INTRODUCTION TO CALCULUS:

Integration
Applications

A. Musopole

Department of Mathematics and Statistics

The Polytechnic
[email protected]

March 3, 2020

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Overview

1 Introduction

2 Marginal and Total Functions

3 Consumer Surplus and Producer Surplus

4 Time Value of Money

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Introduction

In recent years, business-related and finance-related decision making

has become more and more mathematically oriented. Faced with
huge masses of statistical data, depending on hundreds or even
thousands of different variables, analysts have increasingly turned to
mathematical methods to help them describe what is happening,
predict the effects of various policy alternatives, and choose
reasonable courses of action from the range of possibilities available.
Among the mathematical methods employed is calculus.

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Marginal and Total Functions

Recall: a marginal function is the derivative of a total function. When

given a marginal function we can obtain a total function by integrating the
marginal function.

Example
The marginal cost function for producing x items of a product is
c(x) = 5 + 16x − 3x 2 . The total cost of producing 5 item is 500.
Determine the total cost function.

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Marginal and Total Functions...

Working
The marginal cost function is c(x) = 5 + 16x − 3x 2 . The total cost
function is
16x 2 3x 3
Z Z
5 + 16x − 3x 2 dx = 5x +
 
C (x) = c(x)dx = − +C
2 3
= 5x + 8x 2 − x 3 + C .

When x = 5 units are produced the cost is C (5) = 500. Then

500 = 5(5) + 8(52 ) − 53 + C

⇒C = 400.

Thus the total cost function is

C (x) = 5x + 8x 2 − x 3 + 400.
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Marginal and Total Functions...

Example
A manufacturer has just realised that the marginal cost of producing q
units of a product is composed of a fixed cost of 400 and a variable
cost of 3q 2 − 60q. The total cost of producing the first 2 units is 900.
Determine the total cost of producing the first 5 units.

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Marginal and Total Functions...

Working
The marginal cost function is

c(q) = variable part + constant part = 3q 2 − 60q + 400.

The total cost function is

Z Z
 2
3q − 60q + 400 dq = q 3 − 30q 2 + 400q + C .

C (q) = c(q)dq =

When first q = 2 units are produced the total cost is C (2) = 900.
Thus
900 = 23 − 30(22 ) + 400(2) + C ⇒ C = 212.
Thus the total cost function is C (q) = q 3 − 30q 2 + 400q + 212. The
total cost of producing first q = 5 units is

C (5) = 53 − 30(52 ) + 400(5) + 212 = 1587.

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Consumer Surplus and Producer Surplus

It has been convenient to think of demand and supply as quantities

that are functions of price.
We will find it convenient to think of them as prices that are
functions of quantity: p = D(x) and p = S(x).
We can use integration to calculate quantities such as consumer
surplus and producer surplus.
The consumer’s demand curve is the graph of p = D(x), which
shows the price per unit that the consumer is willing to pay for x units
of a product. It is usually a decreasing function since the consumer
expects to pay less per unit for large quantities of the product.
The producer’s supply curve is the graph of p = S(x), which shows
the price per unit the producer is willing to accept for selling x units.
It is usually an increasing function since a higher price per unit is an
incentive for the producer to make more units available for sale.
The equilibrium point (xE , pE ) is the intersection of these two curves.
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Consumer Surplus and Producer Surplus...

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Consumer Surplus and Producer Surplus...
When a consumer receives x units of a product, a certain amount of
pleasure, or utility, U, is derived from them.
We will use the examples in Bettinger, Ellenbogen and Surgent
(2012) to explain this concept.
For example, the number of movies that you see in a month gives you
a certain utility. If you see four movies (unless they are not
entertaining), you get more utility than if you see no movies. The
same notion applies to having a meal in a restaurant or paying your
heating bill to warm your home.
Samantha is a college student who likes movies. At a price of $10 per
ticket, she will see no movies. At a price of $8.75 per ticket, she will
see one movie per month, and at a price of $7.50 per ticket, she will
see two movies per month. As the price per ticket decreases,
Samantha tends to see more movies. As long as the number of
movies (x) is small, Samantha’s demand function for movies can be
modeled by p = 10 − 1.25x. We want to examine the utility she
receives from going to the movies.
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Consumer Surplus and Producer Surplus...
At a ticket price of $8.75, Samantha sees one movie. Her total
expenditure is (1)$8.75 = $8.75, as shown by the figure.
But the area under Samantha’s demand curve over the interval [0, 1]
is $9.38. This is what going to one movie per month is worth to
Samantha- that is, what she is willing to pay. Since she spent $8.75,
the difference in area, represented by the orange triangle,
$9.38 − $8.75 = $0.63, can be interpreted as pleasure Samantha gets,
but does not have to pay for, from the one movie. Economists define
this amount as consumer surplus. It is the extra utility that
consumers enjoy when prices decrease as more units are purchased.

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Consumer Surplus and Producer Surplus...

Suppose Samantha goes to two movies per month at $7.50 per ticket.
Her total expenditure is (2)$7.50 = $15.00, which is represented by
the blue region in the figure.
The area under Samantha’s demand curve over the interval [0, 2] is
$17.50. Therefore, Samantha’s consumer surplus is
$17.50 − $15.00 = $2.50, which measures the pleasure Samantha
received, but did not have to pay for, from the two movies.

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Consumer Surplus and Producer Surplus...

If Samantha goes to Q movies when the price is P, then her total

expenditure is QP. The total area under the curve is the total utility,
or the total enjoyment received, and is

ZQ
D(x)dx.
0

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Consumer Surplus and Producer Surplus...

The consumer surplus is the total area under the curve minus the
total expenditure. This surplus is the total utility minus the total cost
and is given by
ZQ
CS = D(x)dx − QP.
0

Consumer surplus measures the consumers’ gain from trade. It is the

total amount gained by consumers by buying the item at the current
price rather than at the price they would have been willing to pay.
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Consumer Surplus and Producer Surplus...

Example
Determine the consumer surplus at Q = 5, for the demand function

P = 30 − 4Q.

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Consumer Surplus and Producer Surplus...

Working: When Q = 5, P = 30 − 4(5) = 10. We have a sketch below

(the intercepts are (0, 30) and (7.5, 0)).

Entire area under demand curve between 0 and Q1 = 5 is

Z5
5
[30 − 4Q] dQ = 30Q − 2Q 2 0 = [30(5) − 2(25)] − [0] = 100.


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Consumer Surplus and Producer Surplus...

Working...: Total revenue is area under price line at P1 = 10 between

Q = 0 and Q1 = 5, which is

P1 Q1 = 50.

So consumer surplus in this case is

ZQ1
CS = [30 − 4Q] dQ − P1 Q1 = 100 − 50 = 50.
0

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Consumer Surplus and Producer Surplus...

Example
Determine the consumer surplus for the demand function given by

D(y ) = (y − 4)2

at y = 4.

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Consumer Surplus and Producer Surplus...

Working: When y = 4, we have D(4) = (4 − 6)2 = 4. Thus Q = 4

and P = 4. Then consumer surplus is

ZQ Z4
CS = D(y )dy − PQ = (y − 6)2 dy − 4×4
0 0
Z4  3 4
 2 y
− 6y 2 + 36y − 16

= y − 12y + 36 dy − 16 =
3 0
0
= [(69.333) − (0)] − 16 = 53.333.

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Consumer Surplus and Producer Surplus...
We will now look at a supply curve for a movie theater. Suppose the
movie theater will not sell tickets to a movie for any price at or below $4,
but will sell one ticket for one movie at $5.75 or two tickets for two movies
at $7.50 each. For small numbers of movies (x), the theater’s supply curve
is modeled by p = 4 + 1.75x. The price $5.75 is within what Samantha is
willing to pay for one movie, and the theater will take in a revenue of
(1)$5.75 = $5.75 for selling Samantha one ticket for one movie.

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Consumer Surplus and Producer Surplus...

The area of the yellow region in the figure represents the total per-person
cost to the theater for showing one movie, which is $4.88. Since the
theater takes in $5.75 for selling one ticket, the difference,
$5.75 − $4.88 = $0.87, represents the surplus over cost and is a
contribution toward profit for the theater. Economists call this the
producer surplus.

It is the benefit a producer receives when supplying more units at a higher

price than the price at which the producer expects to sell units. It is the
extra revenue the producer receives as a result of not being forced to sell
fewer units at a lower price.

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Consumer Surplus and Producer Surplus...
At a price of $7.50, the theater will show Samantha 2 movies and collect
total receipts of 2($7.50) = $15. The area of the yellow region in the
figure below represents the total cost to the theater of showing Samantha
2 movies, which is $11.50. The area of the green triangle is
$15.00 − $11.50 = $3.50 and is the producer’s surplus. It is a contribution
to the theater’s profit.

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Consumer Surplus and Producer Surplus...

Suppose that the graph of the supply function is a curve, as shown

below.

If the theater shows Samantha Q movies when the price is P, the

total receipts are QP. The producer surplus is the total receipts
minus the area under the curve and is given by

ZQ
PS = QP − S(x)dx.
0

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Consumer Surplus and Producer Surplus...

The producer surplus measures the suppliers’ gain from trade. It is the
total amount gained by producers by selling at the current price, rather
than at the price they would have been willing to accept.

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Consumer Surplus and Producer Surplus...

Example
Given that
p = 3 + Q2
is the supply curve, determine a measure of producer surplus at Q = 4.

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Consumer Surplus and Producer Surplus...

Working: When Q = 4 we have P = 3 + 42 = 19. Thus Q1 = 4 and

P1 = 19. The intercept is (0, 3). A sketch is below.

The area under supply curve between Q = 0 and Q1 = 4 is

Z4 4 
Q3
 
 2
 1 3
3 + 4 dQ = 3Q + = 3(4) + (4) − [0] = 33.333.
3 0 3
0
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Consumer Surplus and Producer Surplus...

Working...: Total revenue is the area under price line P1 = 19,

between Q = 0 and Q1 = 4, and this is

P1 Q1 = 76.

Then producer surplus is

ZQ1
3 + 42 dQ = 76 − 33.333 = 42.667.
 
PS = Q1 P1 −
0

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Consumer Surplus and Producer Surplus...

Example
Determine the producer surplus for

S(x) = 3x 2 + 2x + 3

when x = 3.

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Consumer Surplus and Producer Surplus...

Working
When x = 3 we have S(3) = 3(3)2 + 2(3) + 3 = 36. Thus Q = 3 and
P = 36. Then producer surplus is

ZQ Z3
 2 
PS = QP − S(x)dx = 3×36 − 3x + 2x + 3 dx
0 0
3
= 108 − x 3 + x 2 + 3x 0 = 108 − [(45) − (0)]


= 63.

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Consumer Surplus and Producer Surplus...

The equilibrium point (xE , pE ) is the point at which the supply and
demand curves intersect.

Here the demand and supply curves are equal- the quantity of goods
supplied is equal to the quantity of goods demanded.

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Consumer Surplus and Producer Surplus...

When we add the consumer surplus and the producer surplus we get total
surplus.

Total Surplus = Consumer Surplus + Producer Surplus .

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Consumer Surplus and Producer Surplus...

Given
D(x) = (x − 5)2 and S(x) = x 2 + x + 3
as demand and supply functions respectively, determine
(a) the equilibrium point.
(b) the consumer surplus at the equilibrium point.
(c) the producer surplus at the equilibrium point.
(d) the total surplus at the equilibrium point.

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Consumer Surplus and Producer Surplus...

Working: (a)
At equilibrium we have D(x) = S(x). Then

(x − 5)2 = x 2 + x + 3
⇒x 2 − 10x + 25 = x 2 + x + 3
⇒ − 10x + 25 = x + 3
⇒x = 2.

When x = 2 we have p = D(2) = (2 − 5)2 = 9 (to find p you can also

use S(x) since D(x) = S(x)).

Then the equilibrium point is (xE , pE ) = (2, 9).

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Consumer Surplus and Producer Surplus...

Working: (b)
We need to obtain consumer surplus at equilibrium point. Here
xE = Q = 2 and pE = P = 9. Then

ZQ Z2 h i
CS = D(x)dx − QP = (x − 5)2 dx − 2×9
0 0
Z2 2
x3

2
− 5x 2 + 25x
 
= x − 10x + 25 dx − 18 = − 18
3 0
0
= 14.667

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Consumer Surplus and Producer Surplus...

Working: (c)
We need to determine producer surplus at equilibrium point. We have
xE = Q = 2 and pE = P = 9. Then

ZQ Z2
x 2 + x + 3 dx
 
PS = QP − S(x)dx = 2×9 −
0 0
2
x3 x2
   
8
= 18 − + + 3x = 18 − + 2 + 6 − (0)
3 2 0 3
= 7.333.

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Consumer Surplus and Producer Surplus...

Working: (d)
We need to determine the total surplus at equilibrium point. At
equilibrium we have the consumer surplus as CS = 14.667 and the
producer surplus as PS = 7.333. Then the total surplus is

Total Surplus = Consumer Surplus + Producer Surplus

= CS + PS
= 14.667 + 7.333
= 22.

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Time Value of Money

In the previous semester we looked at time value of money.

The time value of money represents the fact that it is better to have
money today than tomorrow. Investor prefers to receive a payment
today rather than an equal amount in the future, all else being equal.
This is because the money received today can be deposited in a bank
account and an interest is received.
Recall that if interest is compounded n times a year at an annual rate
r for t years, then the relationship between FV and PV is given by
the formula
FV = PV (1 + i)nt
where i is the periodic rate. When n = 1 we have i = r .
With the above formula the cases considered are discrete.
In the case of continuous compound interest, the relationship between
PV and FV is given by
FV = PVe rn .
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Time Value of Money...
Previously we looked at the PV and FV of a single payment.
Suppose we want to calculate the PV and FV of a continuous stream
of payments. The revenues earned by a huge corporation (such as an
electricity company), for example, come in essentially all the time,
and therefore they can be represented by a continuous income stream.
Since the rate at which revenue is earned may vary from time to time,
the income stream is described by a function S(t) which represents
the flow rate in dollars per year. Note that the rate depends on time ,
t, usually measured in years from the present.
To find the present value of a continuous income stream over a period
of T years we divide the interval [0, T ] into n equal subintervals each
of length ∆t = Tn and with division points
0 = t0 < t1 < t2 < t3 < ... < tn = T . That is over each time interval
we are assuming a single payment is made.
Assuming interest r is compounded continuously, the present value of
the total money deposited is approximated by Riemann sum.
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Time Value of Money...

n
X
−rt1 −rt2 −rtn
PV ≈S(t1 )e ∆t + S(t2 )e ∆t + ... + S(tn )e ∆t = S(ti )e −rti ∆t.
i=1

With ∆t→0, i.e. n→∞, we have

ZT
PV = S(t)e −rt dt.
0

Similary
ZT
FV = S(t)e r (T −t) dt.
0

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Time Value of Money...

Example
If you plan to deposit K1200 million per year continuously into an
account that pays 6% annual interest compounded continuously,
determine the amount in the account at the end of 10 years.

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Time Value of Money...

Working
We have S(t) = 1200 (it is a constant); T = 10; and r = 6% = 0.06.
Thus the future value is
ZT Z10
r (T −t)
FV = S(t)e dt = 1200e 0.06(10−t) dt
0 0
Z10 10
1200e 0.6−0.06t

0.6−0.06t
= 1200e dt =
−0.06 0
0
1200e 0.6
   
1200
= − − − = 16442.38.
0.06 0.06

The future value is K16, 442.38 million.

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Time Value of Money...

Example
Suppose the interest rate is constantly 5% and the income stream is
given by the function A(t) = 1000 + 50t. Determine the present value
of this income stream over the next 8 years.

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Time Value of Money...

Working: We have S(t) = A(t); T = 8; and r = 5% = 0.05. Then

the present value is

ZT Z8
−rt
PV = S(t)e dt = (1000 + 50t)e −0.05t dt
0 0
Z8 Z8
−0.05t
= 1000 e dt + 50 te −0.05t dt.
0 0

We can evaluate te −0.05t dt using integration by parts (try to do it).

R

We have
8
PV = −20000e −0.05t − 20te −0.05t − 400e −0.05t 0 = 842.72.


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Try A

1 The marginal cost function of producing q units of a product is

given by c(q) = √ 2q . Determine the total cost function and
q +25
the
h average cost function if the fixed cost isq1000. i
p
C (q) = q 2 + 25 + 995; Average cost = 1 + 25 q2
+ 995
q
2 The marginal cost of a product is given to be a constant multiple
of number of units y produced. The cost of producing
h 50 units isi
y2
5625. Determine the total cost function. C (y ) = 4 + 5000
3 The marginal revenue function of a commodity is given as
r (x) = 8 − 12x 2 + 6x. Determine the total
 revenue function.
R(x) = 8x − 4x 3 + 3x 2


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Try B

1 The marginal
√ cost of producing x units of a product is given by
c(x) = x x + 1. The cost of producing 3 units is 7800.
Determine the cost function.
h 5 3
i
C (x) = 25 (x + 1) 2 − 23 (x + 1) 2 + 116888
15
2 A manufactur’s marginal revenue function is given by
r (x) = 275 − x − 0.3x 2 . Determine the increase in the
manufacturer’s total revenue if the production is increased from
10 to 20 units. [1900]
3 The demand and supply functions for a good are
D(x) = −2x + 14 and S(x) = x + 2 respectively. Determine
(a) the equilibrium point. [(4, 6)]
(b) the total surplus when the market is in equilibrium. [24]

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Try C

1 The demand and supply functions for a good are

D(q) = 50 − 0.1q and S(q) = 11 + 0.05q respectively. Determine
(a) the equilibrium point.
(b) the total surplus when the market is in equilibrium.
2 An investor is investing K3.3 million a year in an account
returning 9.4% APR. Assuming a continuous income stream and
continuous compounding of interest, determine how much will
these investments be worth 10 years from now. [K54.8 million]
3 Determine the constant, continuous rate at which money must be
deposited into an account if the account it ot contain K20, 000
million in 5 years. The account earns 6% interest compounded
continuously. [K4, 630 million per year]

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References

Bittinger, M.L., Ellenbogen, D.J. and Surgent, S.A. (2012), Calculus

and its Applications, 10th ed., Pearson Education.
Ginzburg, A. (2003), Calculus: Problems and Solutions, Dover
Publications.
Stewart, J. (2006), Essential Calculus: Early Transcendentals,
Thomson Brooks/Cole.

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 The End

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