THE USE OF DERIVATIVES IN ECONOMICS

Asked to fulfill an assignment in the mathematical economics course taught by Arnah

Ritonga, S.Si., M.Si

BY :
GROUP III
1. NURUL AFIFAH SYAHPUTRI (
2. SYAFIRA FATIHAH RIZQI (4192111002)

BILINGUAL MATHEMATICS EDUCATION STUDY PROGRAM

FACULTY OF MATHEMATICS AND NATURAL SCIENCES
STATE UNIVERSITY OF MEDAN
MEDAN 2021
 PREFACE

Praise and gratitude for the presence of God Almighty for His grace and guidance,
so this task can be completed, both in terms of form and content.The preparation of this paper
on “The use of Derivatives in Economic” in them Economy Mathematics course.
I hope this paper will help increase knowledge and experience for the readers. Admit
that this paper still has many shortcomings, because I just have very little experience. If there
are mistakes, we expect constructive criticism and suggestions so that the next can be better.
Thank you for all the attention, prayers and support of all colleagues.

Medan, March 2021

Authors
 INTRODUCTION

I. Background
An economic derivative is an over-the-counter (OTC) contract, where the payout is based
on the future value of an economic indicator. It is similar to other derivatives in that it is
designed to spread the risk to parties that are willing to take on risks to participate in the
rewards. The major distinguishing feature of an economic derivative is that the triggering
event is related to an economic indicator.
Economic derivatives are attractive for their ability to mitigate some of the market and
basis risks found in standard investment vehicles. The release of economic indicators has
an immediate impact on portfolio values and, even though the timing of these releases is
well known, mitigating risks in a portfolio in the short term requires working through the
proxies for releases, like bonds or forex.
II. Formulation of The Problem
1. What is marginal concept ?
2. What is maximization and minimization of function ?
3. What is price elasticity ?
4. What is the relationship between the concepts of total, marginal, and mean ?
III. Purpose
1. To know marginal concept
2. To know maximization and minimization of function
3. To know price elasticity
4. To know the relationship between the concepts of total, marginal, and mean
 THE USE OF DERIVATIVES IN ECONOMICS

A. MARGINAL CONCEPTS
The concept of marginal is the instantaneous change of a changing variable the amount
because there are small changes in other variables. marginal concepts refer to change and
finding of a marginal function from a total function is basically a measurement of change.
Since the derivative is a tool to measure change, we will see in this paper how derivative is
used to derive marginal functions from total functions. The simple rule to be followed is to
find any marginal function from it total function, find the first order derivative of the total
function.
1. Marginal utility
Marginal utility is the addition made to total utility by consuming one more unit of
commodity. So the marginal utility is the first derivative of total satisfaction.
dTU
MU =
dQ
where MU is marginal utiliy, TU denotes total utility and Q is the quantity of commodity
consumed.
Example : The utility function is expressed in the equation U = 15Q - 5Q 2. Find the marginal
utility equation at Q = 5
Answer :
U = 15Q – 5Q2
MU = U′
= 15 – 10Q
= 15 - 50
= -35
2. Marginal Propensity to Consume
Marginal propensity to consume measures the change in consumption due to a change in
income of the consumer. Mathematically, MPC is the first derivative of the consumption
function.
dC
Given a consumption function C = f(y), MPC =
dy
Example: Given a consumption function C = 100 + 0.5 Y, find MPC
dC
Answer : MPC = =0,5
dy
 3. Marginal Propensity to Save
Marginal propensity to save measures the change in saving due to a change in income of
the consumer. Mathematically, MPS is the first derivative of the saving function.
dS
Given a consumption function S = f(y), MPS =
dy
Example : Given a saving function S = 80 + 0.4 Y, find MPS
dS
Answer : MPS = =0,4
dy
4. Marginal product
Marginal product of a factor of production refers to addition to total product due to the use
of an additional unit of that factor. The Marginal Product of Labour (MPL) or Marginal
Physical Product of Labour (MPPL) is given by the change in TP due to a one unit change in
the quantity of labour used. MP is derived by finding the derivative of the TP.
dTP dTP
MPL = where L is labour, MPK = where K is capital.
dL dK
Example : Given a production function Q = x3 + 5xy + y2 for a firm which uses two inputs x
and y in the production process, find marginal product of the two inputs.
Answer :
dTP 2
MPx = =3 x +5 y
dx
dTP
MPy = =5 x+2 y
dy
5. Marginal cost
Marginal Cost (MC) refers to the change in total cost (TC) due to the production of an
additional unit of output. The marginal cost function is the first derivative of the total cost
function.
dTC
MC = where Q is output.
dQ
Example : Given that TC = 400 + 50Q2 , Find MC at Q = 80?
Answer :
TC = 400 + 50Q2
MC = TC’
= 100Q
= 100(80)
= 8000
 6. Marginal revenue
Marginal Revenue (MR) is the change in total revenue (TR) due to the production of an
additional unit of output.
dTR
MR = where Q is output
dQ
B. MAXIMIZATION AND MINIMIZATION OF FUNCTION
Maksimisasi atau minimisasi dari sutau fungsi terjadi jika turunannya sama dengan nol.
Konsep turunan kedua digunakan untuk membedakan nilai maksimum dengan minimum
suatu fungsi.Jika turunan pertama menunjukan slope fungsi laba total, maka turunan kedua
tersebut menunjukan slope dari kurva laba marjinal. Kita bisa menggunakan turunan kedua
tersebut untuk membedakan titik maksimum dan minimum. Jika turunan kedua dari sebuah
fungsi negatif maka titik yang ditentukan adalah maksimum. Demikian sebaliknya.
Contoh: suatu perusahaan ingin memaksimumkan penerimaannya, meminimumkan biaya
produksi dan memaksimumkan laba, maka langkah langkahnya adalah :
a) menentukan nilai maksimum atau minimum output produksi yang dapat menciptakan
laba maksimal. Caranya adalah menggunakan turunan atau derivasi tingkat satu dari
suatu fungsi
b) membedakan antara nilai maksimum dan minimum. Caranya adalah dengan
menggunakan turunan atau derivasi tingkat kedua.
-Contoh I:
Manajer suatu perusahaan tentu ingin perlu menghitung berapa laba maksimal yang dapat
dicapai. Maka untuk menentukan laba maksimum tentu perlu menentukan berapa nilai
revenue maksimum dan nilai cost minimum. Misalnya suatu perusahaan mempunyai fungsi
permintaan TR= 100Q – 10Q2 .
Jawab :
Pertama derivasi fungsi TR tersebut hingga nilai derivasi atas fungsi tersebut sama dengan
nol (0).
2
TR=100Q−10 Q
dTR
=100−20Q  turunan pertama
dQ
Karena syaratnya turunan harus nol, maka
100 – 20Q = 0
20Q = 100
Q=5
Artinya total penghasilan adalah 5 unit.
Karena dihadapkan pada pertanyaan apakah laba sebesar 5 unit tersebut merupakan nilai
minimum atau maksimum, maka perlu mencari jawabannya dengan meneruskan perhitungan
hingga turunan kedua (second derivative). Sebagaimana dijelaskan di atas, bahwa turunan
kedua ini berfungsi untuk membedakan antara nilai maksimum dan nilai minimum.
d 2 ( TR )
2
=−2 0
d (Q)
Ada ketentuan yang berkaitan dengan turunan kedua, yaitu jika nilai turunannya bernilai
positif (+) berarti nilai tersebut adalah nilai minimum. Sebaliknya, jika nilai turunannya
bernilai negatif (-) berarti nilai tersebut adalah nilai maksimum.
Karena nilai turunan kedua bertanda negatif (-20) dan turunan pertamanya sebesar Q=5,
maka berarti, atas fungsi tersebut laba maksimumnya berada pada 5 unit. Jika produksinya
dikurangi hingga kurang dari 5 unit maka perusahaan akan mengalami penurunan
keuntungan. Tentu saja produksi harus ditingkatkan hingga menjadi 5 unit.
-Contoh II : (dengan menggunakan fungsi marginal cost).
MC = 3Q2 –16Q + 57
dMC
=6 Q−1 6
dQ
6 Q−16=0
Q=2,67
2
d ( MC )
2
=6
d (Q)
Artinya, laba minimum dicapai pada Q = 2,66 yang dibulatkan menjadi 3.
C. ELASTICITY
Elasticity in common language is a measure of a variable’s sensitivity to a change in
another variable. In economics, as you have seen in Microeconomics course, elasticity
refers the degree to which individuals, consumers or producers change their demand or
the amount supplied in response to price or income changes. Elasticity can be found for
changes in price of a good and response to it in quantity demanded of the good (price
elasticity of demand), changes in price of a good and response to it in quantity supplied of
the good (price elasticity of supply), changes in income and response to it in quantity of
goods demanded (income elasticity of demand), changes in price of one good and
response to it in quantity demanded of some other good – like its substitutes or
complements (cross elasticity of demand) and so on.
a. Price Elasticity of Demand
The concept of elasticity is commonly used to assess the change in consumer demand
as a result of a change in a good or service’s price which is called price elasticity.
Price elasticity of demand express the response of quantity demanded of a good to
change in its price, given the consumer’s income, his tastes and prices of all other
goods. Price elasticity can be found arithmetically as
proportionate change∈quantity demanded
Price ela sticity=
proportionate change∈ price
dQ p
This equation in terms of calculus can be written asη= where η is the
dp Q
coefficient of price elasticity of demand.
When η > 1, then demand is price elastic
When η < 1, then demand is price inelastic
When η = 0, demand is perfectly inelastic
When η = infinity, demand is perfectly elastic
Note that price elasticity of demand (Ep) is always negative, since the change in
quantity demanded is in opposite direction to the change in price. But for the sake of
convenience in understanding to the change in price, we ignore the negative sign and
take in to account only the numerical value of the elasticity.
Example: Given the demand function q = −5p + 100, find price elasticity of demand
when price is equal to 5.
dQ p
η=
dp Q
dQ
given q = −5p + 100, = −5
dp
when P = 5, Q = −5(5) + 100 = 75
5
substituting η = −5 = −0.33 = 0.33 (since we discard the sign in measurement of
75
price elasticity)
b. Income Elasticity
Income elasticity of demand shows the degree of responsiveness of quantity
demanded of good to a small change in income of consumers. The degree of response
of quantity demanded to a change in income is measured by dividing the
proportionate change in quantity demanded by the proportionate change in income.
Thus, more precisely, the income elasticity of demand may be defined as the ratio of
 the proportionate change in the quantity purchased of a good to the proportionate
change in income which induce the former.
proportinate change∈ purchased of a good
Income elasticity=
proportionate change∈income
∂Q Y
In terms of calculus, if the function is given asQ=F ( Y ) , e y =
∂Y Q
Based on the value of elasticity we can distinguish between different types of goods.
Normal Goods: Normal goods have a positive income elasticity of demand. So as
income rise demand also rise for a normal good at each price level.
Necessary Goods: Necessities have an income elasticity of demand of between 0 and
+1. Demand rises with income, but less than proportionately. Often this is because
we have a limited need to consume additional quantities of necessary goods as our
real living standards rise.
Luxuries: Luxuries have an income elasticity of demand greater than 1. (Demand
rises more than proportionate to a change in income). Inferior Goods: Inferior goods
have a negative income elasticity of demand. Demand falls as income rises
Example:Given Q = 700 – 2P + 0.02Y, find income elasticity of demand when P =
25 and Y = 5000.

e y=
∂Q Y
∂Y Q
=0,2 (
5000
750 )
=0,133

c. Cross elasticity of demand

Cross price elasticity (e xy ) measures the responsiveness of demand for good X due to
a change in the price of good Y (a related good – could be a substitute or a
complement or even an unrelated good).
e xy = Proportionate change inthe demand for good X divided by Proportionate change
inthe price for good Y
In terms of calculus, for a consumer using two goods x and y, the cross elasticity of
∂Q x P y
demand may be written ase xy =
∂ P y Qx
With cross price elasticity we can make an important distinction between substitute
products and complementary goods and services.
Substitutes: For substitute goods such as tea and coffee an increase in the price of one
good will lead to an increase in demand for the other good. Cross price elasticity for
two substitutes will be positive.
 Complements: for complementary goods the cross elasticity of demand will be
negative. When there is no relationship between two goods, the cross price elasticity
of demand is zero.
Example: Given Q1 = 100 – P1 + 0.75P2 – 0.25P3 + 0.0075Y. At P1 = 10, P2 = 20, P3 =
40 and Y = 10,000, find the different cross elasticities of demand.
Here the given function relates the demand for a good (Q 1) and price of that good (P1)
and prices of other two related goods (P2 and P3).
∂Q1 P2
Cross elasticity between good 1 and good 2 is given bye 12=
∂ P2 Q 1
∂Q 1
=0,75
∂ P2
20
Substituting,e 12=0,75 =0,088
170
Sincee 12 is positive, good 1 and 2 are substitutes. An increase in P2 will lead to an
increase in Q1.
∂Q 1 P3
Cross elasticity between good 1 and good 3 is given bye 12=
∂ P3 Q 1
Sincee 13 is negative, good 1 and 3 are compliments. An increase in P3 will lead to a
decrease in Q1.
D. Relation between Total, Marginal and Average

a. Total Product
In simple terms, we can define Total Product as the total volume or amount of final
output produced by a firm using given inputs in a given period of time.

b. Marginal Product
The additional output produced as a result of employing an additional unit of the
variable factor input is called the Marginal Product. Thus, we can say that marginal
product is the addition to Total Product when an extra factor input is used.
Marginal Product = Change in Output/ Change in Input
Thus, it can also be said that Total Product is the summation of Marginal products at
different input levels.
Total Product = Ʃ Marginal Product

c. Average Product
 It is defined as the output per unit of factor inputs or the average of the total product
per unit of input and can be calculated by dividing the Total Product by the inputs
(variable factors).

d. Relationship between Marginal Product and Total Product

The law of variable proportions is used to explain the relationship between Total
Product and Marginal Product. It states that when only one variable factor input is
allowed to increase and all other inputs are kept constant, the following can be
observed:
 When the Marginal Product (MP) increases, the Total Product is also increasing at
an increasing rate. This gives the Total product curve a convex shape in the
beginning as variable factor inputs increase. This continues to the point where the
MP curve reaches its maximum.
 When the MP declines but remains positive, the Total Product is increasing but at
a decreasing rate. This give ends the Total product curve a concave shape after the
point of inflexion. This continues until the Total product curve reaches its
maximum.
 When the MP is declining and negative, the Total Product declines.
 When the MP becomes zero, Total Product reaches its maximum.

e. Relationship between Average Product and Marginal Product

There exists an interesting relationship between Average Product and Marginal
Product. We can summarize it as under:
 When Average Product is rising, Marginal Product lies above Average Product.
 When Average Product is declining, Marginal Product lies below Average
Product.
 At the maximum of Average Product, Marginal and Average Product equal each
other.
 BIBLIOGRAPHY

Anonymous.2016.Ekonomi Manajemen. http://andynogosari.blogspot.com/2016/12/teknik-

optimisasi.html.(Accessed on March 8th,2021)
Jose, Chacko, dkk. 2014. Mathematical Economics Study Material. India: Calicut University
Toppr.com. Total Product, Average Product and Marginal Product.
https://www.toppr.com/guides/economics/production-and-costs/total-product-
average-product-and-marginal-product/. (Accessed on March 7th,2021)