 . To do this, first compute f1 and f 2 from
dt dt dt
y y
y  3x1  2 x2 as f1   3 and f 2   2.
x1 x2
dx1 dx dx dx
Then compute from x1  2t 2 as 1  4t and 2 from x2  5t  1 as 2  5 .
dt dt dt dt
dx1 dx dy
Finally, we substitute the results of and 2 in the formula to get as
dt dt dt
dy dx dx
 f1 1  f 2 2  3(4t )  2(5)  12t  10 .
dt dt dt
Case III: When y  f ( x1 , x2 , t ), x1  g (t ) and x2  h(t )
In this case, t is given as an independent variable in the function f and thus it has a direct effect on
dy
y . So, using the two step process, the total derivative can be obtained using the formula
dt
dy dx dx
 f1 1  f 2 2  f t
dt dt dt
Here the total change of derivative of y with respect to t is the sum of two indirect effect of t on
y through x1 and x2 , and the direct effect of t on y .
Now, let us see how we apply the above formula using the following example:

Example
Find the total derivative for y  4 x1  x2 t , where x1  t 2 and x2  2t 3 ! .
dy dx dx
 f1 1  f 2 2  f t
Solution dt dt dt
 4(2t )  t (6t )  x2
2
dy
But the answer for should be in terms of t and thus x2 should be replaced by 2t 3  1to get the
dt
dy dy
final answer of as  4(2t )  t (6t 2 )  (2t 3  1)  8t  6t 3  2t 3  1  8t 3  8t !
dt dt
Exercise
1. What is the major assumption on the nature of independent variables to apply total derivative in
multivariate functions.
2. For each of the following functions, identify the ultimate source variable and find the total
derivative with respect to this variable.
a) y  2x12  3x1 x2 , and x1  3x22  5
b) y  x22  5x1 x3 , where x1  2t , x2  3t 2 , x3  t  1
c) y  4x1t  x2t 2 , where x1  t and x2  3t 3 ! .
4.3 Derivatives of Implicit and Inverse Functions
4.3.1 Implicit Functions
Generally an implicit function with n independent variables will be denoted as
F ( x1 , x2 , . . . xn , y)  0
Notice that we use the capital letter F to denote implicit function and a small letter f to denote
explicit function. For instance, we use y  f ( x1 , x2 ) and F ( x1 , x2 , y)  0 to de note an explicit and
implicit function with two independent variable x1 and x2 respectively.
There are two methods of finding the (first) derivatives of implicit functions. These are:
i) Partial derivative method and

ii) Implicit differentiation method
In the first method, we use a formula in terms of partial derivative which is stated as a rule for uni-
variate and multivariate cases as follows:
Rule 1: For uni-variate implicit function
If F ( x, y)  0 and Fx and Fy both exist and Fy  0, then the explicit function y  f (x) exists and the
dy
derivative is given by
dx
dy  Fx

dx Fy
F F
Where, Fx  and Fy  .
x y
Rule 2: For Multivariate implicit function
If F ( x1 , x2 , . . . xn , y)  0 has continuous first order partial derivatives Fi and Fy  0, then the explicit
y
function y  f ( x1 , x2 , . . . xn ) exists and the partial derivative is given by
xi
y  Fi

xi Fy
F F
Where Fi  and Fy 
xi y
In the implicit differentiation method, we apply the technique of total differential as follows:
i. In univariate implicit function, F ( x, y)  0
dy
 Take the total differential of both sides of the equation and then rearrange the terms to get .
dx
ii) In multivariate implicit function, F x1 , x2 ,...xn , y  0
 Compute the total differential of both sides of the equation and then rearrange the terms to get
y
considering all other variable x j  xi as constant (or making all dx j  0 for x j  xi ).
x i

Example
dy
Find for 2 y  xy  4x  0 using both methods
dx
Solution
To apply the partial derivative method, let F ( x, y)  2 y  xy  4x, and compute Fx and Fy as
F F
Fx   y  4 and Fy   2 x
x y
dy dy  Fx  ( y  4) 4  y
Then use the formula given in rule 1 to get as   
dx dx Fy 2 x 2 x
To apply the implicit differentiation method, take the total differential of both sides of the equation
dy
and rearrange the terms to get as follows
dx
d 2 y  xy  4 x  d (0)  d (2 y)  d ( xy)  d (4x)  0  2dy  xdy  ydx  4dx  0
dy  ( y  4) 4  y
 (2  x)dy  ( y  4)dx  0  (2  x)dy  ( y  4)dx   
dx 2 x 2 x
Example
Find the first order partial derivatives for 3x1 x2  x2 y 2  10  0
Solution
Since the function is an implicit function with two independent variables x1 and x2 , the required
y y
derivatives are the partial derivatives and .
x1 x
2
Now, to apply the partial derivative method, we first let F x1 , x2 , y  3x1 x2  x2 y 2  10 , and
F F F
compute F1 , F2 and Fy as F1   3x2 , F2   3x1  y 2 and Fy   2 x2 y .
x1 x2 y

y y
And then, we use the formula give in rule 2 to get and as
x1 x2
y  F1  3x2  3 y  F2  (3x1  y 2 )
   and   .
x1 Fy 2 x2 y 2 y x2 Fy 2 x2 y
y y
The same results for both and is obtained using the implicit differentiation method as
x1 x2
First take the total differential of both sides as
   
d 3x1 x2  x2 y 2 10  d (0)  d 3x1 x2   d x2 y 2  d (10)  0
 3x2 dx1  3x1dx2  y 2 dx2  2x2 ydy  0
y
Then to get , in the last equation make dx2  0 since x2 is considered as a constant and change
x1
d by  . This will make the equation as
y  3x2  3
3x2 x1  2x2 yy  0  2 x2 yy  3x2 y   
x1 2 x2 y 2 y
y
Similarly, to get , set dx1  0 and change d by  in the last equation obtained from taking
x2
total differential. This will make the equation as
  
3x1x2  y 2x2  2x2 yy  0  3x1  y 2 x2  2x2 yy  0  2x1 yy   3x2  y 2 x2 
y  3x1  y 2 
 
x2 2 x2 y
Exercise
dy
1. Differentiate each of the following functions implicitly (find ).
dx
a) x 2  2x 2 y  3xy2  9  0 b) x 2 ln y  e xy 1  0
2. Find the first order partial derivatives for each of the following functions.
a) x12  x22  x1 x2  12y  0 b) 3x12  x2 y  x1 x2 y 2  0 c) x12 ln y  yex1x2  y 1  0

dx1
5. Find for x12  4x1 x2  x22  0 .
dx2
4.3.2 Derivatives of Inverse Function

Definition
The function y=f(x) has an inverse provided that there is a function g such that the domain of g is
the range of f and y=f(x) if and only if x = f(y). If y=f(x) has an inverse function, then its inverse
function is denoted as f 1 ( x) (read as “f inverse”)
dx
The interest of this sub section is to find for y=f(x). That is, finding the derivative of the
dy
dx
inverse function for y =f(x). One possible way of getting for y = f(x) is that first finding a
dy
formula for the inverse function, f 1 ( x) , and then computing its derivative. But finding a formula
for f 1 ( x) may be tedious or impossible for many types of functions. Thus, for such and other
cases you can use the following general rule to find the derivative of inverse function.
dx 1
If y = f(x) has the inverse function, f 1 ( x) , and f 1 ( x)  0 , then  . That is the derivative of
dy dy
dx
the inverse function is the reciprocal of the derivative of the original function.
Example
dx
Find for y=5x 2 +4x 3
dy
Solution
dy dx
Since =10x+12x 2 , can be obtained as
dx dy
dx 1 1
= =
dy dy 10x+12x 2
dx

4.4 Optimization of Multivariable Functions: Lagrange – multiplie r method
The Lagrange method combines the objective function and the constraints into a single function
called the Lagrange function, or simply the Lagranian. The Lagranian is usually denoted with the
symbol L and is formed by rewriting the constraint so that it is nonnegative, multiplying it by a new
variable  called the Lagrange (or Lagrangian) multiplier, and adding the product to the objective
function.
Consider the above constrained maximization problem of , subject to the constraint
. Let us write what is referred to as the Lagrangian function, which is a modified

version of the objective function that incorporates the constraint as follows:
The symbol  (the Greek letter lambda), representing some as yet undetermined number, is called a
Lagrange (undetermined) multiplier. If somehow be assured that , so that the
constraint will be satisfied, then the last term in Lagrange equation will vanish regardless of the
value of . This is because of , and multiplying  by zero will give a value
equal to zero. In that event, L will be identical with U (initial objective function). Moreover, with
the constraint out of the way, we only have to seek the free maximum of L, in lieu of the
constrained maximum of U, with respect to the two variables and . The question is: how can
we make the parenthetical expression in the above Lagrange equation vanish?
The tactic that will accomplish this is simply to treat  as an additional variable in the Lagrange
equation, i.e., to consider L = L(, x 1 , x 2 ). For then the first-order condition for free extreme will
consist of the set of simultaneous equations

and the first equation will automatically guarantee the satisfaction of the constraint. Thus, by
incorporating the constraint into the Lagrangian function L and by treating the Lagrange multiplier
as an extra variable, we can obtain the constrained extremum (two choice variables) simply by
screening the stationary values of L, taken as a free function of three choice
variables: .
Solving the above first order equation for the critical values of the variables, starting from the last
equation we have,
Substituting the value of  into the second equation , we have
Substituting again this equation for x2 into the first equation, we get
Similarly, we have
The solution will then be = 8, (and .
Example: Find the extremum of
Z = xy subject to x+y=6
Solution
The Lagrangian functionis given by L = xy - (6 – x – y)
For a stationary value of L, it is necessary that
L = 6 – x – y = 0 x+y=6
Lx = y -  = 0 - + y = 0→=y

Ly = x -  = 0 - + x = 0→=x=y
Substituting the value x=y on constraint function we get the value of x and y.
i.e. 6-x-x=0→x=3=y=
The stationary value is = , which needs to be tested against a second-order condition before
we can tell whether it is a maximum or minimum (or neither). That will be take up later.
Excersice
Optimize Z = subject to
Minimization problem
The principles of minimizations are the same with that of maximization. The basic difference lies
on the formulation of the problem. We can use the Lagrangian function to solve such problems. The
Lagrangian for the problem of minimizating subject to the constraint that is
The only difference between this Lagrangian and the one for a maximization problem is that we
write the constraint so it is nonpositive. (As in the case with maximization problems, the only
reason this matters is for the interpretation of the Lagrange multipier)
We derive the first-order conditions of the minimization of the above equation exactly as in the
maximization case, by setting equal to zero the derivatives of the Lagrangian with respect to the
Lagrangian multiplier and each of the choice variables.
Example
Minimize: subject to .
Solution
The Lagrangian function is then
The first-order condition for this minimization problem can be obtained

To eliminate the Lagrangian multiplier  from the first two of the first-order functions,
Eliminating  and equating the two functions
Substituting the value of in in the third first-order function,
and
The stationary values of the minimization problem is thus, and the
minimum objective value will then be
Importance of Lagrange Multiplier Technique
Lagrange-multiplier technique gives you the value of  as a by-product. The value of  conveys an
important information. It measures the sensititvity of the to a shift of the constraint.
Therefore, the Lagrange-multiplier method offers the advantage of containing certain built-in
comparative statistic information in the solution. If, for example, the objective function is to
maximize utility subject to budget constraint, the value of  in the solution will tell you by how

much the optimal solution – in this particular case the maximum utility - will increase when the
total budget allocated will increase by one unit. In other words, it shows the extent to which the
optimal solution will change when the constraint is relaxed. Hence, it shows the marginal effect of
a relaxation of its associated constraint on the value of objective function.
Meaning of the value of Lagrange - 

The value of the Lagrange multiplier on the constraint at the solution of the problem is equal to the
rate of change in the maximal value of the objective function as the constraint is relaxed. If the
constraint is more than one and if the jth constraint arises because of a limit on the amount of some
resource, then we refer to λ j(c) as the shadow price of the jth resource.
Thus, the value of  shows the amount of change in utility due to a shift in the budget line. As you
remember form microeconomics course, when the budget line shifts to the right due to an increase
in income of consumer or reduction in tax, the consumer‟s optimal allocation will change and the
consumer will achieve a higher level of satisfaction. The value of , therefore, tells you the amount
of increase in the level of optimum utility due to a one Birr increase in the budget of the consumer.
For instance, in the example above, the value of  which is equal to 4 tells us that if the constraint
increases by one unit (form 60 to 61), the optimum level of utility will increase by 4 units (from the
initial optimum point of to ).
4.5 Economic Applications of Partial Derivatives
Constrained optimization is very important for the following two applications i.e. utility and Profit
analysis
I. Utility Analysis
The main objective of rational consumer is maximization his utility given his limited income and
market prices of goods and services. Mathematically, the aim of the consumer can be written as
Max U  f(x, y, z)
S. t
I  Px . x  p y y  p z . z
where U is a total utilily
I is consumer limtedincome
Px , p y , and p z are per unit price of good x, y, and z respectivelly

The main interest here is to find the consumer equilibrium (i,e, the consumption level that gives
maximum utility to the consumer). This is in fact means that maximizing the above constrained
utility function through the Lagrange Multiplier method.
To do this the first step is to find the critical points for the corresponding Lagrange Multiplier
function through first order derivative test as follows.
Let V x, y, z,    U x, y, z     p x , x  p y . y  p z . Z  I  be the Lagrange Multiplier function,


 
then find the first order partial derivatives and equating them to zero to get the critical points.
V U
  . p x  0
x x
V U
  . p y  0
y y
V U
  . p z  0
z z
u
   px . x  p y . y  pz . z  I   0

  
U U U
But  U x ,  U y , and  U z
x y z
So the above equations can be re- arranged as: MU x  . Px , MUy  . Py and MU z  . Pz
And from these equations you can derive the first condition for maximization as
MU x MU y MU z
  
Px Py Pz
The second condition for maximization from the second order derivative test will be
 2V  2V 2 V
 0,  0 and 0
x 2 y 2 z 2
2 V 2 U 2 U
Moreover,   0 and is slope of MUX
x 2 x 2 x 2

2 V 2 U 2 U
  0 and is slope of MUy
y2 y2 y 2
2 V 2 U 2 U
  0 and is slope of MUz
z 2 z 2 z 2
Therefore, at equilibrium the marginal utilities of each commodity must be positive and decline.
Example
Find the levels of x and y that can maximize the utility given by
Max U  x0.6 y0.25
S. t
8 x  5 y  680
Solution
V x, y,    x 0.6 y 0.25   8x  5 y  680
V
 0.6 x 0.61 y 0.25  8  0
x
V
 0.25 x 0.6 y 0.25 1  5   0
y
V
  8x  5 y  680  0

0.6 x 0.4 y 0.25  8 .......... .......... .......... .......... .1

0.25 x 0.6 y 0.75  5.......... .......... .......... .......... .2
Then divide equation (1) by (2), t
0.6 x 0.4 y 0.25 8 60 y 8 y 8 25 40 x 60

0.6 0.75
 →  5→    and   1.5 → x  1.5 y.
0.25 x y 5 25 x x 5 60 60 y 40
Substitute x  1.5 y. on budget line equation as

8 1.5 y   5 y  680 and x  1.5 y

12 y  5 y  680  1.5 40
17 y  680 x  60 units
y  40 units
 2V
Moreover,   0.4 0.6 x 0.4 1 y 0.25   0. 24 x 1.4 y 0.25  0 at x  60 and y  40
x 2
 2V
  0.75 0.25 x 0.6 y 0.751   0.1875 x 0.6 y 1.75  0 at x  60 and y  40
y 2
Therefore, x = 60 units and y = 40 units are utility maximization combinations.
II. Profit Analysis
Profit maximization of the firm is achieved in two ways:
 Maximization of output subject to a cost constraint.
 Minimization of cost for a given level of output.
A) Maximization of output subject to a cost constraint
In this situation cost is given or remaining constant. Mathematically, it can be represented as
Max Q  f L, K 
S. t

C  w L  rK
Here also, you can use the method of Lagrange Multiplier to find the level of input combination that
can maximize the profit of the firm.
 

Let F L, K ,    f L, k     w L  r k  c  be the Lagrange Multiplier function, then find the
 
first order partial derivatives and equating them to zero to get the critical points.
F f
  w  0
L L
F f
  r  0
K K

F
  w L  rk  c   0

  
f f
But the expressions and are the marginal products of labor and capital respectively and thus
L K
the first two of the above equations can be re-arranged as MPL  w and MPK   r
If you solve these equations for  , we will get the expression first condition for maximization as
MPL MPK
 
w r
The second condition for maximization will be
2F 2 f 2 f
  0, and  slope of MPL
L2 L2 L2
2F 2 f 2 f
  0 , and  slope of MPK
K 2 K 2 K 2
Therefore, at equilibrium,
i) The ratio of marginal product to the price of the input must be equal for all inputs and
ii) Each marginal product must be positive but declining (slope of MP must be negative)
B) Minimization of cost for a given level of output
In this case output is given or remaining constant and the problem can written mathematically as
Min C  w.L  r. k
S. t

Q  f L, k 
 

Let V L, K ,    wL  rK    f L, K   Q  be the Lagrange function.
 
First apply the first order test on the Lagrange function, V, to get the first order condition for
maximization.
V f
 W  . 0
L L

V f
 r  . 0
K K
V
   f L, K   Q   0

  
w  .MPL
Using the marginal product notations, the first two of the above equations can written as
r  .MPk
If you solve these equations for  , you will get the expression
w r 1 MPL MPk
  or   as the first condition for maximization.
MPL MPK  W r
The second order condition for V to maximized will be
 2V 2 f  2f
   .  0 which imply that  0 or the slope of MPL must be positive
L2 L2 L2
 2V 2 f  2f
   .  0 which imply that  0 or the slope of MPK must be positive
K 2 K 2 K 2
Example
The cost of manufacturing x units at the first plant and y units at the second plant is given by
C x , y  x 2  2 y 2  5xy  700. If the firm has a supply order of 500 units, how many units
should be produced at each plant to minimize the total cost?
Solution
Min C  x 2  2 y 2  5xy  700

Subject to x  y  500
Let V x, y,    x2  2 y 2  5xy  700  ( x  y  500) be the Lagrange function, then the first
conditions will be
V
 2x  5 y    0
x
V
 5x  4 y    0
y

V
  x  y  500  0

2x  5 y  
Then rearrange the first equations as
4 y  5x  
Again solve these equations simultaneously to get y  3x and substitute it in the supply order
constraint function as follows to get the critical point.
x  3x  500  4x  500  x  125and y  3(125) 375
 2V  2V
Moreover,  2  0 and 40
x 2 y2
Therefore, x = 125 units and y = 375 units are cost minimizing levels of output
Exercise: find the values of the function that can optimize the following functions
a) Z  4x 2  2xy  6 y 2 subject to x  y  72
b) Z= 4x 2  3x  5xy  8 y  2 y 2 subject to x= 2y

UNIT FIVE
INTEGRATION
5.1 The Concept and Properties of Integration
Integral calculus and differential calculus have inverse meanings and processes. Differentiation is
the process of converting the total function in to marginal functions but integration is the process of
converting marginal function in to aggregate functions. Integration is mainly divided in to two parts;
indefinite and definite integrals. In this unit you will discuss the meaning of integration, rules of
integration and application of integration on economic variables.
5.1.1 The Concept of Integration
Definition: The function F is an anti-derivative of the continuous function f if and only if for all X
in the domain of f such that F 1 (X) = f (X).
d 1 3 
Example: The function f(X) = 1/3 x3 is the ant derivative of f(X) = X2 because  X  X .
2
dx  3 
Observe that the function f f x  x2 has other anti-derivatives. Some of these are:
F1 x   x3  7 F2 x   F3 x  
1 1 3 1 3 52
x  132 x  and so on.
3 3 3 3
The function, F x  
1 3
x  C where C is any arbitrary constant, is the anti derivative of f(X) = X2 .
3
2
Example: For the function f(x) = , if we find the anti derivation of this function, we have to
X3
2
find a function whose derivative can generate the value . Some of these are
X3
F1` x   F2 x   F3 x  
1 1 1 93
2  30  and so on
x2 x2 x2 4
2
The function F x   C, where C is any constant, is the anti derivative of the function f x   3
1
2
x x

Theorem 1 If F x  is anti-derivative function of f x , then F x   C where C is an arbitrary

constant, is also the anti-derivative of f x 
Theorem 2 If F x  and Gx  are anti-derivatives of the function f x  in the interval a,b, then
F  G x  C, for all E a , b
Exercise
1) Find the anti-derivatives of the following functions;
a). f x x5  6 b). f x  

1
x
c). f x   8 2 x  33 d). f x  

1 2
x  3x  5
2
2) Find the anti-derivatives of the following function
a). f x  e 2 x b). f x  2x e x 2 c). f x  log a x
Definition: The set of all anti derivatives of a continuous function is called the indefinite integral of
f and is denoted symbolically by  f x dx .
The function f is called the integrand and x is called the variable of integration.
 f x dx  F x  C
Example: Find the integral of the function f x  3x2
Solution: - we have to find the anti-derivation of this function
 f x dx  f x  C from the definition.
 3x dx  x3  C, more over, Form the definition of integration, it is clear that:

2
Therefore,
d
dx
 f xdx  f x

5.1.2 Basic Rules (Properties) of Integration
Just as there are rules of derivation, there are also certain rules of interaction. The following are
important rules of integration.
1) Rule of power function. If f x  is given in certain power function, its integration can be easily
x n1
calculated with this rule. If f x   x n then  x n dx   C.
n 1
d  xn  1 
This is because    x n n #  1
dx  n 1 
Example
Find the integration of the following functions
a). f x  x3 b). f x   c) f x   dx d). f x  

1 1
x2 x
Solution
Since most of them are power functions, we can use power rule for finding their integration.
x31 1
 x dx   C  x4  C
3
a).
3 1 4
1 x 2 1 1
b).  dx   x 2
dx   C
x 2
2 1 x
x0 1
c).  dx  1 dx   x 0 dx
  x dx 
o
 C  x  C l;‟l;jkju.
0 1
1 x 11 xo
d).  dx   x dx 
1
 which Is undefined because any number divided by zero
x 1 1 O
is not define. So, this function can't be closed under the rule of this power. That is why we
x n 1
 x dx   C for all valves of n except n   1. Therefore, we have to
n
said that
nc
1
look for other way to find the integration.  xdx  ln x c

2). Coefficient rule ÷ the integral of the product of a constant and a function of x is equal to the
constant times the integral of a function.
 K . f Kxdx
Where
 K  f x dx
is a constant.
Example
a)  3x 2dx  3  x 2dx  3 x3   C  x3  C

1
3 
b)  2e x dx  2  e x dx  2e x  C
3) Summation Rule : - The integral of the sum of two functions is the sum of their integrals.
  f x  g x dx   f xdx   g xdx
1 1 2
 2x dx   x dx   x dx  2 x  x  C  x2  C
2
4). Difference Rule: - Integral of the difference of two functions is the difference of their integrals
  f x  g xdx   f xdx   g x dx

Example:  x  6dx   xdx   6 dx 
1 2
x  6 x C
2
 e dx  e C
x x
5) The exponential rule: It states that
5.2 Techniques of Integration

5.2.1 Integration by substitution
This rule helps to find the integration of functions whose derivative is found by using chain rule.
 f ( g ( x)) * g ( x)  F ( g ( x))  C for any differentiable

'
function g that is not a constant function.
If u= g(x),  f (u)du  F (u)  C  F ( g ( x))  C

To find integral of a function by substitution we can follow the following steps
1. Introduce the letter u stands for some expression in x that is chosen with the simplification
of the integral as the goal
2. Rewrite the integral in-terms of u, to rewrite dx compute du/dx and algebraically as if the
symbol du/dx were a quotient
3. Evaluate the resulting integral and then replace u by its expression in terms of x in the
answer
2
Example Find the integration of 2xex dx
Solution
du
Step 1. Let u= x 2 du=2xdx and solve for dx=
2x
du
 2xe dx   2 xe x dx   2 xeu   e u du  e u  C
x2 2
Step 2.
2x
Step 3. Substitute u by x 2 then  2xex dx  e x  C

2 2
Example Find the integration of 2x( x 2  1) 4 dx
Solution
du
Step 1. let u= x 2  1and du=2xdx and solve for dx=
2x
du 1
Step 2.  2 x( x 2  1) 4 dx   2 xu 4   u 4 du  u 5  C ,
2x 5
1
Step 3. Substitute u by x 2  1 and the final solution is given as  2 x( x  1) 4 dx  ( x 2  1) 5  C
2
Exercise: find the integral of
a. ( x 2  3x  5) 9 (2x  3)dx = ( x 2  3x  5) 9  c
2 1
dx = x 3 e x 2  c
4 4
b. x 3e x
4

5.2.2 Integration by Parts
 f x. g x dx  f x. g x   f x.g xdx

' '
Here, we have to be systematic enough when we are assigning which one is f x  and which one
is g ' x . Assign a function whose anti derivative is found easily as g ' x  and a function whose
derivative is found easily as f x  .
Example Find the integration of xe2 x
Solution: let f x   x and g 1 x   e 2 x  g x  

1 2x
e
2
1 2x 1 1 1 1 1 1 
 xe dx  x e   1. e 2 x dx  xe2 x   e 2 x dx  xe 2 x   e 2 x   C
2x
2 2 2 2 2 2 2 
xe  e  C  e 2 x 2 x  1  C
1 2x 1 2x 1

2 4 4
Example: Find the integration of x 2 ln x dx
Solution
1
Let f(x) = ln x and g ' ( x)  x 2 , implying that g(x) = x 3
3
1 3 11 3 1 1 1 1 1 1
x
2
ln x dx = ln x x  x dx = x 3 ln x   x 2 dx = x 3 ln x  ( x 3 )  C = x 3 (3 ln x  1)  C
3 x3 3 3 3 3 3 9
Steps to find the integral of a function by integration part

1. Select one of the factors of the product as the one to be integrated and the other to be
differentiated based on easiness to find them
2. Integrate the designed factor and multiply it by the other factor
3. Differentiate the designed factor and multiply it by the integrated factor from step 2 and subtract
the integral of this product from the result of step 2

4. Complete the producer by finding the new integral that was formed in step 3 and add the
constant term c only at the very end.
 Here we used f(x) to denote the factor to be differentiated and g(x) to factor to integrate.
1
Theorem3: If  f ( x)dx  F ( x)  C, then  f (ax  b)dx  F (ax  b)  C and
a
1 (ax  b) n1
 (ax  b) dx  C
n
a n 1
1 1 1
The integration of dx is  dx  ln axb  C
ax  b ax  b a
Example
Compute the integration of (3x  7) 5 dx
Solution
 (3x  7) dx can be found

5
in two ways; one is by substitution rule and the other is by theorem3.
1
1 (3x  7) 6 (3x  7) 6  C
 (3x  7) dx  3 6  C = 18
5
Exercise; Compute the following by
1. Applying substitution rule
x x  5dx  x e dx  ln xdx
2 x
a) b) c)
2. Applying substitution rule or theorem 3
3 1
 xdx  (2ax  b) dx  2x  3dx  (2ax  b)(ax  bx) 7 dx
2 2
a) b) c) d)
5.2.3 Integration by Partial Fraction
It is a technique of integration applicable when the function is given in fractional form of two
polynomial functions (rational functions).

Steps to followed in this technique of integration
1. find the common denominator for the fraction
2. add factors and equate to the numerators
3. find the value of A and B
4. Use the general equation
5. Integrate the general equation you get in step 4
Example: Compute
1 2x  3 2 x
a. x 2
4
dx b. x2
9
dx c. x 2
 5x
dx
Solution
1 1 A B
a. Step1. Find the common denominator x 2
4
dx = 
( x  2)(x  2)
dx = ( 
x2 x2
)dx
Step2. Add factors and equate to nominator A(x-2) + B(x+2)=1
Step3. Find the value of A and B
Let x=-2  A(-2-2) + B(-2+2)=1 -4A(x-2)=1A=-1/4
Let x=2  A(2-2) + B(2+2)=1 4B=1B=1/4
1  1/ 4 1/ 4
Step 4 the general equation is x 2
4
dx   ( 
x2 x2
)dx 
 1/ 4 1/ 4 1 1 1 1/ 4
Step5. Integrate the general equation  (  )dx   [ ( ) ( )]dx
x2 x2 4 x2 4 x2
1 1 1 1
=  1 / 4 [( )dx  1 / 4 ( )dx = ln x  2  ln x  2
x2 x2 4 4
1 1 x2
= (ln x  2  ln x  2  c = ln c
4 4 x2

2x  3 2x  3 A B
b. Step1. Find the common denominator x2
9
dx = 
( x  3)(x  2)
dx = ( 
x 3 x 3
)dx
Step2. Add factors and equate to nominator A(x-3) + B(x+3) =2x+3
Let x=-3  A(-3-3) + B(-3+3)=2(-3)+3 -6A=-3A=1/2
Let x=3  A(3-3) + B(3+3)=2(3)+3 4B=1B=3/2
A B 1/ 2 3 / 2
Step 4 the general equation is (  )dx = (  )dx
x 3 x 3 x 3 x 3
1/ 2 3 / 2 1 1 3 1
Step5. Integrate the general equation (  )dx =  [ ( ) ( )]dx
x 3 x 3 2 x 3 2 x 3
1 1 3 1 1 3
=  [(
2 x3
)dx   (
2 x 3
)dx = ln x  3  ln x  3 +c
2 2
2 X 2 x A B
c. Step1. Find the common denominator x
2
 5X
dx = 
x( x  5)
dx   
x x5
dx
Step2. Add factors and equate to nominator A(x+5) + B(x) =2-x
Let x=0  A (0+5) + B (0) =2-0 5A=2A=2/5
Let x=-5  A (-5+5) + B (-5) =2-(-5) -5B=7B=-7/5
2 x A B
Step 4 the general equation is  x( x  5)dx   x  x  5 dx
2 x 2/5  7/5
Step5. Integrate the general equation  dx    dx
x( x  5) x x5
2 1 7 1 2 7
 
5 x
dx  
5 x5
dx = ln x
5 5
ln x  5  c
Exercise: find the integral of
x2 x 2  x _1
a. b.
x 2  16 x( x 2  1)

5.3 Definite Integrals
Meaning of Definite Integrals
All the integrals cited in the preceding section are of the indefinite variety: each is a function of a
variable and hence possesses no definite numerical valve. After here, for a given indefinite integral
of a continuous function f x  ,  f x dx  F x  C . If we choose two valves of x in the domain
say a and b, the indefinite integral can be changed in to definite integral.
Definition: - Let f x  be a function with an anti-derivative that we donate it by F(x). Let a and b be
any two real numbers such that f x  and F x  exist for all values of x in the closed interval with
end points a and b. Then definite integral of f x  from x=a to x=b
b b
Is denoted by:  f xdx and is defined by  f x dx  F b a. The
a a
numbers a and b are
called limits of integration, a the lower limit and b the upper limit. Usually a < b but not necessarily.
Example
 
b
1 
b
1
a)  x dx   x 5   b 5  a 5
4
b 2 a 5
 t dt  ln 
3
1 t 3
b) 1  ln3  ln1  ln3
1
2
1 
 
2
1 1 1
c)  e dx   e 3 x   e 6  e 0  e 6  1
3x
0  3 0 3 3 3
Note: In a definite integral since constants are canceling of each other, there is no need to include a
constant term C.
Exercise
Find the integral of following functions
e 4 6
a)  ln dx  3x dx c)  e dx
x 3x
b)
1 2 0

5.3.1 Properties of Definite Integral
Property I: - The interchange of the limits of integration changes the sign of the definite integral.
b a
 f x dx    f xdx
a b
Example
4 2
 3xdx    3x dx
2 4
4 2
3  3 
  x2     x2 
 2 2  2 4

3
4  3 22    3 22  3 42 
2 2 2 2 

3
16  3 4    3 4  3 16
2 2 2 2 
 24  6   6 24
 18    18
18  18
Property II- A definite integral has a value of zero when the two limits of integration are identical.
a
 f xdx  F a  F a  o

a
Property III: - A definite integral can be expressed as a sum of finite number of definite sub
integrals.
d b c d
 f x  dx   f x  dx   f x  dx   f x dx
a a b c
b b
Property IV:-   f x dx  
a
 f x dx
a

b b
Property V:-  Kf xdx  K  f x dx
a a
b b b
Property VI:-   f x g xdx   f xdx   g x dx.
a a a
Exercise
Find the integral of the following
 
2 2 3
a).  3x dx
2
b).  Ln
x
dx c).   6 x 2  5x  4 dx
3 2 1
5.3.2 Integral and area under the curve
One of the application of definite integration is finding the area of a region bounded by f(x), the X-
axis and the vertical lines X = a and x=b.
Note: The area of the region R, denoted by A(R), bounded by f, the X-axis, the vertical lines X=a
b
and X=b is given by; A(R) =  f ( x)dx provided that two conditions
a
hold. These are:
1. f must be continuous in a, b
2. f (x) > O for all x E a, b
If f is continuous and non-positive in the interval a, b , the area of the region bounded by f, x-axis
b
and the lines X = a and X = b is given by: A(R) =   f ( x)dx
a
Fundamental Theorem of calculus
Let f(x) be a continuous non- negative function in a < X< b and let F(x) be an anti derivative of f(x).
Then A, the area between Y = f(x), the X-axis and vertical lines X = a and X = b is given by the
b
definite integral: A =  f ( x)dx  F (b)  F (a)
a

Example
Evaluate the area of the region bounded by the function
y  3x 2  2x  5, the x  axis and thelines x  1 and x  3
Solution
 3x   
3
3
A 2
 2x  5 dx  x 3  x 2  5 1
1
 
A  3  3  5 3  13  12  5 1  27  9  15  7  51  7  44 square units
3 2
5.4 Economic Applications of Integrals
Integrals have several uses in economics variable analysis. The following are some of the areas:
5.4.1 Developing a total function from marginal function
The process of integration can yield a total function if the marginal function is given.
Example
If the marginal cost (Mc) of a firm is given by an equation C ' Q   4Q3  6Q  80 and the fixed
cost of production is 90 Birr, we can get the total cost of production that can be computed from MC
function by integrating it
 MdQ  TC    4 Q 
 6Q  80 dx    4Q dx   6QdQ    80dx
3
TC   Q3  3Q2  80 Q  C Since C is the fixed cost, it can be replaced by 90.
Therefore, the total cost equation is given as: TC   Q3  3Q2  80Q  90
5.4.2 Consumer’s and Producer’s Surplus
The other application of definite integral is to find the consumer‟s and producer‟s surplus which is
explained as follows: Let the demand curve be P  f Q  for a certain commodity and the supply
curve for the same commodity be given by P  h Q. Q denotes the quantity of a commodity that
can be sold or supplied at price P per unit. In general, the demand function is a decreasing function
and the supply function is an increasing function of price.

SS
C.S
Po
P.S
DD
Qo
The market is at its equilibrium Qo , Po  where the demand and supply curves intersect each other.
From the graph of the demand curve, it is clear that as the price increases, demand decreases: This
implies that there are some consumers who will be willing to buy the commodity at a higher price
than the market equilibrium price, Po that they actually have to pay. Consider the quantity Q of
units that lie between Q1 and Q1  Q . The area P1  Q of the rectangle ACDB in the above figure
can be interpreted as the total amount of money that the consumer would pay for these  Q units if
the price were P1  f Q1  per unit. At the market equilibrium price Po , the actual amount spent by
the consumers on these Q units. In other words the consumer saves equal
to P1 Q  Po Q   f Q1   Po   Q . This saving is equal to the area of shaded rectangle ABFE. If

we divide the range from 0 to Q=Q 0 in to a large number intervals of length  Q , we obtain a
similar result for each interval. This is known as consumer‟s surplus. The consumer‟s surplus is
given as:
Qo Qo
C.S    f Q  Po  dQ   f Q dQ  Po
o o
Qo
Similarly, in the free market there are also producers who would be willing to sell the commodity at
price lower than the market price Po that the consumers actually pay. In such a situation, the

producers also are benefited; this benefit to the producers is called the producer‟s surplus. The
producer‟s surplus is givens as:
Qo
P.S   P
o
o  h Q dQ
Qo
P.S  po Qo   h Q  dQ
o
Example
P  52  2Q
The supply and demand functions for a certain product are given by:
P  100  Q 2
Assuming that market equilibrium has been established, then determine the consumer‟s and
producer‟s surplus?
Solution
First we have to find the equilibrium price and quantity since these are the base for computing both
consumers and producer‟s surplus.
At equilibrium, demand = Supply
52  2Q  100  Q2  Q2  2Q  48  0  Q  8 Q  6  0  Qo  6 units, eq. gty
Po  52  2Q0  52  2 6  64 birr, equilibrium price
 
6
 
6 6
f Q  dx  Po Qo   100  Q dx  6 x 64  100Q  Q 3   384
1
C. S  
2
0 o  3 0
 600  6  384  600  1 216  384  600  72  384  600  456 = 144 Birr
1 3
3 3
 
6
P. S  Po Q0   52  2QdQ
6
 64 x 6  52Q  Q 2 o
0
 384  52 6  6  384  312  36  384  348 =36 birr
2

REFRENCES
Allen R.G.D: Mathematical Analysis for Economists, 2nd ed.
Barnett,Naymod.A and Ziegler, Michael.R: Applied Mathematics for Bussiness, Economics, Life
Sciences, and Social Sciences, 3rded.
Chiang Alpha C. (1985). Fundamental Methods of Mathematical Economics, 3rd Ed, New York.
Freund, John. E: College Mathematics with Business Applications, 1st ed
Hoffman, and Bradley: Brief Calculus with Applications, 5th ed.
Stant, Richard A: Calculus,2nd ed

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HU Economics Department Lecture Note

Calculus for Economists

Course Number- Econ 1011

CALCULUS AND ITS ECONOMIC APPLICATION

Prepared by Amare Mabrie Page 1

Mathematical economics has claim to the following advantages

Prepared by Amare Mabrie Page 2

A function can be defined either in rule form or in set form

Definition in Rule form

Definition in Set form

Prepared by Amare Mabrie Page 3

Table 1 Table 2 Table 3

Domain Range Domain Range Domain Range (Number)

Function 1= {(-2,-8), (-1,-1), (0,0),(1, 1), (2, 8),}

Prepared by Amare Mabrie Page 4

Domain = {-2,-1, 0, 1, 2} and Range = {1, 3, 4}

B) Give an example of a function both in a set form and in a rule form

B). T = {(-3, 1), (-1, 2), (3, 2) (5, 1)}

Functions specified by Equations

Prepared by Amare Mabrie Page 5

Determine which of the following equations specify functions with input x

a) 4y-3x=8 b) y2 -x2 =9, x  R

a) Solving for the output y, we have

b) Solving for the output y we have

9  x 2 and y = - 9  x 2 ) . For example, if x = 4, then equation in (b) is satisfied for y = 5 and y

Agreement on Domain and Ranges

Prepared by Amare Mabrie Page 6

1. Determine which of the following equations specify functions with input X

2. Find the domain and range of the following equations (functions)

1.2.1 Type of Functions

1. Polynomial is a continuous function with a general form of;

1.1 Constant function is a polynomial with degree zero (n = 0).

Prepared by Amare Mabrie Page 7

1.2 Linear function is a polynomial with degree one (n=1).

F(x) = a0 + a1 x, a1 x, a1  0, where a6 and a7 are constants,

For instance, f(x) = 2+5x is a linear function.

1.3 Quadratic function is a polynomial with degree two (n = 2).

1.4 Cubic function is a polynomial with degree three (n =3)

2. Rational function is a function in which y or f(x) is expressed as a ratio of two polynomial

The graph of this function is a rectangular hyperbola.

3. Exponential functions ;are functions which generally denoted by bn =b*b*b*…*b n times

4. Logarithmic Functions: are the inverses of exponential functions.

Given f(x) =bn then logbf ( x )  n

Prepared by Amare Mabrie Page 8

1.2.2 Multivariate Functions

Prepared by Amare Mabrie Page 9

1.2.3 Explicit Versus Implicit Functions

An explicit function of two independent variables can be represented by Z = f (X ,Y). The

 An implicit function of one independent variable can be represented by f(x, y) = 0.

 An implicit function of two independent variable can be written as f(x, y, z) = 0

The budget formula M = Px X+Py Y, Cetris paribus, is an implicit function.

Where M is the budget (money), Px is price of commodity x and Py is price of Y.

Prepared by Amare Mabrie Page 10

Y = f(x) = 3x-2 is an explicit function. It equivalent implicit function (form) will be

Y-3x+2 = 0 and it is the general form of f(x, y) =0

1. Explain the difference between explicit functions and implicit functions.

2. Write the implicit form of the following explicit functions

1.2.4 Exponential and Logarithmic Functions

Prepared by Amare Mabrie Page 11

3. Exponential functions ;are functions which generally denoted by bn =bbb…b n times