UGC SWAYAM MOOCS - Mathematical Economics Content Writer: Sikha Ahmad
Mathematical Economics: Application of Integration in Economic Theory
28.1 Suppose a firm is faced with a marginal revenue function .
a) What will be the total revenue of the firm if quantity supplied is 10 units?
b) What will be the change in total revenue when the quantity changes by one unit? Interpret.
c) Find the area under the curve when quantity changes from q=0 to q=10
Solution:
a) By definition (Module 27, Section 27.6), Total revenue function is given by
∫( )
∫ ∫
( )
Now, if
When , ( ) ( )
b) By definition, the change in total revenue for a unit change in quantity is given by
marginal revenue, that is,
Using the MR equation and putting the value of , ( )
This means that when quantity changes by one unit, the total revenue changes by 34
Therefore,
If , and if ,
This can also be attained by putting the value of q in the TR function.
Thus, for ( ) ( )
And for ( ) ( )
Conversely, ,
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UGC SWAYAM MOOCS - Mathematical Economics Content Writer: Sikha Ahmad
Note:
For simplicity we say one unit. Sugar may be weighed in milligrams or in tons while cars are in
large units.
By using the concept of definite integral:
In order to find the area under the curve between two points ( ), we may
write
∫ ( )
[ ]
( ) ( )
[ ( ) ] [ ( ) ]
c) Graphical representation:
In order to find the area under the MR curve, let us draw the graph of the marginal revenue
function
GRAPH OF MARGINAL REVENUE FUNCTION
41
40
40 39.4
38.8
39 38.2
Marginal Revenue
37.6
38
37
37 36.4
35.8
36 35.2
34.6
35
34
34
33
0 2 4 6 8 10 12
Quantity
Fig. 28.1: Graph of Marginal Revenue Function
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In order to find the area under the curve when we find the area of the
triangle and the rectangle shown in Fig. 28.2.
Fig. 28.2: Area under Marginal Revenue Curve between q=0 and q=10
Now,
( )
And
Therefore,
The area under the curve is noting but the total revenue.
This area may be calculated by using the concept of definite integration from
Therefore,
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∫( )
[ ]
( ) ( )
[ ( ) ] [ ( ) ]
28.2 Suppose the marginal cost function of a firm is given as ,
a) Determine the change in total cost when quantity is changed from 5 units to 10 units
b) Find the area under the MC curve when quantity changes from q=5 to q=10
Solution:
a) Given the marginal cost function, the total cost function may be found by taking the
integration of the MC function.
Therefore,
∫( )
[ ]
( ) ( )
[ ( ) ( ) ] [ ( ) ( ) ]
Therefore, when quantity changes from 5 units to 10 units, the total cost changes by 691.67
b) In order to find the area under the curve between , let us draw the
graph of the MC curve,
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GRAPH OF MARGINAL COST FUNCTION
300 265
250
205
Marginal Cost 200
153
150
109
100 73
45
50 25 13 13
25
9
0
0 2 4 6 8 10 12
Quantity
Fig. 28.3: Graph of Marginal Cost Function
Since the MC curve is a non-linear equation, the area under the curve is given by the shaded area
in yellow as shown in Fig. 28.4
Fig. 28.4: Area under Marginal Cost curve between q=5 and q=10
If we add the area of the rectangle ABCD and the area of the triangle ADE, we get the Area of the
figure coloured in yellow and orange, which is greater than the area under the MC curve.
Thus,
and
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UGC SWAYAM MOOCS - Mathematical Economics Content Writer: Sikha Ahmad
( )
The concept of integration helps to find the area under the curve. This is obtained in section (a) of
question 28.2 as
Therefore, the orange area excluded =
28.3. Consumer’s Surplus:
When consumers demand for a particular good or commodity, they are willing to pay any price to
get that good or commodity. However, the price that is fixed in the market is the price at which
demand is equal to the supply. Generally, the willingness to pay of the consumer is greater than
the market price and the difference between the willingness to pay and the market price is
termed as consumer’s surplus.
This concept may be explained with the graphical method and calculated using the concept of
integration.
Suppose a consumer is faced with a demand function for a particular good as and
the market price of the good is ` 20. Calculate the consumer’s surplus.
Solution:
Given the demand function, , when . The consumer’s surplus may
be graphically shown as in Fig. 28.5
For one unit of the good, the market price is 20, but the consumer is willing to pay somewhere
close to 25. Since the market price is less than the consumer’s willingness to pay, there exist a
surplus and this surplus is termed as consumer’s surplus.
The total consumer’s surplus till the equilibrium quantity is therefore given by the yellow shaded
region.
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Fig. 28.5: Consumer’s Surplus for P=20
If the market price is 10, equilibrium quantity is 30 and the consumer’s surplus will increase as
shown by the orange region in Fig. 28.6.
Fig. 28.6: Consumer’s Surplus for P =10
This consumer’s surplus may be calculated by using the concept of definite integral.
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Now,
When market price for equilibrium quantity the consumer will pay
Expenditure=
Therefore,
∫( )
[ ]
[ ( ) ( ) ] [ ( ) ( ) ]
Since the graph is linear, the consumer’s surplus can also be found out by finding the area of the
yellow shaded region.
Thus,
( )
Similarly, the consumer’s surplus when may be calculated. (Try it!)
28.4 Producer’s Surplus:
When suppliers supply a good or commodity, they receive more than what they are willing to
accept. This is excess amount is termed as producer’s surplus.
Suppose that the supply function is given by . If the market price is `6, what is the
producer’s surplus?
Solution:
Given the supply function, , when . The producer’s surplus may be
calculated by using the concept of definite integral.
Now,
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UGC SWAYAM MOOCS - Mathematical Economics Content Writer: Sikha Ahmad
At equilibrium quantity,
Therefore,
∫( )
[ ]
[ ( ) ( ) ] [ ( ) ( ) ]
The producer’s surplus can be graphically shown as in Fig. 28.7
Fig. 28.7: Producer’s Surplus
In order to determine the producer’s surplus by the graphical method, we find the area of the
orange shaded region.
Thus,
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