ECN 2311: TOPIC 4 Multivariate functions
Partial Derivatives, Higher Order Derivatives and
Total Differentials
Functions of Several Variables
• More realistic in economics to assume an economic variable is a function of a
number of different factors:
Y =f(X, Z)
• Demand may depend on the price of the good and the income level of the
consumer
Qd =f(P,Y)
• Output of a firm depends on inputs into the production process like capital and
labour
Q =f(K,L)
• We therefore now focus on finding derivatives for functions of many variables
Partial derivatives
• Economic analysis often proceeds by considering the
consequences of a certain event, ceteris paribus.
• The relevance of this approach is that it identifies the exclusive
impact of the variable under study rather than confounding its
effect with the effect of other variables.
Partial derivatives
• If we have a function of more than one variable, such as:
𝑓 𝑥𝑦 = 𝑥 3 + 4𝑥𝑦 + 5𝑦 2
we can ask, for example, how f(x, y) changes when x increases
but y doesn’t change.
• The answer to this question is found by thinking of y as a
constant.
• Differentiate 𝑓 𝑥𝑦 wrt x, while treating y as if it were a
constant parameter.
Partial Derivatives
Definition:
Suppose f(x, y) is a function of two variables x and y.
Then, the partial derivative of f with respect to x at the
point (x, y) is
𝜕𝑓 𝑓 𝑥 + ℎ, 𝑦 − 𝑓 𝑥, 𝑦
= lim
𝜕𝑥 ℎ→0 ℎ
provided the limit exists.
The partial derivative of f with respect to y at the point (x,
y) is
𝜕𝑓 𝑓 𝑥,𝑦+𝑘 −𝑓 𝑥,𝑦
= lim
𝜕𝑦 k→0 𝑘
provided the limit exists.
Examples
Find the partial derivatives ∂f/∂x and ∂f/∂y of the function
𝑓 𝑥, 𝑦 = 𝑥 𝟐 − 𝐱𝑦 2 + 𝑦 𝟑
Use the partials to determine the rate of change of f in the x-
direction and in the y-direction at the point (1, 2) .
Solution
To compute ∂f/∂x, think of the variable y as a constant and
differentiate the resulting function of x with respect to x:
𝜕𝑓
= 2𝑥 − 𝑦 2
𝜕𝑥
Examples
Find the partial derivatives ∂f/∂x and ∂f/∂y of the function
𝑓 𝑥, 𝑦 = 𝑥 𝟐 − 𝐱𝑦 2 + 𝑦 𝟑
Use the partials to determine the rate of change of f in the x-
direction and in the y-direction at the point (1, 2).
Solution
To compute ∂f/∂y, think of the variable x as a constant and
differentiate the resulting function of y with respect to y:
𝜕𝑓
= −2𝑥 + 3𝑦 2
𝜕𝑦
The Cobb-Douglas Production Function
The Cobb-Douglass Production Function is of the form
f(l, k) = albk1– b (0 < b < 1)
where
a and b are positive constants,
l stands for labor,
k stands for capital equipment, and
f measures the output of the finished product.
The Cobb-Douglas Production Function
f(l, k) = albk1– b (0 < b < 1)
The first partial derivative fl is called the marginal
productivity of labor.
It measures the rate of change of production with respect to
the quantity of labor employed, with the level of capital kept
constant.
The first partial derivative fk is called the marginal
productivity of capital.
It measures the rate of change of production with respect to
the amount of capital used, with the employment level of
labor kept constant.
Applied Example: Marginal Productivity
Zambia’s production in the early years following its
independence in 1964 is described by the function
f(l, k) = 30l2/3k1/3
when x units of labor and y units of capital were used.
Compute fl and fk.
Find the marginal productivity of labor and the marginal
productivity of capital when the amount expended on labor
and capital was 125 units and 27 units, respectively.
Should the government have encouraged capital investment
rather than increase expenditure on labor to increase the
country’s productivity?
Applied Example 4, page 550
Applied Example: Marginal Productivity
f(l, k) = 30l2/3k1/3
Solution
The partial derivatives are
1
2 −1 1 𝑘 3
𝑓𝑙 = 30. 𝑙 3 𝑘 3 = 20.
3 𝑙
2
1 2 −2 𝑙 3
𝑓𝑘 = 30. 𝑙 𝑘 = 10.
3 3
3 𝑘
Applied Example 4, page 550
Applied Example: Marginal Productivity
f(l, k) = 30l2/3k1/3
Solution
The required marginal productivity of labor is given by
1
27 3 3
𝑓𝒍 (125,27) = 20. = 20. =12
125 5
or 12 units of output per unit increase in labor expenditure (keeping
capital constant).
The required marginal productivity of capital is given by
2
27 3 25 7
𝑓𝒌 (125,27) = 10. = 10. =27
125 9 9
or 27 7/9 units of output per unit increase in capital expenditure (keeping
labor
Applied constant).
Example 4, page 550
Applied Example: Marginal Productivity
f(l, k) = 30l2/3k1/3
Solution
The government should definitely have encouraged capital
investment.
A unit increase in capital expenditure resulted in a much faster
increase in productivity than a unit increase in labor: 27 7/9
versus 12 per unit of investment, respectively.
Applied Example 4, page 550
Higher Order Derivatives
Higher order Derivatives
In the study of productivity, we differentiate the production
function to get MP for each factor or input.
This tells us about the rate of change in out put as that factor ,
ceteris paribus , changes by a unit.
The interest is to know how output will increase if we employ one
more person.
How the change in the output compares with the wage rate provides
the rule for decision
Higher order Derivatives
Aside from the analysis on previous slide, we might also be interested in how the
MP behaves for every successive unit of the factor of production.
Do we get the same level of productivity for every additional person does this vary.
If it increases as we get more persons (assuming fixed wage), then there is every
reason to employ that additional unit
Higher order Derivatives
To get this we differentiate the MP function wrt labour
Notice that MP is itself a derivative of the production function
As such , the end result now is the second derivative of the initial
function ; the production function.
Similarly, we can get the third, fourth and up to the nth .
These called higher order derivatives
Second Partial Derivative & Cross Partial Derivatives
A second partial derivative is a measure of how a partial derivative with
respect to one argument of a multivariate function changes with a very
small change in that argument.
A cross partial derivative is a measure of how a partial derivative taken
with respect to one of the arguments of the multivariate function varies
with a very small change in another argument of that function.
Partial Derivatives
We have the function y f(x1,x2 )
The two partial derivates are f1(x1,x2 ) and f 2(x1,x2 ) or
y y
and
x1 x2
Second partial derivatives
y 2 y
f11(x1,x2 )
x1 x1 x12
y 2 y
f 22(x1,x2 )
x2 x2 x 2
2
Cross Partial Derivative
The cross partial derivative representing the partial
derivative of f 1(x1 ,x2 ) taken with respect to x2 is denote as
y
2 y
f 21(x1,x2 )
x2
x1 x2 x1
and the cross partial derivate of f 2(x1 ,x2 ) taken with respect
to x1 is denoted as
y 2 y
f12(x1,x2 )
x1 x2 x1x2
Example Utility Function
U U ( X , Y ) X Y 1 0 1 and 0
Marginal Utilities
1
U Y
UX X 1Y 1 0
X X
U X
UY 1 X Y 1 0
Y Y
Diminish Marginal Utility or second partial derivatives
2U
U XX 1 X 2 1
Y 0
X 2
2U
U YY 1 X 1
Y 0
Y 2
Example Cross Partial
Marginal Utilities
1
U Y
UX X 1 1
Y 0
X X
U X
UY 1 X Y
1 0
Y Y
The cross partials are
U 2U
U YX 1 X 1Y 0
Y X YX
U 2U
U XY 1 X 1Y 0
X Y XY
These goods are compliments in consumption. More of
one increases the marginal utility of the other.
Total Differentials
Total Differentials
The more general and realistic case of a K- independent variable is
when all variables are allowed to vary independently.
In this case we are concerned with the total change in the dependent
variable if each independent variable changes
That is the total differential
Total Differentials
Consider a given utility function
𝑈 = ራ 𝑥1 𝑥2 𝑥3 … … 𝑥𝑘
The total differential is written as
𝜕𝑈 𝜕𝑈 𝜕𝑈 𝜕𝑈
𝑑𝑈 = 𝑑𝑥1 + 𝑑𝑥2 + ⅆ𝑥3 ………. + 𝑑𝑥k
𝜕𝑥1 𝜕𝑥2 𝜕𝑥3 𝜕𝑥k
or
𝑑𝑈 = 𝑢1 𝑑𝑥1 +𝑢2 𝑑𝑥2 +𝑢3 𝑑𝑥3 +……𝑢k 𝑑𝑥k
Total Differentials
Each term on the right hand side indicate the approximate change
in U resulting from a change in one of the independent variables.
From the first term, it is the marginal utility of 𝑥1 multiplied by the
amount of change in 𝑥1 .
The total change in U is thus the summation of the individual
effects of all the variables.
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.
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