Differentiation
1.Rules of Differentiation
2.Applications
1
Differentiation is all about measuring change!
Measuring change in a linear function:
y = a + bx
a = intercept
b = constant slope i.e. the impact of a unit
change in x on the level of y
y2 y1
b = y =
x x2 x1
2
If the function is non-linear:
40
e.g. if y = x2
30
y=x2
20
10
0
0 1 2 3
X 4 5 6
y y 2 y1
x
= x2 x1
gives slope of the line
connecting 2 points (x1, y1) and (x2,y2) on a
curve
(16-4)
(2,4) to (4,16): slope = /(4-2) = 6
(2,4) to (6,36): slope = (36-4)/(6-2) = 8 3
The slope of a curve is equal to the slope of
the line (or tangent) that touches the curve
at that point
Total Cost Curve
40
35
30
25
y=x2
20
15
10
0
1 2 3 4 5 6 7
which is different for different values of x
4
Example:A firms cost function is
Y = X2
X X Y Y
0 0
1 +1 1 +1
2 +1 4 +3
3 +1 9 +5
4 +1 16 +7
Y = X2
Y+Y = (X+X) 2
Y+Y =X2+2X.X+X2
Y = X2+2X.X+X2 – Y
since Y = X2 Y = 2X.X+X2
Y
X
= 2X+X
The slope depends on X and X
5
The slope of the graph of a function
is called the derivative of the
function
dy y
f ' ( x ) lim
dx x 0 x
• The process of differentiation involves
letting the change in x become arbitrarily
small, i.e. letting x 0
• e.g if = 2X+X and X 0
= 2X in the limit as X 0
6
the slope of the non-linear
function
Y = X2 is 2X
• the slope tells us the change in y that
results from a very small change in X
• We see the slope varies with X
e.g. the curve at X = 2 has a slope = 4
and the curve at X = 4 has a slope = 8
• In this example, the slope is steeper
at higher values of X 7
Rules for Differentiation
(section 4.3)
1. The Constant Rule
If y = c where c is a constant,
dy
0
dx
dy
e.g. y = 10 then dx 0
8
2. The Linear Function Rule
If y = a + bx
dy
b
dx
dy
6
e.g. y = 10 + 6x then dx
9
3. The Power Function Rule
If y = axn, where a and n are constants
dy
n.a .x n 1
dx
dy 0
i) y = 4x => dx 4 x 4
dy
ii) y = 4x 2
=> dx 8 x
-2dy 3
iii) y = 4x => dx 8 x
10
4. The Sum-Difference Rule
If y = f(x) g(x)
dy d [ f ( x )] d [ g ( x )]
dx dx dx
If y is the sum/difference of two or more
functions of x:
differentiate the 2 (or more) terms
separately, then add/subtract
dy
(i) y = 2x2 + 3x then 4 x 3
dx
dy
(ii) y = 5x + 4 then dx 5 11
5. The Product Rule
If y = u.v where u and v are functions of x,
(u = f(x) and v = g(x) ) Then
dy dv du
u v
dx dx dx
12
Examples
dy dv du
If y = u.v u v
dx dx dx
2
i) y = (x + 2 )(a x + b x )
x 2 2 ax b ax
dy 2
bx
dx
ii) y = (4 x 3-3 x + 2 )(2 x 2+ 4 x )
dy 4 x 3 3 x 2 4 x 4 2 x 2 4 x 12 x 2 3
dx
13
6. The Quotient Rule
• If y = u/v where u and v are functions of x
(u = f(x) and v = g(x) ) Then
du dv
v u
dy dx dx
2
dx v
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du dv
v u
u dy
If y then dx 2 dx
v dx v
Example 1
y
x 2
x 4
dy
x 4 1 x 2 1
2
dx x 4 2
x 42
15
7. The Chain Rule
(Implicit Function Rule)
• If y is a function of v, and v is a function of
x, then y is a function of x and
dy dy dv
.
dx dv dx
16
dy dy dv
.
Examples dx dv dx
2 ½
i) y = (ax + bx)
let v = (ax2 + bx) , so y = v½
1
dy 1
dx 2
2
ax bx 2 .2ax b
3 4
ii) y = (4x + 3x – 7 )
3 4
let v = (4x + 3x – 7 ), so y = v
dy
dx
3 3
2
4 4 x 3 x 7 . 12 x 3
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8. The Inverse Function Rule
dy 1
If x = f(y) then dx dx
dy
• Examples
i) x = 3y2 then
dx dy 1
dy
6 y so dx 6 y
3
ii) y = 4x then
dy dx 1
12x 2 so dy 12 x 2
dx 18
Differentiation in Economics
Application I
• Total Costs = TC = FC + VC
• Total Revenue = TR = P * Q
= Profit = TR – TC
• Break even: = 0, or TR = TC
• Profit Maximisation: MR = MC
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Application I: Marginal Functions
(Revenue, Costs and Profit)
•
Calculating Marginal Functions
d TR
MR
dQ
d TC
MC
dQ
20
Example 1
• A firm faces the
Solution:
demand curve P=17-
3Q
TR = P.Q = 17Q – 3Q2
• (i) Find an
expression for TR in
terms of Q d TR
MR 17 6Q
• (ii) Find an dQ
expression for MR in
terms of Q
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Example 2
A firms total cost curve is given by
TC=Q3- 4Q2+12Q
(i) Find an expression for AC in terms of Q
(ii) Find an expression for MC in terms of Q
(iii) When does AC=MC?
(iv) When does the slope of AC=0?
(v) Plot MC and AC curves and comment on
the economic significance of their
relationship
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Solution
(i) TC = Q3 – 4Q2 + 12Q
TC
Then, AC = / Q = Q – 4Q + 12
2
d TC 2
(ii) MC = dQ 3Q 8Q 12
(iii) When does AC = MC?
Q2 – 4Q + 12 = 3Q2 – 8Q + 12
Q =2
Thus, AC = MC when Q = 2
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Solution continued….
(iv) When does the slope of AC = 0?
d AC
2Q 4 = 0
dQ
Q = 2 when slope AC = 0
(v) Economic Significance?
MC cuts AC curve at minimum point…
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9. Differentiating Exponential Functions
x
If y = exp(x) = e where e = 2.71828….
dy x
then dx e
More generally,
rx
If y = Ae
dy rx
then dx rAe ry
25
Examples
2x
dy 2x
1) y = e then dx = 2e
-7x
dy -7x
2) y = e then dx = -7e
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10. Differentiating Natural Logs
Recall if y = ex then x = loge y = ln y
If y = ex dy
then e x = y
dx
From The Inverse Function Rule
dx 1
y = e dy y
x
Now, if y = ex this is equivalent to writing
x = ln y
Thus, x = ln y dx
1
dy y
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More generally,
dy 1
if y = ln x dx x
NOTE: the derivative of a natural log
function does not depend on the co-efficient
of x
dy 1
Thus, if y = ln mx
dx x
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Proof
if y = ln mx m>0
Rules of Logs y = ln m+ ln x
Differentiating (Sum-Difference rule)
dy 1 1
0
dx x x
29
Examples
dy 1
1) y = ln 5x (x>0) dx
x
2
2) y = ln(x +2x+1)
2
let v = (x +2x+1) so y = ln v
dy dy dv
Chain Rule: dx dv . dx
dy 1
2 .2 x 2
dx x 2 x 1
dy
2
2 x 2
dx
x 2x 1
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3) y = x4lnx
Product Rule:
dy 1
x 4 ln x .4 x 3
dx x
= x 3
4 x 3
ln x = x 3
1 4 ln x
4) y = ln(x3(x+2)4)
Simplify first using rules of logs
y = lnx3 + ln(x+2)4
y = 3lnx + 4ln(x+2)
dy 3 4
dx x x 2
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Applications II
• how does demand change with a change in
price……
• e d= proportion al change in demand
proportion al change in price
Q P Q P
= Q P = P . Q
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Point elasticity of demand
dQ P
.
ed = dP Q
ed is negative for a downward sloping demand
curve
–Inelastic demand if | ed |<1
–Unit elastic demand if | ed |=1
–Elastic demand if | ed |>1
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Example 1
-b
Find ed of the function Q= aP
dQ P
ed = .
dP Q
b 1 P
ed = baP . b
aP
baP b P
= P . aP b b
ed at all price levels is –b
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Example 2
If the (inverse) Demand equation is
P = 200 – 40ln(Q+1)
Calculate the price elasticity of demand
when Q = 20
dQ P
Price elasticity of demand: ed = .
dP Q
<0
P is expressed in terms of Q,
dP 40
dQ Q 1
dQ Q 1
Inverse rule dP
40
Q 1 P
Hence, ed = . <0
40 Q
21 78.22
Q is 20 ed = 40. 20 = -2.05
(where P = 200 – 40ln(20+1) = 78.22) 35
Application III: Differentiation of Natural
Logs to find Proportional Changes
f’(x)
The derivative of log(f(x)) /f(x), or the
proportional change in the variable x
i.e. y = f(x), then the proportional x
dy 1 d (ln y )
= dx . y = dx
Take logs and differentiate to find
proportional changes in variables
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dy 1
1) Show that if y = x , then dx . y x
and this derivative of ln(y) with respect to x.
Solution:
dy 1 1
. .x 1
dx y y
1 x
= y . x
1 y
= y . . x
= x
37
Solution Continued…
Now ln y = ln x
Re-writing ln y = lnx
d (ln y ) 1
.
dx x x
Differentiating the ln y with respect to x gives
the proportional change in x.
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Example 2: If Price level at time t is
P(t) = a+bt+ct2
Calculate the rate of inflation.
Solution: Alternatively,
The inflation rate at t is the proportional differentiating the log of P(t) wrt t directly
change in p 2
lnP(t) = ln(a+bt+ct )
1 dP( t ) b 2ct
. where v = (a+bt+ct2) so lnP = ln v
P( t ) dt a bt ct 2
Using chain rule,
d ln P( t ) b 2ct
dt a bt ct 2
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