Chapter 5

1 MATH FOR BUSINESS TA: VŨ THỊ THU TRANG
Chapter 5:
Partial Differentiation
I. Functions of several variables
1. First-order derivatives of functions of 2 variables
- Differentiate with respect to x holding z constant:
𝜕𝑦
= fx
∂x
- Differentiate with respect to z holding x constant:
𝜕𝑦
∂z
= fz
2. Second-order derivatives of a functions of 2 variables
- With y = f(x,z):
𝜕2 𝑦 𝜕2 𝑦
= fxx = fzz
∂𝑥 2 ∂𝑧 2
𝜕2 𝑦 𝜕2 𝑦
= fxz = fzx
∂𝑥 ∂z ∂𝑧 ∂x
3. Interpretation of partial derivatives
- If x and z change simultaneously, the small increments formula:
𝜕𝑦 𝜕𝑦
∆y ≈ ∆x + ∆z
∂x ∂z
4. Implicit Differentiation
𝑑𝑦 𝑓𝑥
If f(x,y) = constant then =−
𝑑𝑥 𝑓𝑦
II. Partial elasticity and marginal functions

Qd = f(P, PA, Y)
Contact: https://www.facebook.com/thutrang.vu308
Email: vuthithutrang2003@gmail.com
When Q: demand for a certain good

P: the good’s price
PA: the price of an alternative good
Y: the income of consumers.
1. Elasticity of demand:
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝑃 𝜕𝑄
EP = = x
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑄 𝜕𝑃
Inelasticity: |E| <1

Elasticity: |E| >1
Unit elasticity: |E| =1
2. Cross price elasticity of demand:
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝑃𝐴 𝜕𝑄
EPA =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝐺𝑜𝑜𝑑 𝐴
=
𝑄
x 𝜕𝑃𝐴
+ Negative for complements
+ Positive for substitues
3. Income elasticity of demand:
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝑌 𝜕𝑄
EY = = x
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 𝑄 𝜕𝑌
+ Ey < 0 → inferior goods (white bread, instant noodle, bus transportation)

+ Ey > 0
• < 1: normal goods
• >1: superior goods (sport cars, quality wine, ...)
III. Utility
- Suppose there are two goods x1 and x2. The utility function relates the
quantities of these goods to the consumers levels of satisfaction using a utility
function:
U = f(x1, x2)
- Marginal utility associated with x1 (x2) gives the change in utility as a

result of a one unit change in the quantity of x1 (x2) consumed:
𝜕𝑈 𝜕𝑈
MU1 = MU2 =
∂x1 ∂x2
- When both x1 and x2 change simultaneously, we can use the small

increments formula to determine the overall change in utility:
𝜕𝑈 𝜕𝑈
∆U ≈ ∆x1 + ∆x2
∂x1 ∂x2
- We would expect the second derivative to be negative given the law of
diminishing marginal utility:
𝜕2 𝑈 𝜕2 𝑈
<0 and <0
∂𝑥12 ∂𝑥22
𝜕𝑈
𝑑𝑥2 𝜕𝑥1
- Slope/ gradient of the indifference curve: = − 𝜕𝑈 (negative)
𝑑𝑥1
𝜕𝑥2
- Marginal rate of commodity substitution (MRCS):
𝜕𝑈
𝑑𝑥2 𝜕𝑥1
MRCS= − = 𝜕𝑈
𝑑𝑥1
𝜕𝑥2
- The increase in x2 required to maintain the current level of utility when

x1 decreases by ∆x1 units:
∆x2 = MRCS x ∆x1

IV. Production Functions
Q = f(K,L)
The output (Q) depends on capital (K) and labour (L)
1. Marginal products: the first derivatives of the production function.
𝜕𝑄
MPK = (The marginal product of capital)
∂K
𝜕𝑄
MPL = (The marginal product of labour)
∂L
2. Returns to individual inputs: second-order derivatives.
𝜕2𝑄
∂𝐾 2
<0: Diminishing returns to capital.
>0: Increasing returns to capital.
=0: Constant returns to capital.
𝜕2𝑄
∂𝐿2
<0: Diminishing returns to labour.
>0: Increasing returns to labour.
=0: Constant returns to labout.
1. Small increment formula
𝜕𝑄 𝜕𝑄
∆Q ≈ ∆K + ∆L (isoquant)
∂K ∂L
2. Marginal rate of technical substitution (MRTS)
Marginal rate of technical substitution is the marginal product of labor divided by

the marginal product of capital
MPL
MRTS =
MPK
V. Optimisation problem
1. Unconstrained optimization
- Total differential:
𝜕𝑦 𝜕𝑦
dy = dx + dz
∂x ∂z
*Stationary points:
𝜕𝑦 𝜕𝑦
- First order conditions: dy = 0 => = 0 and =0
∂x ∂z
- Second order conditions:
𝜕2 𝑦 𝜕2 𝑦 𝜕2 𝑦
∇=( ) ( ∂𝑧 2 ) − ( ∂𝑥 ∂z )2
∂𝑥 2
- Minimum:
𝜕2 𝑦 𝜕2 𝑦
∂𝑥 2
>0, ( ∂𝑧 2 ) > 0 and ∇ > 0
- Maximum:
𝜕2 𝑦 𝜕2 𝑦
∂𝑥 2
<0 , ( ∂𝑧 2 ) < 0 and ∇ > 0
- Saddle point: ∇ < 0
2. Constrained optimization
2.1. The substitution method:
Optimise z = f(x,y) subject to 𝜑(x,y) = M
B1: Dùng phương trình 𝜑(x,y) = M để viết 1 phương trình mới y theo x (y = ax
+ b)
B2: Thay phương trình mới viết vào phương trình f(x,y) để được 1 phương trình
chứa 1 ẩn x
B3: Tìm f’(x), giải tìm x khi f’(x) = 0 ⟶ có x tìm được y
B4: Tìm f’’(x) <0 or >0 để xem là min hay max
2.2. The Lagrange multiplier
- Optimise y = f(x,z) subject to M = g(x,z).
- Step 1: Define a new function:
L = f(x, z) + λ(M − g(x, z))
- Step 2: Find all first order partial derivatives.
- Step 3: Solve the system of equations:
𝜕𝐿 𝜕𝐿 𝜕𝐿
= 0, = 0, =0
∂x ∂z ∂λ
- Step 4: Substitute values for x and z to find optimal value of y (if required).
*The ratio:
- The ratio of the input prices is equal to the ratio of their marginal products:
PL MPL
=
PK MPK
- The ratio of marginal product to price is the same for all inputs 𝑀𝑃𝐿= 𝑀𝑃𝐾:
MPL 𝑀𝑃𝐾
=
PL PK
- The ratio of the prices of the goods is equal to the ratio of their marginal
utilities:
P1 U1
=
P2 U2
- The ratio of marginal utility to price is the same for all goods consumed
𝑈1=𝑈2:
U1 U2
=
P1 P2

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1 MATH FOR BUSINESS TA: VŨ THỊ THU TRANG

II. Partial elasticity and marginal functions

When Q: demand for a certain good

Inelasticity: |E| <1

+ Ey < 0 → inferior goods (white bread, instant noodle, bus transportation)

- Marginal utility associated with x1 (x2) gives the change in utility as a

- When both x1 and x2 change simultaneously, we can use the small

- The increase in x2 required to maintain the current level of utility when

∆x2 = MRCS x ∆x1

Marginal rate of technical substitution is the marginal product of labor divided by

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