ECN 2311: TOPIC 4 Multivariate functions

Partial Derivatives, Higher Order Derivatives and

Total Differentials
 Functions of Several Variables
• More realistic in economics to assume an economic variable is a function of a
number of different factors:
Y =f(X, Z)

• Demand may depend on the price of the good and the income level of the
consumer
Qd =f(P,Y)

• Output of a firm depends on inputs into the production process like capital and
labour
Q =f(K,L)
• We therefore now focus on finding derivatives for functions of many variables
 Partial derivatives
• Economic analysis often proceeds by considering the
consequences of a certain event, ceteris paribus.
• The relevance of this approach is that it identifies the exclusive
impact of the variable under study rather than confounding its
effect with the effect of other variables.
 Partial derivatives
• If we have a function of more than one variable, such as:
𝑓 𝑥𝑦 = 𝑥 3 + 4𝑥𝑦 + 5𝑦 2
we can ask, for example, how f(x, y) changes when x increases
but y doesn’t change.
• The answer to this question is found by thinking of y as a
constant.
• Differentiate 𝑓 𝑥𝑦 wrt x, while treating y as if it were a
constant parameter.
 Partial Derivatives

Definition:
 Suppose f(x, y) is a function of two variables x and y.
 Then, the partial derivative of f with respect to x at the
point (x, y) is

𝜕𝑓 𝑓 𝑥 + ℎ, 𝑦 − 𝑓 𝑥, 𝑦
= lim
𝜕𝑥 ℎ→0 ℎ
provided the limit exists.
 The partial derivative of f with respect to y at the point (x,
y) is
𝜕𝑓 𝑓 𝑥,𝑦+𝑘 −𝑓 𝑥,𝑦
= lim
𝜕𝑦 k→0 𝑘
provided the limit exists.
 Examples
 Find the partial derivatives ∂f/∂x and ∂f/∂y of the function
𝑓 𝑥, 𝑦 = 𝑥 𝟐 − 𝐱𝑦 2 + 𝑦 𝟑
 Use the partials to determine the rate of change of f in the x-
direction and in the y-direction at the point (1, 2) .
Solution
 To compute ∂f/∂x, think of the variable y as a constant and
differentiate the resulting function of x with respect to x:

𝜕𝑓
= 2𝑥 − 𝑦 2
𝜕𝑥
 Examples
 Find the partial derivatives ∂f/∂x and ∂f/∂y of the function
𝑓 𝑥, 𝑦 = 𝑥 𝟐 − 𝐱𝑦 2 + 𝑦 𝟑
 Use the partials to determine the rate of change of f in the x-
direction and in the y-direction at the point (1, 2).
Solution
 To compute ∂f/∂y, think of the variable x as a constant and
differentiate the resulting function of y with respect to y:

𝜕𝑓
= −2𝑥 + 3𝑦 2
𝜕𝑦
 The Cobb-Douglas Production Function

 The Cobb-Douglass Production Function is of the form

f(l, k) = albk1– b (0 < b < 1)

where
a and b are positive constants,
l stands for labor,
k stands for capital equipment, and
f measures the output of the finished product.
 The Cobb-Douglas Production Function

f(l, k) = albk1– b (0 < b < 1)

 The first partial derivative fl is called the marginal

productivity of labor.
 It measures the rate of change of production with respect to
the quantity of labor employed, with the level of capital kept
constant.
 The first partial derivative fk is called the marginal
productivity of capital.
 It measures the rate of change of production with respect to
the amount of capital used, with the employment level of
labor kept constant.
 Applied Example: Marginal Productivity

 Zambia’s production in the early years following its

independence in 1964 is described by the function
f(l, k) = 30l2/3k1/3
when x units of labor and y units of capital were used.
 Compute fl and fk.
 Find the marginal productivity of labor and the marginal
productivity of capital when the amount expended on labor
and capital was 125 units and 27 units, respectively.
 Should the government have encouraged capital investment
rather than increase expenditure on labor to increase the
country’s productivity?

Applied Example 4, page 550

 Applied Example: Marginal Productivity

f(l, k) = 30l2/3k1/3
Solution
 The partial derivatives are

1
2 −1 1 𝑘 3
𝑓𝑙 = 30. 𝑙 3 𝑘 3 = 20.
3 𝑙

2
1 2 −2 𝑙 3
𝑓𝑘 = 30. 𝑙 𝑘 = 10.
3 3
3 𝑘

Applied Example 4, page 550

 Applied Example: Marginal Productivity

f(l, k) = 30l2/3k1/3
Solution
 The required marginal productivity of labor is given by

1
27 3 3
𝑓𝒍 (125,27) = 20. = 20. =12
125 5
or 12 units of output per unit increase in labor expenditure (keeping
capital constant).
 The required marginal productivity of capital is given by
2
27 3 25 7
𝑓𝒌 (125,27) = 10. = 10. =27
125 9 9

or 27 7/9 units of output per unit increase in capital expenditure (keeping

labor
Applied constant).
Example 4, page 550
 Applied Example: Marginal Productivity

f(l, k) = 30l2/3k1/3
Solution
 The government should definitely have encouraged capital
investment.
 A unit increase in capital expenditure resulted in a much faster
increase in productivity than a unit increase in labor: 27 7/9
versus 12 per unit of investment, respectively.

Applied Example 4, page 550

Higher Order Derivatives
 Higher order Derivatives

 In the study of productivity, we differentiate the production

function to get MP for each factor or input.
 This tells us about the rate of change in out put as that factor ,
ceteris paribus , changes by a unit.
 The interest is to know how output will increase if we employ one
more person.
 How the change in the output compares with the wage rate provides
the rule for decision
 Higher order Derivatives

 Aside from the analysis on previous slide, we might also be interested in how the
MP behaves for every successive unit of the factor of production.

 Do we get the same level of productivity for every additional person does this vary.

 If it increases as we get more persons (assuming fixed wage), then there is every
reason to employ that additional unit
 Higher order Derivatives

 To get this we differentiate the MP function wrt labour

 Notice that MP is itself a derivative of the production function

 As such , the end result now is the second derivative of the initial
function ; the production function.

 Similarly, we can get the third, fourth and up to the nth .

 These called higher order derivatives

 Second Partial Derivative & Cross Partial Derivatives

 A second partial derivative is a measure of how a partial derivative with

respect to one argument of a multivariate function changes with a very
small change in that argument.

 A cross partial derivative is a measure of how a partial derivative taken

with respect to one of the arguments of the multivariate function varies
with a very small change in another argument of that function.
 Partial Derivatives

We have the function y  f(x1,x2 )

The two partial derivates are f1(x1,x2 ) and f 2(x1,x2 ) or
y y
and
x1 x2
Second partial derivatives
  y   2 y
f11(x1,x2 )    
x1  x1  x12
  y  2 y
f 22(x1,x2 )    
x2  x2  x 2
2
 Cross Partial Derivative

The cross partial derivative representing the partial

derivative of f 1(x1 ,x2 ) taken with respect to x2 is denote as
 y 
 2 y
f 21(x1,x2 )    
x2
 x1  x2 x1
and the cross partial derivate of f 2(x1 ,x2 ) taken with respect
to x1 is denoted as
  y  2 y
f12(x1,x2 )    
x1  x2  x1x2
 Example Utility Function

U  U ( X , Y )  X  Y 1 0    1 and   0
Marginal Utilities
1
U Y 
UX   X  1Y 1     0
X X

U X
UY   1   X Y  1       0
 
Y Y 
Diminish Marginal Utility or second partial derivatives
 2U
U XX     1  X   2 1
Y 0
X 2

 2U
U YY    1   X   1
Y 0
Y 2
 Example Cross Partial

Marginal Utilities
1
U Y 
UX    X  1 1
Y     0
X  X 

U  X 
UY   1    X Y
 
 1      0
Y Y 
The cross partials are
  U   2U
U YX     1    X  1Y   0
Y  X  YX
  U   2U
U XY      1    X  1Y   0
X  Y  XY
These goods are compliments in consumption. More of
one increases the marginal utility of the other.
Total Differentials
 Total Differentials

 The more general and realistic case of a K- independent variable is

when all variables are allowed to vary independently.

 In this case we are concerned with the total change in the dependent
variable if each independent variable changes

 That is the total differential

 Total Differentials

 Consider a given utility function

𝑈 = ራ 𝑥1 𝑥2 𝑥3 … … 𝑥𝑘

 The total differential is written as

𝜕𝑈 𝜕𝑈 𝜕𝑈 𝜕𝑈
𝑑𝑈 = 𝑑𝑥1 + 𝑑𝑥2 + ⅆ𝑥3 ………. + 𝑑𝑥k
𝜕𝑥1 𝜕𝑥2 𝜕𝑥3 𝜕𝑥k
 or

𝑑𝑈 = 𝑢1 𝑑𝑥1 +𝑢2 𝑑𝑥2 +𝑢3 𝑑𝑥3 +……𝑢k 𝑑𝑥k

 Total Differentials

 Each term on the right hand side indicate the approximate change
in U resulting from a change in one of the independent variables.

 From the first term, it is the marginal utility of 𝑥1 multiplied by the

amount of change in 𝑥1 .

 The total change in U is thus the summation of the individual

effects of all the variables.
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

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