What is Differentiation?
Differentiation is a mathematical tool to find the rate at which a function's output (y) changes
with respect to a small change in its input (x).
The Calculus uses derivatives to approximate any change in a quantity. Like checking the
temperature variation. Sometimes in common terms, we say what is the “Delta Change”.
If we need the rate of change, considering delta △ x as very small, the derivative gives this
value.
dy/dx = △x = x.
In terms of Business Mathematics, the first derivative of a function represents its
instantaneous rate of change, such as the marginal profit, while the second derivative
represents the rate of change of that rate, indicating whether the initial rate is increasing or
decreasing and the shape (concavity) of the business model's graph, which helps in finding
maximum or minimum points like optimal production levels.
In essence, while the first derivative tells you the direction of change, the second derivative
tells you about the nature of that change, helping businesses understand the behavior and
stability of their key metrics
The First Derivative (f'(x) or dy/dx) [Also called first-order derivative]
Definition: The first derivative shows how a function is changing at a specific point.
Business Application:
Marginal Cost/Revenue/Profit: If C(x) is the total cost of producing x units,
C'(x) is the marginal cost, representing the cost of producing one additional unit.
- Total Cost (TC): The overall cost of producing a given level of output.
- Marginal Cost (MC): The additional cost of producing one more unit.
Growth/Decline: If f(x) represents a company's revenue over time, f'(x) indicates
whether the revenue is increasing or decreasing and by how much at a given time.
The Second Derivative (f''(x) or d²y/dx²) [Also called second-order derivative]
Definition: The second derivative is found by differentiating the first derivative. It
describes the change in the first derivative, essentially the "slope of the slope".
Business Application:
Concavity: The sign of the second derivative reveals the concavity of the
function's graph.
o A positive second derivative (f''(x) > 0) indicates that the rate of change is
increasing, and the graph is concave up, suggesting the function is accelerating its
growth.
o A negative second derivative (f''(x) < 0) means the rate of change is decreasing,
and the graph is concave down, indicating the function is decelerating its growth
or is approaching a maximum.
Optimization: The second derivative test is used to determine if a critical point
found using the first derivative is a maximum or minimum. For instance, if the
profit function's first derivative is zero, a negative second derivative confirms this
point as a profit maximum.
Second derivative applications in Business Mathematics:
Profit Maximization: Businesses use the second derivative to confirm that a found profit-
maximizing quantity is indeed a maximum point, ensuring the highest possible profit.
Cost Minimization: Similarly, it verifies that a cost-minimizing quantity results in a
minimum point for the cost function.
Market Volatility: In financial markets, the second derivative can be used to measure the
volatility of a product's price, indicating how much the price curve is bending over time.
Rate of Inflation: In economics, if a function represents the general price level over time, the
first derivative is inflation, and the second derivative represents the rate of change of
inflation.
Basic formulas for Differentiation:-
Rules of Derivative:
Derivation of Derivative Formula:
Examples:
