10th – April LESSON 3 – HIGHER ORDER

DERIVATIVES
Differentiating a function y= f(x) gives the rate of change in y with respect to x.
Using the same rules of differentiation, the first derivative can be differentiated
again if the function allows us to do so.

Example: Find the second and 3rd derivatives for y= 3x2 .

Solution: ∂y/∂x = 6x, ∂2y/∂x2 = 6 and ∂3y/∂x3 = 0

Exercise: Find the 2nd and 3rd derivatives for y=3x3 + 4x2 + 2x

Partial differentiation

The differentiation used to measure the impact of a change in an independent

variable, holding other independent variables constant on the dependent
variable.

The function we deal with is a function of several variables such as, y=(Xx1 ,
Xx2 , Xx3 ………..Xn) whose independent variable xi where i=(1,………n) are
independent of each other.

For example, fx1 means the partial derivative of the function with respect to x1
holding other independent variables constant.

It should also be noted that fx1 is still a function of the same independent
variable. i.e. fx1 (x1 , x2 , x3……….xn)

Example1:

Differentiate y=3X1 X2 partially with respect to X1 and X2

Solution: Express a function as y=3X1 X2 = f(X1, X2) hence:

∂y/∂x1 = fx1 =3X2 and ∂f/∂x2 =3X1 where fx1 means the partial derivatives of a
function with respect to X1 holding X2 constant and fx2 indicates the partial
derivatives of a function with respect to X2 holding X1 constant

Exercise:
a) Differentiate the function y=4X12 X23 partially with respect to X1 and
X2
b) The production function shows a relationship between factors of
production and output level. One form of production function is
called Cobb-Douglas production function. Suppose this function
takes the form , Q=4L0.3K0.7 where Q, L, K are output levels, units of
labor and units of capital respectively
Find the marginal products of labor and capital as well as the
elasticities in respect to labor and capital.

Implicit differentiation

To differentiate the function f(x1 x2…………xn) =0, implicitly one can use the
formula

∂xi/∂xj=-fxi/fxj for j =-fxi/fxj for j= (2, 3……….n) and 0 fxi ≠0

Example 1: Differentiate the function f(x, y, z) = 3x2y2z-3xy-3=0

Solution:

∂y/∂x =-fx /fy = - (6xy2z – 3y)/ (6x2yz-3x)

∂y/∂z =-fz /fy = -3x2y2 / (6x2yz-3x)

∂y/∂x1 = -fx /fz =-(6xy2z – 3y)/ (3x2y2)

Exercise: Differentiate the function f(x1, x2, x3) = 3x1 , x2, x3 – 10 =0

implicitly.

High order partial derivatives

Similar to a high order differentiation of functions of one variable multi-

variate functions can be differentiated to higher orders such as first, second,
third and so on as long as the given functions permit.

Literally, the second – order partial differentiation measures the rate of

change of the dependent variable with respect to a change in an independent
variable, holding all other independent variables constant.

Suppose we have the function y=f(x1, x2, x3) the following notations are used
to indicate the second – order partial derivatives i.e. fx1x2 , fx1x2, fx1x3 fx1xn ,
fx2x2, fx3x3 and fxnxn indicate the direct second order partial derivatives
whereas, fx1x2, fx1x3, fx1xn and so on indicate the cross-partial higher order
derivatives.

In addition, according to Young’s theorem, the second order cross partial

derivatives such as fx1x2 and fx2x1 are equal. Similarly fx3x1 and fx1x3 are
equal as well.

Example 1

Find all second order partial derivatives for y=4x1x2

Solution: First partial derivatives are fx1=4x2 and fx2 = 4x1, the second direct
partial derivatives are: fx1xi=0 and fx2x2=0 and the second cross-partial
derivatives are; fx1x2=4, fx2x1=4

Exercise:

Find all second – order partial derivatives for y=5x12x22+x1 +3x2

Total differentials

For a function such as Z=f(x, y), the total differential ∂z of the function
measures the small change in Z, (∂z) caused by the changes in both X, (∂x)
and Y, (∂y)

In other words, the total differentials is used if both X and Y change

simultaneously, no independent variable is constant.

Therefore the total differential (∂z) of the function Z=f(x, y) is ∂z=fx∂x +

fy∂y where fx or (zx) and fy or (zy) are the partial derivatives of the function
with respect to X and Y respectively.

Generally for a function of n variables such as,

Z=f(x1, x2, x3………xn) the total differential would be,

∂z =fx1∂x1 +fx1∂x2 + fx3∂x3+……..+fxn∂xn

Example 1

Differentiate the function Z=5xy totally

Solution: Zx = 5y and zy=5x thus the total differential is ∂z= 5y∂x + 5x∂y
Exercise: Differentiate the function Z=8x2y2 totally

Second – order total differentials

Similar to second – order differentials, one can find a second order total
differential for the function Z=f(x, y). ∂z = fx∂x +fy∂y

The partial derivatives fx (or Zx) and fy (or Zy) are functions of x and y
respectively, i.e.

∂z=fx (x, y) +fy (x, y)

The second order total differentials:

∂z= (fxx ∂x)∂x+(fxy ∂y)∂x+(fyx ∂x)∂y+(fyy ∂y)

∂2z=fxx∂2x+2fxy∂y∂x+fyy∂2y i.e. second order total differentials say that the

change of the original change in Z, ∂z is the sum of the change of the change
in x, the change of the change in y, and double the change in fx (or fy) caused
by a small change in y, fxy or x , fyx.

Exercise: Find the first and second order total differentials for z=12x2y

Total derivatives

Given a function of the form Z=f (x. y). We’re interested in finding the rate
of change of a function with respect to x when x and y are related. I.e. In this
kind of differentiation, the independent variable are actually dependent on
other variables.

Given function Z= f (x, y) where y=g(x), the total derivatives of z with

respect to x is ∂z/∂x =fx∂x/∂x+ fy∂y/∂x but ∂x/∂x is equal to one hence:

∂z/∂x = fx+ fy∂y/∂x where fx and fy are the partial derivatives of the function
with respect to x and y respectively.

Example 1

Find the total derivatives for Z = 3xy where y=3x2

Solution: Zx= fx =3y, Zy=fy=3x and ∂y/∂x=6x

Hence: ∂z/∂x=3y+3x (6x) = 3y+18x2

Exercise: Find the total derivative for Z=exy where y=2x. (Answers only)

APRIL 24th – 4TH LESSON

THE INPUT – OUPUT MODEL

Economic impacts of one sector (or a new firm) on an economy is

usually measured by an analytical tool (model) called “input output
model”

Input-Output model is not only a theory of production but also an

effective application of the Walrasian general equilibrium analysis.

It’s also an application of the general equilibrium analysis because it

consists of a system of simultaneous equations describing demand for
and supply of each sectoral output.

The model also describes a structural interdependence among the

various economic sectors of a region or nation. E.g. an economy can be
divided into various economic sectors called “industries” producing
different products. Each activity say X1 requires a certain number of
inputs produced by other industries in order to produce its own
production. By the same time, other industries X1, i=2……….n requires
a certain number of inputs produced by industry X1 and others to
produce their own production.

Example 1:

A hypothetical input-output table for a five sector economy.

The four quadrants of the input-output model
S S1 S2 S3 S4 S5 TID HO IN EX TF TO
U V P D
S1 20 10 30 5 25 90 40 5 30 75 165
S2 10 0 15 0 8 33 5 0 20 25 58
S3 35 7 4 3 11 60 0 10 10 20 80
S4 5 8 1 14 12 40 0 15 5 20 60
S5 20 8 10 18 0 56 15 15 5 35 91
TP 90 33 60 40 56 279 60 45 70 175
IM 20 10 0 5 14 49 5 5 0 (10) 49
P
 T 20 5 10 5 4 44 (20) (0) (10) (30) 44
HO 15 3 5 3 4 30 2 0 0 2 32
U
CA 10 2 5 0 10 27 0 0 0 0 27
P
NR 10 5 0 7 3 25 0 0 0 0 25
VA 55 15 20 15 21 126 2 0 0 2 128
TI 165 58 80 60 91 454 67 50 70 177 631

Notes//
TID = Total Intermediate demand, CAP = Capital
EXP = exports, TP = Total purchases
HOU = Households, T=Taxes (government)
INV = investments, NR= Natural resources
TFD = Total Final Demand VA= Value Added
TO =Total output, TI=Total Input
IMP=Imports
Interpretation:
 The output of industry S1 is the sum of (TID)+TFD where
TID=20+10+30+5+25 = sh.90
TFD=40+5+30 = sh.75
Hence the total production of industry S1=sh.165 (90+75)
 The transaction of sh.10 in row S1 and column S2 indicates that industry
S2 purchases sh.10 worth of output from industry S1 to produce its output.
 The value added(VA) of column S1 which equals sh.55 is obtained by
summing sh.20, 15, 10, 10; the sum of T, HOU, Capital and Natural
resources of column S1 is equal to the sum of TP, IMP and VA i.e.
(90+20+55)=sh.165. The transaction of sh.20 in row T, and column HOU
indicates that households pay sh.20 to the government as taxes. Other
transactions can be interpreted similarly.
Assumptions of input – output model.

1. This model assumes that there’s a single process production function for
every industry (sector). Example, the single production function for
column S3 industry is
X3=Xi3/ai3 for i=1,2,…..n.
In general for industry (j) one can write a single production function as
Xj= Xij/aij =X2j/a2j = Xij/anj
This assumption can be broken down into two:
a) Constant returns to scale – i.e. if input increases by 10%, output will also
increase by 10%
b) Zero substitution among inputs – The isoquant of the production function
is of L-shape. Since one method of production exist, the planned output
level determines the required level of inputs as the technical coefficient
(aij) are constant
c) Additivity assumptions
It’s used to rule out external economies and diseconomies. Once these
economies and diseconomies are excluded, the remaining conditions
under which output is produced is the constant return to scale.

(Try as much as possible to understand the input-output model by

reading further and make effort to understand how the example 1
above is interpreted and analyzed)

To be continued******************************************