ECONOMIC APPLICATION OF DERIVATIVES INTRODUCTION In economics, particularly in micro-economies, the “Marginal Analysis” commands a great importance. Marginal means any addition or change which occur im one variable due fo change in other variable. \t means that the concept of marginal depicts the rate of change or slope, While to show the rate of change in mathematics. the concept of derivative is used, Now we see the cases where the concept of derivative is applicable in economics. Demand Punetion is: Q= (P) Slope of demand function = marginal demand function = derivative = = Utility Functions: U~ £(Q). Derivative of this function is called Marginal Utility (MU) = = is: Q=f(L) ion is marginal product (MP) = a inal supply function = derivative = a ‘ ry = £C marginal cost (MC) = dQ° is marginal revenue (MR) = & i; is called marginal propensity 10 consumeve (MPS) = Derivative of saving function is called marginal propensity 10 50 av ND 1. DEMAND FUNCTION AND ELASTICITY OF DEMA\ gQ : Whit As we told carlicr that demand function is Q= £( P). Thus its slope ~ gp i astern paese ind fun average demand function = 3 If we divide the derivative by average demar enon get elasticity of demand. AMPLE-1, If Q = 100 ~ 2P, while P = 25, we find elasticity of demand. we ds ss Solution, Now Q = 100 -2P 2 cy ‘sega mee Sie os Og eo | SO Be vente Ae Calas Ro2* 5 ee [As When P= 25, Q = 100 - 2(25} = 0] Thus ignoring -ve sign, F = | EXAMPLE-2. (1 Q = 250 ~ P - 0,05P?, and P = 10, we find elasticity of demand. Solution, Now Q = 250 - P - 0.05 P? When P= 10,Q= 250-10 --0,05(10)? —P-0.05 P?. Qe -W-S*235 ried 1-0.05 (2)p?"1 1-0.1P =1-0.1(0)=-1-1=-2 235 rca ap. eR 4 10 PiASvtbe DIS oTanaT 4 which is less than 1. AND ELASTICITY OF ‘SUPPLY x : ae’ £(P ), its slope or derivative < x. While average : icity of supply is obtained by dividing the derivative by sas: r= 2.9 a +p 70.10, and P= 20, we fj ici oe Wwe find elasticity of supply +420) p= et Go Re 200 * 80+ 0.1¢400)a Now Q=200+4P+01P?, G5 =0+4 0.1 (2p?! = 44 0.2P So When P= 20, 8 = 440.2020) = 444-8 ig bak 32 tp = O)+ 39 Thus elasticity of supply = 4 which is less than | (Note, the same question is solved below by supposing P= 10, above it was solved with P = 20) {b) Find the Elasticity of Supply at Price Rs.10¥- and Rs.20/- per Unit, when supply equation is given as qs = 200 + 4P ~ 0.1P" uOP: 2014 qe= 200-4 410) + 0.1(10)' = 250 qe = 200 +4P + 0.1P?, dq. dP = 4+ 0.2P = 4 + 0.2(10)= E,=dq./ dP + qu! P= 6 +250 / 10~ 6 x 10 /250~6 / 25 ~ 0.24 EXAMPLE-2. If 13P - Qs = 27, and we find elasti of supply. Solution. Now Q = 13P — 27 When P= 3, Q= 133)~2 Now Q=13P-27 = 2 = 13 -0=13 E= 2 + g = y+ 2 = (13)+ 4= of supply = 3.25 which is greater than 1 OF DEMAND AND ELASTICITY OF SUPPLY \d P = 30, we find elasticity of demand. 39-27=12 = 90 -0.2(900) is)+= 15 -ve sign. , P= 10, we find elasticity of demand. =0.5(2)h" = = 2-P[© Find Pquilibrium Price (P ). Eau" * the followings Fin avium Pri (P er tibefllowngs ! [i Qs+ 32-7P=0 | | Qd- 128+ 9P=0 Ans: P = 2; | Bd = 0.66; B 2. §When Q=1, MU. = 16-29 WhenQ=2, MU. © 16-20 When Q=3, MU. = 16~2¢ EXAMPLE-2. U = 16Q-4Q?, we find MU and construct schedule. du dQ jution. MU 16-8Q To construct schedule we suppose the values of Q and put th When Q= 1. ML 16-8Q 4-81)" 16-898 When Q=2, MU, = 16-8Q = 4-8(2)=16-16=0 When Q=3, MU. = 16-8Q= 4~8(3) = 16~24= 4. PRODUCTION FUNCTION AND DERIVATIVE As the production function is: Q=f(L) mp, = 22 Its derivative will be marginal production of labor : MP, = 3p while the average product of labor is AP, 2 If the production function is: Q=f(K) aQ Its derivative will be marginal production of capital : MPx. = 3x Q K while the average product of capital is : APK = : ~ 1512+ 3L?, we find AP,, MP; OL-15L%+7L? 10L 151? | 3L L rl L 1SL2+ 3) HOCI)L'+ ~ 15(2)L?! + 3G)L"! = 10 - 301. + 91? » we find AP , MPx. 20K _ 30K? 6k? +> «20 -30K+ 6K? K K K 20 -30K+ 6K =10~15L + 3L? YK! ~30(2)K™! + 6(3)K?! = 10 - 60K + 18K? AND DERIVATIVE, j ‘its general form iss C= £¢X) C= HQ) oF TC= £(Q)where Qe X.Its derivative will be marginal cost: MC = gQ function. It is as Uhe slope of MC is the second derivative of east Function 2c _ amc) Slope of MC = 5 - a ie : cost (AC)* AC™ @ The average cost function is called average ‘cost (AC @ AC) 2 while the slope of AC is the derivative of AC = ~ 49) ©. Find Marginal cost function when (a): =97/ +14-70+ 30) AC=9% +14-70430 As we know that © = TPC = TVC Thus in cost equation the term without Q represents TEC ( Total Fixed Costs) while the terms with Q represent TVC { Total Variable Costs). The AVC= ™ while AFC (Average Fixed Costs) c=acQ) cof 214-2030" jo Q isas: AFC = Q 1 | | | | | | (i: WoPR012.2016) | EXAMPLE. C =Q?~12Q? + 60.Q , we find wunwe2oian | AC-1/ -07s-08sq-0 (2) Average Cost (AC) und Marginal Cost (MC) functions, (2) Slopes of AC and MC functions, (3) At what value of Q, the MC = AC. | | =f _ = 129'+ 609 BORON Reco Q AC=196 -0.78-0.889 oacidr( ordeal Co1340.78Q 40.89 2 129 +60 MC= 37 150+1.700 (ch ac= Yai eqs? C= Marea'ero MC= 35 +2047 P+ 60 <<, Q QMc aa 3Q°- 249+ 60 = 6Q~24. (3) AC= Mc gives4) ECONOMIC APPLICATION OF DERIVATIVES 133 (2) Slopes of AC and MC functions, (3) Moreover, without making diagram we show that MC curve crosses AVC at its minimum => (MC = AVC). Q ~ 60 G+ 13009 Solution. (1) AC = GF = SAND ~ 60g + 1800 C= Q 609 + 18009 dc MC = 55 = 30°! — 60(2)0?! + 18000)!" = 3Q2~ 1200 + 1800 Ac = 55 = 30 0(2)Q?* + 1800.15 1? ~ 120Q + 1800Q 2 > = &_ 60Q + 1800 pis @) AC = &- 60Q + 1800 ae is Example | Slope of AC = derivative of AC» MASE ~ ae _ 6¢ eee el ‘ aQ | ave. T¥E .Q'-6097-+18009 MC = 3Q?- 1200 + 1800Q ete Q Slope of MC « derivative of MC a“ 6Q-120 | AVC=Q' ~60Q+18 As MC = 39? ~120Q +1800 EXAMPLE-2, If C = 0,001x' - 0.09.2 + 20.x, we find] ic» Ave (1) AC and slope of AC function, oe-1300 a1 (2) MC and slope of MC function. E 01? — 0.09 x7 x = 0.001x? ~ 0,09%x + 20 Solution. (1) AC = > aac Thus at Q=0 and Q = 30 Stopeobac= “Ge = 0.002.x~0.09 | MC=AVC or MC crosses Q) C= 0,001x = 0.097 + 20x = 0,001(3)x-! - 0.09(2)2" + 20¢1}x*"! MC = 0.003x? - 0.18% + 20 de 0:006x - 0.18 000 + 25Q- 5Q?+ Q?, we find ions, (2) Slopes of AC and MC functions, ‘what Q, AVC = MC. (vort2007) " = +25-5Q+Q 25-10Q+ 3Q? = 25-100 + 3? ~$Q+Q = 100091 +25-5Q+Q*we oman tby C= Ac sora tio 15? +4448. ME" dey Sei 6. REVENUE FUNCTION AND DERIVATIVE [IF AR = 60-20, As revenuc function is: R= #(Q) {iy find TR function (11) R MR function (iii) slope Average revenue function will be AR = @ ee an slope of MR function UK 2011) Q: If P = 30-2Q, find {AR} | (a) TR function (b) MR Marginal revenue funetion will be: MR = gq) The slope of AR = derivative af AR 40 | ey AR fection (e) d(MR) | show MR and AR Slope of MR = derivative of MR = eB function graphically (wore20i) which is also second derivative of revenue function. | & iy aR = 3-250 EXAMPLE-1, R= 250Q -3Q? , we find Calculate MR (1) AR and MR functions (LOPR:2016) R= AR(Q) = 3Q-2.5Q' (2) Slopes of AR and MR functions and their relationships ° (3) At what value af Q, the MR and P will be zero, | MR« Solution. (1) R= 2509 -3.Q . 2B. 290939? AR Q q Now R=250Q-30? = R , 2500-30" Q) AR re 0 R= Derivative of AR ~ 250-39 3P= 250-3Q=0 and 39 = 250 => Q~ 82s 433 Thus at Q = 83.33, P of AR is zero EXAMPLE-2. If P= $02.50, find (1) MR, AR, R functions (2) Slopes of AR and MR functions (3) At what Q, f id MR are zero. Solution. (1) R= PQ» (so OW ~ oO R _ S0Q~25Q? MAR, AR= 6 O * 80-25 = Slope of AR = AS 25 es (MR MR= 9 * $0-SQ => Slope or mn = 0 Ignorin the absolute values we find that the sh (3) Now we find Q where MR Now we find Q where P = 0 MR = 50~SQ=0 Again, it is reminded that P= AR so P= $0-25Q=0 Q=50 => Q=F =10 a 259 =50 => Q 20 Thus at Q = 10, MR = ¢ 2.5 Thus at Q = 20, P or AR is zere EXAMPLE-3. If Qd=100-2P,find (1) R, AR, MR functions (2) Slopes of AR and MR functions (3) Q where, P and MR are zero. Solution. (1) Ignoring d and solving for P 2P-100-9 2P~ 2 p~ soto Therefore, we write s0g- 4 Rr» s0Q- ba dR eae. MR= Go * S0-Q oe dr) 1 Slope of MR “dQ 0 i 2 or taking the absolute values we find that the slope of AR (i.e. 0.5) =O Nowwe find Q where P ~ 0 | Again, itis reminded that P= AR= so-4 eo Piet Q~ > Q» Wo ithat in revenue function Q is the independent variable whEXERCISE ~ 13, a eas a au ox functions find (1) AC and MC functions (2) Slopes af ‘AC and MC functions (3) At what values of Q, MC = AVE? TC=Q'-20' +99 +650 [= coe ns. MC = AVC] Q=6.75,0 1 { Ans. Mc = AVC] L z-5;0 3MR=0), /AR=P jz, g=so-4 = | 2 LA" g=25/' \aco=50 } = pes O° }13., Q=20-2P Ans{ MR=0), (AR=P=0)) | a= 10) tg~20 | 7MR = 4. Qd=60-3P anh ne | Le Ara= 60 7. CONSUMPTION FUNCTION AND DERIVATIVE, The consumption expenditures depend upon income of the people z a A: C~£(¥). The average consumption function is called APC = 77 , while the d ative . ic tion is called MPC = $y . ‘The rate of change of APC is nt | while the slope of MPC autre 1D DERIVATIVE YY). The average saving |, while the derivative or marginal saving function is called MAPS) dy of APS is called slope of APS = while the AND SAVING FUNCTIONS QIFC= 100+ 0.6, t T=50 then find (a): APC function and rate of change of APC function (b): MPC function und rate of change of MPC function. (U0: 3986)