Topic 6: Differentiation

Jacques Text Book (edition 4 ):

Chapter 4
1.Rules of Differentiation
2.Applications

1
 Differentiation is all about measuring
change!
Measuring change in a linear function:
y = a + bx
a = intercept
b = constant slope i.e. the impact of a unit
change in x on the level of y

b = ∆y =
y2 − y1
∆x x2 − x1
2
 If the function is non-linear:
40
e.g. if y = x2
30
y=x2

20

10

0
0 1 2 3
X 4 5 6

∆y y 2 − y1
∆x
= x 2 − x1
gives slope of the line
connecting 2 points (x 1 , y 1 ) and (x 2 ,y 2 ) on a
curve
• (2,4) to (4,16): slope = (16-4)
/ (4-2) = 6
• (2,4) to (6,36): slope = (36-4)
/ (6-2) = 8 3
The slope of a curve is equal to the slope of
the line (or tangent) that touches the curve
at that point
Total Cost Curve

40

35

30

25
y=x2

20

15

10

0
1 2 3 4 5 6 7

which is different for different values of x

4
Example:A firms cost function is
Y = X2
X ∆X Y ∆Y
0 0
1 +1 1 +1
2 +1 4 +3
3 +1 9 +5
4 +1 16 +7

Y = X2
Y+∆Y = (X+∆X) 2
Y+∆Y =X2+2X.∆X+∆X2
∆Y = X2+2X.∆X+∆X2 – Y
since Y = X2 ⇒ ∆Y = 2X.∆X+∆X2
∆ Y
∆ X
= 2X+∆X

The slope depends on X and ∆X

5
The slope of the graph of a function
is called the derivative of the
function

dy ∆y
f ' ( x) = = lim
dx ∆x→0 ∆x
• The process of differentiation involves
letting the change in x become arbitrarily
small, i.e. letting ∆ x → 0
• e.g if = 2X+∆X and ∆X →0
• ⇒ = 2X in the limit as ∆X →0
6
 the slope of the non-linear
function
Y = X2 is 2X
• the slope tells us the change in y that
results from a very small change in X
• We see the slope varies with X
e.g. the curve at X = 2 has a slope = 4
and the curve at X = 4 has a slope = 8
• In this example, the slope is steeper
at higher values of X 7
 Rules for Differentiation
(section 4.3)

1. The Constant Rule

If y = c where c is a constant,
dy
= 0
dx

dy
e.g. y = 10 then dx = 0

8
2. The Linear Function Rule
If y = a + bx
dy
=b
dx
dy
=6
e.g. y = 10 + 6x then dx

9
3. The Power Function Rule
If y = axn, where a and n are constants
dy
= n .a . x n − 1
dx

dy
i) y = 4x => dx = 4 x 0
= 4

dy
ii) y = 4x 2
=> dx = 8 x

dy −3
-2
iii) y = 4x => dx = − 8 x
10
4. The Sum-Difference Rule
If y = f(x) ± g(x)
dy d [ f ( x )] d [ g ( x )]
= ±
dx dx dx

If y is the sum/difference of two or more

functions of x:
differentiate the 2 (or more) terms
separately, then add/subtract
dy
(i) y = 2x2 + 3x then = 4x + 3
dx
dy
(ii) y = 5x + 4 then dx = 5 11
5. The Product Rule

If y = u.v where u and v are functions of x,

(u = f(x) and v = g(x) ) Then
dy dv du
= u +v
dx dx dx

12
 Examples

dy dv du
If y = u .v = u + v
dx dx dx

2
i) y = (x+2)(ax +bx)
dy
dx
(
= (x + 2 )(2 ax + b ) + ax 2 + bx )
ii) y = (4x3-3x+2)(2x2+4x)
dy = ⎛⎜ 4x3 −3x + 2⎞⎟ (4x + 4)+⎛⎜ 2x2 + 4x⎞⎟ ⎛⎜12x2 −3⎞⎟
dx ⎝ ⎠ ⎝ ⎠⎝ ⎠
13
6. The Quotient Rule
• If y = u/v where u and v are functions of x
(u = f(x) and v = g(x) ) Then

du dv
v −u
dy dx dx
= 2
dx v
14
 du dv
v −u
u dy dx dx
If y = then =
v dx v2

Example 1

y =
(x + 2 )
(x + 4 )

dy
=
( x + 4 )(1 ) − ( x + 2 )(1 )
=
−2
dx (x + 4 ) 2
(x + 4 )2

15
7. The Chain Rule
(Implicit Function Rule)

• If y is a function of v, and v is a function of

x, then y is a function of x and

dy dy dv
= .
dx dv dx

16
 dy dy dv
= .
Examples dx dv dx
2 ½
i) y = (ax + bx)
let v = (ax2 + bx) , so y = v½
( )
1
dy 1 −
= ax + bx 2 .(2 ax + b )
2
dx 2
3 4
ii) y = (4x + 3x – 7 )
3 4
let v = (4x + 3x – 7 ), so y = v
dy
dx
(
= 4 4x + 3x − 7
3
) .(12 x
3 2
+3 )
17
 8. The Inverse Function Rule
dy 1
=
If x = f(y) then dx dx
dy
• Examples
i) x = 3y2 then
dx dy 1
dy
= 6y so dx = 6 y
3
ii) y = 4x then
dy dx 1
= 12 x 2 so dy = 12 x 2
dx 18
 Differentiation in Economics
Application I

• Total Costs = TC = FC + VC
• Total Revenue = TR = P * Q
• π = Profit = TR – TC
• Break even: π = 0, or TR = TC
• Profit Maximisation: MR = MC

19
Application I: Marginal Functions
(Revenue, Costs and Profit)
•
Calculating Marginal Functions

d (TR )
MR =
dQ
d (TC )
MC =
dQ
20
 Example 1
• A firm faces the
Solution:
demand curve P=17-
3Q
TR = P.Q = 17Q – 3Q2
• (i) Find an
expression for TR in
terms of Q d (TR )
MR = = 17 − 6Q
• (ii) Find an dQ
expression for MR in
terms of Q

21
 Example 2
A firms total cost curve is given by

TC=Q3- 4Q2+12Q
(i) Find an expression for AC in terms of Q
(ii) Find an expression for MC in terms of Q
(iii) When does AC=MC?
(iv) When does the slope of AC=0?
(v) Plot MC and AC curves and comment on
the economic significance of their
relationship
22
 Solution

(i) TC = Q3 – 4Q2 + 12Q

TC 2
Then, AC = / Q = Q – 4Q + 12
d (TC )
(ii) MC = dQ = 3 Q 2
− 8 Q + 12

(iii) When does AC = MC?

Q2 – 4Q + 12 = 3Q2 – 8Q + 12
⇒Q =2
Thus, AC = MC when Q = 2
23
 Solution continued….

(iv) When does the slope of AC = 0?

d ( AC )
= 2Q − 4 = 0
dQ
⇒ Q = 2 when slope AC = 0
(v) Economic Significance?
MC cuts AC curve at minimum point…

24
9. Differentiating Exponential Functions
x
If y = exp(x) = e where e = 2.71828….
dy
then dx = e
x

More generally,
rx
If y = Ae
dy
then dx = rAe = ry
rx

25
 Examples

2x
dy 2x
1) y = e then dx = 2e

-7x
dy -7x
2) y = e then dx = -7e

26
10. Differentiating Natural Logs
Recall if y = ex then x = loge y = ln y
dy
• If y = e
x
then dx
= ex = y

• From The Inverse Function Rule

dx 1
y = e ⇒ dy = y
x

• Now, if y = ex this is equivalent to writing

x = ln y
dx 1
• Thus, x = ln y ⇒ dy y
=
27
More generally,
dy 1
=
if y = ln x ⇒ dx x

NOTE: the derivative of a natural log

function does not depend on the co-efficient
of x
Thus, if y = ln mx ⇒ dy 1
dx
=
x
28
 Proof

• if y = ln mx m>0
• Rules of Logs ⇒ y = ln m+ ln x
• Differentiating (Sum-Difference rule)
dy 1 1
= 0+ =
dx x x

29
 Examples
dy 1
1) y = ln 5x (x>0) ⇒ dx
=
x
2
2) y = ln(x +2x+1)
2
let v = (x +2x+1) so y = ln v
dy dy dv
Chain Rule: ⇒ dx = dv . dx
dy 1
= 2 .(2 x + 2 )
dx x + 2x +1
dy
=
(2x + 2)
dx (
x2 + 2x + 1 )
30
3) y = x4lnx
Product Rule: ⇒
dy 1
= x 4 + ln x . 4 x 3
dx x
= x 3
+ 4 x 3
ln x = x 3
(1 + 4 ln x )
4) y = ln(x3(x+2)4)
Simplify first using rules of logs
⇒ y = lnx3 + ln(x+2)4
⇒ y = 3lnx + 4ln(x+2)
dy 3 4
= +
dx x x+ 2
31
 Applications II

• how does demand change with a change in

price……

• ed= proportion al change in demand

proportion al change in price

∆Q ∆P ∆Q P
= Q P = ∆P . Q
32
Point elasticity of demand

dQ P
.
ed = dP Q

ed is negative for a downward sloping demand

curve
–Inelastic demand if | ed |<1
–Unit elastic demand if | ed |=1
–Elastic demand if | ed |>1
33
 Example 1
-b
Find ed of the function Q= aP
dQ P
ed = .
dP Q
−b−1 P
ed = − baP . −b
aP
− baP−b P
= P . aP −b = −b
ed at all price levels is –b
34
 Example 2
If the (inverse) Demand equation is
P = 200 – 40ln(Q+1)
Calculate the price elasticity of demand
when Q = 20
dQ P
ƒ Price elasticity of demand: ed = .
dP Q
<0
ƒ P is expressed in terms of Q,
dP 40
= −
dQ Q +1
dQ Q +1
ƒ Inverse rule ⇒ dP
= −
40
Q+ 1 P
ƒ Hence, ed = − . <0
40 Q
21 78.22
ƒ Q is 20 ⇒ ed = − 40 . 20 = -2.05
(where P = 200 – 40ln(20+1) = 78.22) 35
Application III: Differentiation of Natural
Logs to find Proportional Changes
f’(x)
The derivative of log(f(x)) ≡ /f(x), or the
proportional change in the variable x

i.e. y = f(x), then the proportional ∆ x

dy 1 d (ln y )
= dx . y = dx
Take logs and differentiate to find
proportional changes in variables
36
 dy 1 α
1) Show that if y = x , then dx . y = x
α

and this ≡ derivative of ln(y) with respect to x.

Solution:
dy 1 1 α −1
. = .α x
dx y y

1 xα
= y .α x

1 y
= y .α . x

α
= x

37
 Solution Continued…
α
Now ln y = ln x
Re-writing ⇒ ln y = αlnx
d (ln y ) 1 α
⇒ = α. =
dx x x
Differentiating the ln y with respect to x gives
the proportional change in x.

38
 Example 2: If Price level at time t is
P(t) = a+bt+ct2
Calculate the rate of inflation.
Solution: Alternatively,
The inflation rate at t is the proportional differentiating the log of P(t) wrt t directly
change in p 2
lnP(t) = ln(a+bt+ct )
1 dP(t ) b+2ct
. = where v = (a+bt+ct2) so lnP = ln v
P(t ) dt a+bt+ct2
Using chain rule,
d (ln P( t )) b + 2ct
=
dt a + bt + ct2

39