Lecture notes on Mathematics for Business

Nguyen Thi Thu Van

March 31, 2019

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 Chapter 4. Differentiation

Outline of the chapter:

Tangent and velocity problems. Rates of change

Derivative of a function

Rules of differentiation

Some applications of differentiation in Economics

Marginal functions

Elasticity

Optimization in Economics

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 Chapter 4. Differentiation 4.1. Tangent and Velocity Problems. Rates of change

Recall that a linear function L(x) = mx + b changes at a constant rate m

w.r.t. x, that is, the rate of change of L(x) is the slope or the steepness of
the line y = mx + b.

However if a function f (x) is not linear, the rate of change is not a

constant but varies with x. In particular, when x = c, the rate is given by
the steepness of the graph of f (x) at the point P(c, f (c)), which can be
measured by the slope of the tangent line to the graph at P.

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 Chapter 4. Differentiation 4.1. Tangent and Velocity Problems. Rates of change

Tangent problem. Find the slope of a tangent line at P(c, f (c)) on the
curve C of equation y = f (x).

Strategy: consider a point Q(c + h, f (c + h)) nearby P (Q 6= P). The

slope of the secant line PQ:
rise change in f f (c + h) − f (c)
mPQ = = =
run change in x h

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 Chapter 4. Differentiation 4.1. Tangent and Velocity Problems. Rates of change

Observe that if we let Q approach P by letting c + h approach c then the

pink lines PQ approach the blue line at P. In other words, the blue line is
considered as the limiting line of the pink lines. As a result, the slope of
the tangent line at P can be calculated as
f (c + h) − f (c)
m = lim mPQ = lim
Q→P h→0 h

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 Chapter 4. Differentiation 4.1. Tangent and Velocity Problems. Rates of change

Velocity problem. If an object is moving along a straight line according

to an equation s = f (t), where s is the displacement of the object from
the origin at time t, then the average velocity of the object moving in the
time interval from time a to time a + h is
displacement f (a + h) − f (a)
va = =
elapsed time h

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 Chapter 4. Differentiation 4.1. Tangent and Velocity Problems. Rates of change

If we consider the movement of the object in a shorter and shorter time

interval, the average velocity becomes the instantaneous velocity

f (a + h) − f (a)
v (a) = limh→0
h

Note that we are not concerned with the direction in which the movement
occurs, but displacement and velocity. The speed of the movement is
|velocity |.

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 Chapter 4. Differentiation 4.2. Derivative

Both problems lead to finding limit

f (a + ∆x) − f (a)
lim .
∆x→0 ∆x
This limit arises actually not only in geometry and physics but in many
other practical situations, so it is given a special name: DERIVATIVE!

Definition
The derivative of a function at the number a, denoted by f 0 (a) (followed
by Newton’s notation) which is read ’f dashed of a‘, is

f (a + ∆x) − f (a) ∆f
f 0 (a) = lim = lim
∆x→0 ∆x ∆x→0 ∆x
if the limit exists and, in this case, f is said to be derivable (or also called
differentiable) at a.

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 Chapter 4. Differentiation 4.2. Derivative

Note that
f must be absolutely defined at a and about a if f 0 (a) exists

If f is derivable at every point in an interval (a, b) then f is said to be

derivable on (a, b)

If a number a is replaced by a variable x, the derivative of f is also a

function in terms of x that is also called a derived function!

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 Chapter 4. Differentiation 4.2. Derivative

If it is so hard, there are other ways to approach the concept of

‘DEVIRATIVE’, such as simply thinking of it as the rate of change in y
w.r.t. the change in x.
Example

So the slope of the tangent line at −2 to the curve, called the derivative of
the function at -2, is
∆y f (−3) − f (−1)
= = −4
∆x (−3) − (−1)

Note that the tangent line to the curve at 0 is horizontal, so its slope at
x = 0 is zero, and thus, f 0 (0) = 0. March 31, 2019 10 / 32
 Chapter 4. Differentiation 4.2. Derivative

It is easy to deduce from the definition of the derivative that

If f 0 > 0 on a certain interval then the curve of f rises from the left to
the right of the interval and thus the function is said to be increasing.

If f 0 < 0, the curve of f drops and the function is decreasing.

Example

Observe that the graph of f drops on (−∞, 0) (so f 0 < 0 on this interval)
and rises on (0, +∞) (so on this interval f 0 < 0).
The point at which x = 0 is called the turning point!
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 Chapter 4. Differentiation 4.2. Derivative

Noting that not all functions are derivable. For example, function is not
continuous at a point then it is not derivable at that point, that is, the
graph at this point is broken into two pieces or has a hole.

Even continuous functions that whose graph has a sharp corner are also
not derivable.

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 Chapter 4. Differentiation 4.3. Rules of Differentiation

Theorem
If f and g are derivable and c is a constant then
(f ± g )0 = f 0 ± g 0
(fg )0 = f 0 g + fg 0
f 0 g −fg 0
( gf )0 = g2
(cf )0 = cf 0

Theorem (Chain rule)

If f and g are derivable then

(f (g (x)))0 = f 0 (g (x))g 0 (x)

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 Chapter 4. Differentiation 4.3. Rules of Differentiation

Example
Given two functions f , g whose graphs are shown below. Let
u(x) = f (g (x)), v (x) = g (f (x)), and w (x) = g (g (x))

Find u 0 (1), v 0 (1), and w 0 (1).

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 Chapter 4. Differentiation 4.3. Rules of Differentiation

Second order derivatives. As mentioned above, whenever a functions is

differentiated, the thing that you end up with is itself a function. This
suggests the possibility of differentiating a second time to get the slope of
the slope function, written as f 00 (x), is calculated by f 00 (x) = (f 0 )0 (x).

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 Chapter 4. Differentiation 4.3. Rules of Differentiation

Moreover, the sign of f 00 enables us to identify the behavior of the function

f . Precisely,

If f 00 > 0 on a certain interval then the curve of f bends upwards on

that interval and the function is said to be convex.

If f 00 < 0, the curve of f bends upwards and the function is said to be

concave.

The point at which the function changes the concavity is called the point
of inflection.
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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

You may wonder what on earth differentiation has to do with economics?

In fact we cannot get very far from economic theory without making use
of calculus. In this section, we focus on the three applications:

Marginal analysis

Elasticity

Optimization in economics

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Marginal functions

We are known briefly economic concepts in the second chapter such as

cost, revenue, profit, and supply, demand, and market equilibrium. At this
stage, we use the derivative to explore rates of change involving economic
quantities.

Recall that
f (a + ∆x) − f (a) ∆f
f 0 (a) = lim = lim
∆x→0 ∆x ∆x→0 ∆x

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Suppose C (q) is the total cost of producing q units of a particular

commodity. If q0 units are currently being produced, then the derivative
C (q0 + ∆q) − C (q0 )
C 0 (q0 ) = lim
∆q→0 ∆q
is the marginal cost of producing q0 units. In addition, the average cost of
a unit of product if q0 units are produced is AC (q0 ) = C (q0 +∆q)−C
∆q
(q0 )

This deduces, as ∆q = 1, that

C 0 (q0 ) ≈ C (q0 + 1) − C (q0 )

in which
the right hand side is the cost of increasing the level of production by
one unit, from q0 to q0 + 1

the left hand side approximates the additional cost incurred when the
level of production is increased by one unit, from q0 to q0 + 1.
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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

The geometric relationship between the marginal cost and the additional
cost are shown in the figure below.

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Example
Unit of output Total cost (in dollars) Marginal cost (in dollars)
1 5 5
2 9 4
3 12 3
4 16 4
5 21 5
6 29 8

Observe that the marginal cost curve decreases sharply with smaller
output and reaches a minimum. As production is expanded to a higher
level, it begins to rise at a rapid rate.
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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

In general, if the level of production is increased by ∆q then

C (q0 + ∆q) − C (q0 ) ≈ C 0 (q0 ) × ∆q

In other words,

change in total cost ≈ marginal cost × change in output

Example
Suppose the total cost in dollars of manufacturing q units of a certain
commodity is C (q) = 3q 2 + 5q + 10. If the current level of production is
40 units, estimate how the total cost will change if 40.5 units are produced.

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

The derivative formula applies not only to cost, but also for other
economic quantities, such as revenue, profit, and so on.

Marginal cost is important in the business decision-making process, for

example, when the management needs to decide whether to increase
production or not.

Marginal revenue increases whenever the revenue received from

producing one additional unit of a good grows faster (or shrinks more
slowly) than its marginal cost of production.

Increasing marginal revenue is a sign that the company is producing

too little relative to consumer demand, and there are profit
opportunities if production expands.

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Example
A company manufactures toy soldiers. After some production, it costs the
company $5 in materials and labor to create its 100th toy soldier. That
100th toy soldier sells for $15. Profit for this toy is $10.

Now, suppose the 101st toy soldier also costs $5, but this time can sell for
$17. The profit for the 101st toy soldier, $12, is greater than the profit for
the 100th toy soldier. This is an example of increasing marginal revenue.

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Two general principles of marginal analysis.

[Maximum profit criterion] The profit P(q) = R(q) − C (q) is

maximized at a level of production q where marginal revenue equals
marginal cost and the rate of change of marginal cost exceeds the
rate of change of marginal revenue; that is, where

R 0 (q) = C 0 (q) and R 00 (q) < C 00 (q)

[Minimal average cost] Average cost is minimized at the level of

production where average cost equals marginal cost; that is, when
AC (q) = C 0 (q)

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Elasticity

We are known that demand, in general, is a decreasing function, that is,

an increase in the unit price of a commodity will result in decreased
demand. However, the sensitivity or responsiveness of demand to a change
in price varies from one product to another.

For instance, the demand for products such as soap, flashlight batteries, or
salt will not be much affected by a small percentage change in unit price,
while a comparable percentage change in the price of airline tickets or
home loans can affect demand dramatically.

Economists use a quantity called elasticity of demand to measure the

sensitivity of the change.

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Elasticity is defined, supposed that q is a demand function in terms of unit

price p, by
q0
percentage rate of change in demand q × 100 p × q0
E (p) = = p0
=
percentage rate of change in price × 100 q
p

Demand is said to be

elastic if |E | > 1 ⇒ the percentage decrease in demand is greater

than the percentage increase in price that caused it, and thus,
demand is relatively sensitive to changes in price

inelastic if |E | < 1 ⇒ demand is relatively insensitive to changes in

price

unit elastic if |E | = 1

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

The relationship between revenue and price is shown below. Note that the
revenue curve is rising where demand is inelastic, falling where demand is
elastic, and has a horizontal tangent line where the demand is of unit
elasticity.

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Example
The manager of a bookstore determines that when a certain new
paperback novel is priced at p dollars per copy, the daily demand will be
√
q = 300 − p 2 copies, where 0 ≤ p ≤ 300

(a) Determine where the demand is elastic, inelastic, and of unit elasticity
with respect to price.

(b) Interpret the results of part (a) in terms of the behavior of total
revenue as a function of price.

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Optimization in Economics

In addition, we can use derivatives to optimize economic quantities.

[First order derivative] If f 0 (a) = 0 and f 0 changes sign around a, a is

an extreme point.

[Second order derivative] If f 0 (a) = 0 then

if f 00 (a) > 0 then f attains a minimum value at a

if f 00 (a) < 0 then f attains a maximum value at a

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 Chapter 4. Differentiation 4.4. Some applications of differentiation on Economics

Assignment: 1,6 page 257; 6 page 268; 1abfg,2c, and 3c page 292;
1a,2a,3a, and 4b page 293 (deadline 27 Oct, before 11:30 a.m.)

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