Business Mathematics Univariate Differential Calculus and its applications

Topic Five: Univariate Differential Calculus and its applications

5.1 Definition of derivative and its basic rules
It is one aspect of calculus that measures the rate of change in one variables as another
variable changes. It broadens the idea of slope.

A function: if for every value of a variable x, there corresponds exactly one and only one
value of the variable y, we call y is a function of x, written as:
Y = f(x).
Definition: for y = f(x) we define the derivative of f at x, denoted by f′′(x) to be;
f′(x) = lim f(x) = lim f(x+x)- f(x)
x 0 x x 0 x

Example-1
Find f′(x) for f(x) = 2x +4
f(x) = lim f(x+ x) –f(x)
x 0 x
1 → find f(x) =
st

f(x) = f(x+x)-f(x)
= [2(x+x) +4] – (2+4)]
= 2+2x+4-2x-4
f(x) = 2x
2 nd
find the limit: f′(x) = lim f(x)
x 0 x
= lim 2x
x 0 X
f′(x) = 2
Example-2

For the function f(x) = 4x-x2 find f′(x)

f′(x)= lim f(x+x) – f(x)
x 0 x
1 → find f(x) = 4(x+x)-(x+x)2- (4x-x2)
st

x x
= 4x+4x-x2 – 2xx -x2-4x+x2
x
= x (4-2x-x)
x
= 4-2x-x
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Business Mathematics Univariate Differential Calculus and its applications

2nd → find the limit of the resulting function

f′(x) = lim f(x) = lim 4-2x-x
x 0 x x 0
′
f (x) = 4-2x

Rule of differentiation:

1. A constant function rule

If f(x) = c then f′(x) = 0
E.g. If f(x) = 5 then f′(x) = 0

2. The power rule

The derivative of the power function is the power times the function raised the power
minus one.
If f(x) = axn, then f′(x) = anxn-1
E.g. If f(x) = x5, then f′(x) = 5x5-1 = 5x4
If f(x) =3x3, f′(x) =33x3-1 = 9x2

3. The sum and difference rule

The derivative o f the sum or difference of two functions is the derivative of the first
function plus or minus the derivative of the second function.
If f(x) = u(x) + v(x), then f′(x) =u′(x) + v′ (x)
E.g. f(x) = 3x+8 , f′(x) =3+0= 3
f(x) = 4x-x2 ; f′(x) = 4-2x
4. The product rule
The derivative of the product of two functions is the first function times the derivative of
the second function plus the second function times the derivative of the first.
If f(x) = u(x). (v(x)) then;
f′(x) =u(x). v′(x) + v(x) .u′(x)
E.g. f(x) = 3x2 (4x-1), the f′(x) =
3x2(4) + (4x-1) (6x)
= 12x2 +24x2-6x
= 36x2-6x
5. The quotient rule;
The derivative of the division of two functions is the denominator times the derivative of the
numerator minus the numerator times the derivative of the denominator over the denominator
square.
If f(x) = u(x), then;
V(x)
f′(x) = v(x) .u′(x) – u(x). v′(x)
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Business Mathematics Univariate Differential Calculus and its applications

[V(x)] 2
If f(x) = x2/2x-1
f′(x) = (2x-1)(2x) –(x2)(2)
(2x-1)2
= 4x2-2x-2x2
4x2-4x+1
= 2x2-2x
(2x-1)2

5.2Application of derivatives

The word marginal refers to rate o f change→ that is a derivative.

Let x be the number of units of a product produced
Total cost function → C(x)
Total revenue function→ R(x)
Total profit function→ P(x) = R(x) –C(x)
Marginal cost function → C′(x)
 Marginal cost is the rate of change in total cost per unit change in production at an
output level of x-units.
 Marginal revenue function→ R′(x)
 Marginal profit function→ P′(x) = R′(x) - C′(x)
 Average cost→ č(x) = C(x)
x
 Marginal average cost→ č′ (x)
 Average revenue → Ř(x) = R(x)
x
 Marginal average revenue→ Ř′(x
 Average profit → Pˉ (x) =P(x)
x
 Marginal average profit → Pˉ′(x)

Example-1
A company manufactures and sells x transistor radios per week. Its weekly cost and demand
equations are:

C(x) = 5000 +2x

P = 10 – x find
1000
a) Production level that maximizes revenue and the maximum revenue.
b) The production level that maximizes profit and the maximum profit.
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Business Mathematics Univariate Differential Calculus and its applications

c) The MR and MC at the profit maximizing output level.

d) The average cost per unit if 1000 radios are produced.
e) The marginal average cost at a production level of 1000 radios and interpret the
result.

Solution:

a) R(x) = P.X = (10-x) (x)

1000
2
R(x) 10x- x
1000
R(x) = 10 –x =0
5000
10= x → x = 5000 units
500
R′(x) = -1/5000; R′(x) <0 x= 5000 units is the revenue maximizing output level.
Maximum revenue is at x = 5000 units
R(x) = 10x – x2
1000
R(5000) =10(5000)- (5000)2
1000
= Birr 25000
b) P(x) = R(x) – C(x)
[10x- x2 ]- [5000+2x]
1000
= 10x –x2 - 5000-2x
1000
P(x) = 8x-x2 - 5000
1000
P′(x) 8-2x = 8-x
1000 500
8-x= 0
500
8= x
500
x = 4000 units
P″(x) = -1 P″(x)<0 x = 4000 units is the profit maximizing output level
500
At x = 4000 units P(x) = 8x-x2 - 5000
1000

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Business Mathematics Univariate Differential Calculus and its applications

= 8(4000) - (4000)2-5000
1000
= Birr 11,000

c) C′(x) = 2 production cost increases by birr 2 at each level of out put

R′(x) = 10- 2x = 10-x
1000 500
At x = 4000 units
R′(x) = 10 -4000 = 10-8 =2 birr
500
At each level of output TR increases by birr 2
At the profit maximization; MR = MC, i.e. 2 Birr

d) x =1000 radios;
 Average cost č(x) = C(x)
x
= 5000 +2x
x
At x = 1000 radios; č(x) = 5000 +2(1000)
1000
= 7 Birr
e) Marginal average cost = č′(x)
MAC = - 5000
x2
č′(x) = - 5000 = -0.005 Birr
(1000)2

Interpretation: At a production level of 1000 units a unit increase in production will decrease
average cost by approximately 0.5 cents or by 0.005 Birr.

5.2.2 Point price elasticity of demand

Elasticity is a measure of a proportionate change in the dependent variable which results
from a proportionate change in the independent variable.
Elasticity of demand is a measure of the percentage change is quantity demanded due to a
percentage change in the factors which determine demand.
If there is change in quantity demanded from Q to (Q+ Q ) resulting from a given change in
price from P to (P + P ), the price elasticity of demand is

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Business Mathematics Univariate Differential Calculus and its applications

If there is change in quantity demanded from Q to (Q+ Q ) resulting from a given change in price
from P to (P + P ), the price elasticity of demand is

E p = Proportionate change in quantity demanded

Proportionate change in price
Q
Q
=
p
p
Q p Q p
= x = ( )
Q p p Q
It gives us the average, price elasticity of demand over the price range of P to (P+ p ) .It is possible
to use the method of derivative to get the price elasticity of demand at a particular point P, i.e., as
p approaches to zero.
p Q P Q
E p = lim ( ) = lim
Q p Q P
p  0 p  0
P dQ
= ( )
Q dp
Thus price elasticity of demand dQ p
E p= ( )
dp Q
Example
1. Find the price elasticity of demand if the demand function for a product is
Q = P 2 - 6P + 36, where Q is quantity and P is price of a product. Using the above formula
dQ p dQ
E p= ( ), but  2p  6
dp Q dp

p
Therefore, E p = (2 p - 6)
P  6 P  36
2

2p  6p
2
Ep = 2
p  6 p  36
2 p2  6 p
Ep = 2
p  6 p  36
What is the elasticity of demand at P = 4?

2(42 )  64)
Ep =
42  6(4)  36

32  24 8
= = < 1
16  24  36 28
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Business Mathematics Univariate Differential Calculus and its applications

As E p < 1 demand is said to be price inelastic at P = 4.

2. Find the price elasticity of demand in terms of quantity sold.

10
P= = 10 (Q+1) 2
(Q  1) 2

dQ P 1 dp Q
Ep = ( ), Therefore, = ( )
dp Q Ep dQ P
Differentiating the demand function with respect to Q gives as
dp 3  20
 -20 (Q+1) =
dQ (Q  1)3
Q
1  20 10
Thus, =[ ]
Ep (Q  1) (Q  1) 2
3

1  2Q
=
Ep (Q  1)

Q 1
This means Ep 
 2Q

3. If the demand function is given as Q= 10  p 2 , find the price elasticity of demand at P = 2.

dQ p dQ 1
Ep  = ½ (10 - p 2 ) 2
(-2p)
dp Q dp
 2p
= 1
2(10  P 2 ) 2

dQ p

dp 10  p 2

p p
Thus, E p = ( )( )
10  p 2 10  p 2

 p2  22 4 2
Ep = . Thus, at P = 2, E p = = 
10  p 2
10  2 2
6 3
This means, as the price of the product increases by one percent then the quantity demanded for the
product decreases by 2 percent at p = 2.
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Business Mathematics Univariate Differential Calculus and its applications

5.3 Relative maximum and minimum

INTRODUCTION
 In general, the nature of optimization process is to get the values of the choice
variables that will optimize the objective function.

 This unit is emphasized on unconstrained optimization, i.e. minimization or

maximization of objective function without constraint.

Functions of One Independent Variable

 Some objective functions involve constraints and others do not.

 Functions which do not involve constraints are referred to as unconstrained
functions and the process of optimization is said to be unconstrained or free
optimization.

 Given the function y = f(x) which is continuous and differentiable,

 it is said to have a maximum value at a point where it changes from an
increasing to decreasing function
 it is said to have a minimum value at the point where it changes from
decreasing to increasing functions.
 The values of x at which the function is at its minimum or maximum point
are known as critical values.
 The given function should satisfy two conditions in order to decide about
maximum and minimum value at a particular point. These conditions are
called order conditions.

a) Conditions for minimum value

1. First order condition f ( x)  0
(Necessary condition)
2. Second order condition f ( x)  0
(Sufficient condition)

b) Conditions for Maximum value

1. First order condition f ( x)  0
(Necessary condition)
2. Second order condition f ( x)  0
(Sufficient Condition)

Example
Find the minimum and maximum values of the function f ( x)  3x 4  10x 3  6 x 2  5

Solution
The first order condition is f ( x)  0 .We can determine the critical values using this
condition. Thus, f ( x)  12x 3  30x 2  12x  0
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Business Mathematics Univariate Differential Calculus and its applications

3x(4 x 2  10x  4)  0
3 x[2 x(2 x  1)  4(2 x  1)]  0
3 x[( 2 x  4)(2 x  1)]  0
3x  0 or 2x  4  0 or 2x  1  0

1
Thus the critical values are x  0 or x  2 or x  .
2
We should test the second order condition at these points to know whether the function is at
its relative maximum or minimum point.
f ( x)  36x 2  60x  12
At x  0 , f ( x)  36(0) 2  60(0)  12  12  0 . Thus, the function is at its relative minimum
point at x = 0.
At x = 2, f ( x)  36(2) 2  60(2)  12
=144-120 +12
f ( x)  36  0 . Thus, the function is at its relative minimum point at x  2 .
1 1
At x = ½, f ( x)  36( )  60( )  12
2 2
1
= 36( )  30  12
4
= 9  30  12  9  0
1
Therefore, the function is at its relative maximum point when x  .
2