Applications to Economics and

Business
12

This unit is designed to introduce the learners to the basic concepts

associated with the applications of mathematics in business and
economics. The learners will learn about different types of
functions that are widely used in economics and the relationships
among total, average and marginal functions. This unit also
discusses the elasticity of demand and supply, consumers’ surplus
and producers’ surplus etc. Some relevant examples are provided
in this unit for clear understanding to the learners.
School of Business

Blank Page

Unit-12 Page-292
 Bangladesh Open University

Lesson-1: Uses of Different Functions in Business and

Economics
After studying this lesson, you should be able to:

Develop different functions relating to demand, supply, cost,
revenue, profit and production;

Analyze different types of functions;

Determine total cost, average cost and marginal cost;

Determine total revenue and marginal revenue;

Determine total profit and marginal profit.
Introduction
Functions explain the nature of correspondence between variables
indicated by some formula, graph or a mathematical equation. A function A function is a term
is a term used to symbolize relationship between or among the variables. used to symbolize
relationship between
When two variables are so related that for any arbitrarily assigned value or among the
to one of them there corresponds a definite value or a set of definite variables.
values for the other, the second variable is said to be the function of the
first. We shall now introduce some different types of functions, which are
particularly useful in business and economics.
Demand Function
Demand functions are an essential concept in the study of economics.
Usually these functions are curves rather than straight lines, but straight
lines provide good illustrations of demand characteristics. The demand Demand refers to the
function specifies the amounts of a particular commodity that buyers are relationship between
willing and able to purchase at each price in a series of possible prices price and quantity.
during a specified period of time. Demand refers to the relationship
between price and quantity. Conventionally, we plot price on the vertical
axis and quantity demanded on the horizontal axis.
Let p be the price and x be the quantity demanded, the function x = f (p)
is plotted as a demand curve. It usually slopes downwards as demand
decreases when price increases.

0 x

Supply Function
Supply function specifies the amounts of a particular product that a
producer is willing and able to produce and make available for sale at
each price in a series of possible prices during a specified period of time.

Business Mathematics Page-293

 School of Business

Let p be the price and x be the quantity supplied; the function x = g ( p )

is plotted as a supply curve. When price increases quantity supplied
increases, therefore, a supply curve slopes upward.

0 x

Total Revenue (TR)

A firm’s total revenue that is derived from the sale of a product is given
by price multiplied by quantity. It can be expressed mathematically, TR =
p × q.
From the demand function we observe that price is a function of quantity,
i.e., p = f (q)
Total revenue is thus represented as a function of quantity,
i.e., TR = f (q ) × q
Total Cost (TC)
The cost of production to the firm depends upon the costs of inputs used
The cost of production
to the firm depends in the production process and the quantity of product manufactured. If x
upon the costs of is the quantity produced of a certain product by a firm at a total cost C,
inputs used in the we can write the total cost function: TC = f (x) .
production process
and the quantity of It may be noted that the total cost TC of producing goods can be
product manufactured. analyzed into two parts: (i) fixed cost which is independent of x with
certain limits, and (ii) variable cost depending on x. Thus, we may have
cost function of the type, TC = FC + VC , where FC is fixed cost and VC
is variable cost.
Cost curves are obtained from the knowledge of production functions.
Usually, the cost curve is rising to the right as the cost of production
generally increases with the output (x).
Total Profit
Profits of a firm depend upon both revenue and cost. Profits are defined
Profits of a firm
depend upon both as the excess of total revenue over total costs. Symbolically, it can be
revenue and cost. expressed as, P = TR − TC .
Average Revenue (AR)
The average revenue from a product is found by dividing the total
revenue by the quantity of the product sold. The function that describes
average revenue is the quotient of the total revenue function and the
quantity.

Unit-12 Page-294
 Bangladesh Open University

We see that average revenue function and the demand function are
equivalent.
TR f (q ).q
AR = = = f (q )
q q
Average Cost (AC)
Average cost of production or cost per unit is obtained by dividing total
cost by the quantity produced.
C
AC =
x
Marginal Revenue (MR)
Marginal revenue is the additional revenue derived from selling one Marginal revenue is
more unit of a product or service. If each unit of a product sells at the the additional revenue
same price, the marginal revenue is always equal to the price. derived from selling
one more unit of a
d (TR) product or service.
Thus, MR = ; the rate of change of revenue with respect to units
dq
of output.

Marginal Cost (MC)

Marginal cost is defined as the change in total cost incurred in the
production of an additional unit.
d (TC )
MC = ; the rate of change of cost with respect to units of
dq
production.

Marginal Profit (MP)

Marginal profit analysis is concerned with the effect on profit if one
Marginal profit
additional unit of a product is produced and sold. As long as the analysis is concerned
additional revenue brought in by the next unit exceeds the cost of with the effect on
producing and selling that unit, there is a net profit from producing and profit if one additional
selling that unit and total profit increases. If, however, the additional unit of a product is
revenue from selling the next unit is exceeded by the cost of producing produced and sold.
and selling the additional unit, there is a net loss from that next unit and
total profit decreases.
d (TP)
MP = ; the rate of change of profit with respect to units of
dq
output.
A rule of thumb concerning whether or not to produce an additional unit
(assuming profit maximization is of greatest importance) is given below.
(i) If MR > MC , produce the next unit.
(ii) If MR < MC , do not produce the next unit.
(iii) If MR = MC , the total profit will be maximized.

Business Mathematics Page-295

 School of Business

Production Function
A production function is a technical relationship between the inputs of
A production function
is a technical relation- production and the output of the firm’s. The relationship is such that the
ship between the level of output depends upon the level of inputs used, not vice versa. A
inputs of production production function can be written as: Q = f ( L, K ) , where L and K are
and the output of the
firm’s. quantities of labor and capital respectively required to produce Q.
In Economics, the Cobb – Douglas production function defined as
Q = aLα K β , where α + β = 1 .
Utility Function
The term utility refers to the benefit or satisfaction or pleasure of a
person gets from the consumption of a commodity or service. In abstract
Utility is the power of sense, utility is the power of a commodity to satisfy human want, i.e.,
a commodity to satisfy utility is want-satisfying power. A commodity is likely to have utility if it
human want.
can satisfy a want. For example, bread has the power to satisfy hunger,
water quenches our thirst and so on.
If U ( x, y ) denotes the satisfaction obtained by an individual when he
buys quantities x and y of two commodities X and Y respectively, then
U ( x, y ) is called the utility function or utility index of the individual.
Consumption Function
If C is the total consumption of the community dependent on income Y
and propensity to consume c, the aggregate consumption function is
defined by
C = a + cY
But since Y = C + S
S = Y − (a + cY ) ; This is the savings function of the community.
Relationship between Average Cost (AC) and Marginal Cost
(MC)
Let us assume that total cost, C = f (x )
C
Thus, AC =
x
dC
x −C
d d C dx 1 dC C 1
( AC ) = ( )= 2
= ( − ) = ( MC − AC )
dx dx x x x dx x x
Case 1: When average cost curve slopes downwards, i.e., when AC is
declining, its slope will be negative.
d C
( AC ) < 0
dx AC
1
( MC − AC ) < 0 MC
x
MC − AC < 0
0 x
MC < AC

Unit-12 Page-296
 Bangladesh Open University

Thus when AC curves slopes downwards MC curve will lie below AC

curve.
Case 2: When AC curve reaches a minimum point, its slope becomes
zero.

d C MC
( AC ) = 0 AC
dx

1
( MC − AC ) = 0
x
MC – AC = 0
MC = AC 0 x
Thus MC curve and AC curve intersect at the point of minimum average
cost.
Case 3: When average cost curve slopes upward
d
( AC ) > 0 C MC
dx
AC
1
( MC − AC ) > 0
x
MC − AC > 0
MC >AC 0 x
Thus when AC curve slopes upward MC curve will be above AC curve.
Relationship between Average Revenue (AR) and Marginal
Revenue (MR)
When average revenue curve slopes downwards, i.e., when AR is
When AR curves
declining, its slope will be negative. Thus when AR curves slopes slopes downwards MR
downwards MR curve will lay below AR curve. This is common in curve will lay below
imperfect competitive market. AR curve.

When AR is always same then there is no difference between AR and

MR. This relationship will be applicable for pure competitive market.
R R
AR=MR
AR
MR
0 x 0 x
Pure competitive market Imperfect competitive market
Illustrative Examples:
Example-1:
Let the unit demand function be x = ap + b and the cost function be
c = ex + f , where x = sales (in units), p = price (in Tk.), f = fixed cost

Business Mathematics Page-297

School of Business

(in Tk.), e = variable cost, b = demand, and when p = 0, a = slope of unit

demand function.
Required: (i) find the cost C as a function of p.
(ii) find the revenue function R (x).
(iii) find the profit function P (x).
Solution:
(i) Cost, c = ex + f
= e(ap + b) + f .
(ii) Revenue = price × quantity
=p × x
x b
= ( − ).x
a a
x 2 bx
= −
a a
(iii) Profit = Revenue – Cost
x 2 bx
P (x) = ( − ) – (ex + f )
a a
x 2 bx
= − − ex − f
a a
x2 b
= − ( + e) x − f .
a a
Example-2:
Find the average cost and marginal cost if total cost
TC = 1000 + 100q – 10q2 + q3
Solution:
TC 1000 + 100q − 10q 2 + q 3
Average cost (AC) = =
q q
1000
= + 100 − 10q + q 2
q
d
Marginal cost (MC) = (TC)
dq
d
= (1000 + 100q − 10q 2 + q 3 )
dq
= 100 - 20q + 3q 2
Example-3:
If the demand function of the monopolist is 3q = 98 − 4 p and average
cost is 3q + 2 where q is output and p is the price, find maximum profit
of the monopolist.

Unit-12 Page-298
 Bangladesh Open University

Solution:
Given average cost, AC = 3q + 2
Total Cost, TC = AC × q = ( 3q + 2 ). q = 3q 2 + 2q
d
Marginal cost (MC) = (TC )
dq
d
MC = (3q 2 + 2q ) = 6q + 2
dq
Again given that, 3q = 98 − 4 p
98 − 3q
p=
4
Total Revenue (TR) = price × quantity
TR = p × q
98 − 3q 98q − 3q 2
TR = .q =
4 4
d 98q − 3q 2
Marginal Revenue (MR) = ( )
dq 4
98 6q
= −
4 4
We know that under monopoly market, profit will be maximum at MC =
MR.
98 6q
6q + 2 = −
4 4
24q + 8 = 98 − 6q
30q = 90
q = 3.
So the maximum profit of the monopolist will be obtained at q = 3.
Again Total Profit (TP) = TR – TC
98q − 3q 2
TP = ( ) – ( 3q 2 + 2q )
4
When q = 3, then the profit will be maximum
(98)(3) − 3(3) 2
i.e., maximum profit = − 3(3) 2 − 2(3) = 33.75
4
Example-4:
Show that marginal cost (MC) must equal marginal revenue (MR) at the
profit maximizing level of output.
Solution:
We know that, Total profit = Total revenue – Total cost
i.e., TP = TR – TC

Business Mathematics Page-299

School of Business

d (TP )
To maximize TP, must equal zero.
dQ
d (TP ) d (TR ) d (TC )
= − =0
dQ dQ dQ
d (TR ) d (TC )
= .
dQ dQ
MR = MC (showed)
Example-5:
If the cost function is C ( x ) = 4 x + 9 and the revenue function is
R( x ) = 9 x − x 2 , where x is the number of units produced (in thousands)
and R and C are measured in million of Tk., find the following:
(i) Marginal revenue.
(ii) Marginal revenue at x = 5 .
(iii) Marginal cost.
(iv) The fixed cost.
(v) The variable cost at x = 5 .
(vi) The break-even point, that is R ( x ) = C ( x ) .
(vii) The profit function.
(viii) The most profitable output.
(ix) The maximum profit.
(x) The marginal revenue at the most profitable output.
(xi) The revenue at the most profitable output.
(xii) The variable cost at the most profitable output.

Solution:
Given that, R ( x ) = 9 x − x 2
C ( x) = 4 x + 9
d d
(i) MR = ( R) = (9 x − x 2 ) = 9 − 2 x
dx dx
(ii) When x = 5 , then MR = 9 − 2 × 5 = −1 .
d d
(iii) MC = (C ) = ( 4 x + 9) = 4
dx dx
(iv) The fixed cost, FC = 9.
(v) When x = 5 , the variable cost (VC) is (4 × 5) = 20.
(vi) For break-even point, R(x) = C(x).
9x − x 2 = 4x + 9
x 2 − 5x + 9 = 0

Unit-12 Page-300
 Bangladesh Open University

5 ± − 11
x= .
2
(vii) Profit, P = R – C = { (9 x − x 2 ) – ( 4 x + 9) } = 5 x − x 2 − 9 .

(viii) Here profit, P = 5 x − x 2 − 9

dP
= 5 − 2x
dx
dP
For maximum or minimum, =0
dx

5 − 2x = 0
5
x= .
2
d 2P
Again = −2 ; which is negative.
dx 2
5
So the profit function is maximum at x = .
2
5
Thus, the required most profitable output is x = .
2
(ix) The maximum profit, P = 5 x − x 2 − 9 .
5 5
= 5× − ( )2 − 9 ;
2 2
11
= − , which shows a loss.
4
5 5
(x) When x = , then MR = 9 − 2 x = 9 − 2 × = 4 .
2 2
5 5 5
(xi) When x = , then R = 9 x − x 2 = 9 × − ( ) 2 = 16.25 .
2 2 2
5 5
(xii) When x = , then variable cost VC = 4 x = 4 × = 10 .
2 2

Business Mathematics Page-301

School of Business

Questions for Review:

These questions are designed to help you assess how far you have
understood and can apply the learning you have accomplished by
answering (in written form) the following questions:
2 35
1. The total cost C for output x is given by C = x+ .
3 2
Find (i) Total cost when output is 50 units.
(ii) Average cost when output is 100 units.
(iii) Marginal cost when output is 60 units.
2. The total cost of a firm is given by C = 0.04q 3 − 0.9q 2 + 10q + 100
Find (i) Average cost
(ii) Marginal cost
(iii) Slope of average cost
(iv) Slope of marginal cost
(v) Value of q at which average variable cost is minimum.
25 − 2 p
3. The unit demand function is x = where x is the number of
3
units and p is the price. Assume that average cost per unit is Tk.50.
Find (i) The revenue function R in terms of price P.
(ii) The cost function C.
(iii) The profit function P.
(iv) The price per unit that maximizes the profit function
(v) The maximum profit.
4. The marginal cost function (y) for production (x) is
y = 20 + 48 x − 6 x 2 if the total cost of producing one unit is $50.
Find the total cost function and average cost function.
5. The anticipated price of a product is Tk.15. The fixed cost of
manufacturing the product is Tk.10,000 and the variable cost is
Tk.10 per unit. Develop revenue, total cost function and calculate
breakeven production. Calculate revenue, total cost, and profit at the
breakeven product.

Unit-12 Page-302
 Bangladesh Open University

Lesson-2: Elasticity
After studying this lesson, you should be able to:

Define the concept of elasticity, elasticity of demand, and
elasticity of supply.

Describe the techniques of measuring elasticity.
Elasticity
Elasticity is the ratio that measures the responsiveness or sensitiveness of
The term elasticity
a dependent variable to the changes in any of the independent variables. refers to the
More clearly, the term elasticity refers to the percentage change in percentage change in
dependent variable divided by the percentage change in independent dependent variable
variable. divided by the
percentage change in
Percentage change in dependent variable
Thus, elasticity = independent variable.
Percentage change in independentvariable
If y = f (x ) , i.e., y depends on x, then the elasticity of y with respect to x
is
Percentage change in y % ∆y
Elasticity of y = = .
Percentage change in x % ∆x
Elasticity of Demand
The elasticity of demand is the measure of responsiveness of demand for
The elasticity of
a commodity to the changes in any of its determinants. The determinants demand is the
of demand are the commodity’s own price, income, price of related measure of respon-
goods (substitutes and complements) and consumers’ expectations siveness of demand
regarding future price. for a commodity to the
changes in any of its
Q XD = f ( Px , M , Py , Pz .........) determinants.

where Q XD = quantity demanded of commodity x.

Px = price of commodity x
M = money income of the consumer
Py = price of the substitute, x and y are substitute to each other
Pz = price of complement, x and z are complement to each
other.
Price Elasticity of Demand
The average price elasticity of demand is the proportionate response of The average price
quantity demanded to the change in price. Let δp be small change in elasticity of demand is
the proportionate
price p and δx be a small change in the quantity demanded.
response of quantity
δx demanded to the
p δx change in price.
The average price elasticity of demand = x = .
δp x δp
p

Business Mathematics Page-303

 School of Business

Since the point elasticity of demand is the limiting value of average price
p dx
elasticity. So, the point elasticity of demand is E d = . .
x dp
Generally, slope of the demand curve is negative and thus Ed is negative,
i.e.,
p dx
Ed = − . .
x dp
Thus, when E d > 1 , the demand is elastic.
when E d < 1 , the demand is inelastic.
when E d = 1 , the demand is unitary elastic.

Price Elasticity of Supply

The price elasticity of supply measures the responsiveness of the quantity
The price elasticity of
supply measures the supplied of a commodity to a change in its price.
responsiveness of the
quantity supplied of a
Percentage change in quantity supplied
Price elasticity of supply = =
commodity to a Percentage change in price
change in its price.
% ∆Q
% ∆P
Thus, the price elasticity of supply is denoted by e s and is given by
p dx
. ; where x is quantity supplied and p is price.
x dp
Income Elasticity of Demand
The income elasticity
The income elasticity of demand is a measure of the responsiveness of
of demand is a quantity demanded to a change in income, other things remaining the
measure of the same. It is calculated by using the following formula:
responsiveness of
quantity demanded to Income elasticity of demand =
a change in income.
Percentage change in quantity demanded
.
Percentage change in income
y dx
It is denoted by Ey and is given by . where x is the quantity
x dy
demanded and y is the income per head in the relevant group of people.
The income elasticity of demand may be positive or negative. This
motivates the definition of following types of goods.
Case 1: Goods are Luxury, if E y > 1 .
Case 2: Goods are Necessity of life, if 0 < E y < 1 .
Case 3: Goods are Inferior, if E y < 0 .

Unit-12 Page-304
 Bangladesh Open University

Cross Elasticity of Demand

The cross elasticity of demand is a measure of the responsiveness of The cross elasticity of
quantity demanded to the price of its substitutes or complements. demand is a measure
of the responsiveness
If x and y are related goods, the cross elasticity of demand, of quantity demanded
dQ x to the price of its
substitutes or
Q dQ x Py complements.
E xy = x = . .
dPy dPy Q x
Py
When x and y are complementary goods, the sign of the cross elasticity is
negative and if x and y are substitute goods, then the sign is positive.
Illustrative Examples:
Example-1:
Find the elasticity of demand for the function p = 100 − x − x 2 .
Solution:
p dx
Ed = − .
x dp
p 1 p 1
=– . =– .
x dx x -1-2 x
dp
p 100 − x − x 2
= =
x + 2x 2 x(1 + 2 x)
Example-2:
The demand function is Q = 20 − 5 P . Find the inverse function and
estimate the elasticity at P = 2.
Solution:
Given that Q = 20 − 5 P .
The inverse function is P = 4 − 0.2 Q
dQ
= −5
dP
At P = 2, Q = 10.
dQ P 2
Ed = − . = −(−5). = 1 .
dP Q 10
Example-3:
If the demand function is p = 4 − 5 x 2 ; for what value of x, the elasticity
of demand will be unity.
Solution:
The given demand function is p = 4 − 5 x 2 .
dp
= −10 x .
dx

Business Mathematics Page-305

School of Business

p dx
The price elasticity of demand is E d = − .
x dp
4 − 5x 2 − 1 4 − 5x 2
=– . = .
x 10 x 10 x 2
The elasticity of demand will be unity if E d = 1 .
4 − 5x 2
= 1.
10 x 2
10 x 2 = 4 − 5 x 2
15 x 2 = 4
2
∴ x= .
15
Example-4:
Find the elasticity of demand and supply at equilibrium price for demand
function p = 100 − x 2 and supply function x = 2p – 10, where p is price
and x is quantity.
Solution:
Equilibrium conditions can be determined by equating demand and
supply.
x + 10
100 − x 2 =
2
or, 2 100 − x 2 = x + 10
or, 4 (100 – x2) = x2 + 20x +100
or, 5x2 + 20x – 300 = 0
or, x2 + 4x – 60 = 0
or, (x + 10) (x – 6) = 0
or, x = 6; (since negative quantity is not admissible).
∴ x = 8.
Price elasticity of demand:
p = 100 − x 2
dp 1 −1
2 x
= .(100 − x ) .( −2 x ) = –
dx 2 100 − x 2
p dx = 8 −x
Ed = − . − .
x dp 6 100 − x 2

∴ Ed =
16
9
Price elasticity of supply:
Here x = 2p – 10
dx
=2
dp
p dx 8 8
Price elasticity of supply, ES = . = .2 =
x dp 6 3

Unit-12 Page-306
 Bangladesh Open University

Questions for Review:

These questions are designed to help you assess how far you have
understood and can apply the learning you have accomplished by
answering (in written form) the following questions:

1. If the demand function is Q = 1400 − P 2 . Find the price elasticity

of demand at P = 20.
2. Find the elasticity of demand when demand function is q = 7 − 2 p
at p = 2.

3. Find the elasticity of supply when supply function is q = 2 p 2 + 5 at

p = 1.

Business Mathematics Page-307

 School of Business

Lesson-3: Consumers’ Surplus and Producers’

Surplus
After completing this lesson, you will be able to:

Explain consumers’ surplus;

Explain producers’ surplus;

Determine consumers’ surplus;

Determine producers’ surplus.

Introduction
In the economic model of pure competition, it is assumed that all
In the economic model consumers of product pay the same price per unit of a product. This price
of pure competition, it
is assumed that all comes about by the interplay of competitive market forces and is the
consumers of product price per unit at which the quantity of product consumers are willing and
pay the same price per able to buy is matched by the quantity producers are willing and able to
unit of a product. supply. The purpose of this lesson is to illustrate that this competitive
situation benefits both consumer and supplier and to develop a measure
of these benefits.
Market Equilibrium Position
Suppose the price p that a consumer is willing to pay for a quantity x of a
particular commodity is governed by the demand curve p = D (x ) .
Further, suppose the price p that a producer is willing to charge for a
commodity x of a particular commodity is governed by the supply
curve p = S (x ) . The point of intersection of the demand curve and the
supply curve is called the equilibrium point E.
If the coordinates of E are ( x 0 , p 0 ) , then p 0 is the market price a
consumer is willing to pay for and a producer is willing to sell for a
quantity x0 , the demand level of the commodity.

p p = S(x)

E
B
p = D(x)

0 A x

Consumer’s Surplus (CS)

Difference between A demand function represents the different prices consumers are willing
what consumers
actually pay and the to pay for different quantities of a good. In a free market economy, when
maximum amount that some consumers’ would be willing to pay more than the market
they would be willing equilibrium price for the commodity, this benefit to the consumers, i.e.,
to pay is called difference between what consumers actually pay and the maximum
consumers’ surplus.
amount that they would be willing to pay is called consumers’ surplus.

Unit-12 Page-308
 Bangladesh Open University

p0 E
B
A
0 x0 x

Thus, consumers’ surplus = {total area under the demand curve D(x)
from x = 0 to x = x0} – {the area of the rectangle OAEB}.
x0

Mathematically, Consumers’ surplus = ∫ D( x )dx − x

0
0 p0

Producer’s Surplus (PS)

The relationship between the market price and the quantities producers
are willing to supply is expressed as a supply function. The supply curve
slopes upward to the right as because producers are willing to supply
more at higher prices than at lower prices.

p0 E
B

A
0 x0 x
In a free market economy, when some producers would be willing to sell
The difference
at a price below the market price p0 that the consumers actually pays, the between the revenue
benefit of this to the producer, i.e., the difference between the revenue producers actually
producers actually receive and what they have been willing to receive is receive and what they
known as producer’s surplus (PS). have been willing to
receive is known as
Thus, producers’ surplus = {area of the rectangle OAEB} – {area below producer’s surplus
the supply curve from x = 0 to x = x0}. (PS).
x0

Mathematically, Producers’ surplus = x 0 p0 − S ( x )dx ∫

0

Illustrative Example:
Example-1:
The demand law for a commodity is P = 1200 − q 2 . Find the
consumer’s surplus (CS) when the demand is15.

Business Mathematics Page-309

School of Business

Solution:
Here given that P = f ( q ) = 1200 − q 2
If q 0 = 15, P0 = 1200 − 15 2 = 975 .
q0

We know that consumer’s surplus (CS) = ∫ dq − p q

0
0 0

15

∫ (1200 − q
2
= )dq − 975 × 15
0

15
 q3 
= 1200q −  − 14625 .
 3 0
 15 3 
= 1200 × 15 −  − 14625
 3 
= 2250.
Example-2:
The demand and supply functions under perfect competition for a
product are D ( x ) = 16 − x 2 and S ( x ) = 4 + x respectively. Find the
market price, consumer’s surplus (CS) and producer’s surplus (PS).
Solution:
Here given that, demand function = D ( x ) = 16 − x 2 (i)
and supply function = S ( x ) = 4 + x (ii)
Solving (i) and (ii) we get, x = 3 = x0
When x = 3, y = 7 = y0
x0

We know that consumer’s surplus (CS) = ∫ D(x )dx − p x

0
0 0

∫
= (16 - x 2 )dx − 7 × 3
0
= 18
x0

∫
Producer’s surplus (PS) = p0 x0 − S(x )dx
0
3

∫
= 7 × 3 − (4 + x )dx
0
= 4.5
Example-3:
The demand and supply functions under perfect competition for a
product are D ( x ) = 16 − x 2 and S ( x ) = 2 x 2 + 4 respectively. Find the
market price, consumer’s surplus (CS) and producer’s surplus (PS).

Unit-12 Page-310
 Bangladesh Open University

Solution:
Here given that, demand function = D ( x ) = 16 − x 2 (i)

and supply function = S ( x ) = 2 x 2 + 4 (ii)

Solving (i) and (ii) we get, x = 2 = x0
When x = 2, y = 12 = y0
x0

∫
We know that consumer’s surplus (CS) = D(x )dx − p0 x0
0

∫
= (16 - x 2 )dx − 2X12
0

= 5.33
x0

∫
Producer’s surplus (PS) = p0 x0 − S(x )dx
0
2

∫
= 2 × 12 − (2x 2 + 4 )dx
0
= 10.67.
Example-4:
The demand and supply functions under pure competition for a product
are D ( q ) = 25 − q 2 and S ( q ) = 2q + 1 respectively. Find the market
price, consumer’s surplus (CS) and producer’s surplus (PS).
Solution:
For market equilibrium, Demand (D) = Supply (S).
25 − q 2 = 2q + 1
Here, q = 4, or –6
∴ q0 = 4 (since q cannot be negative)
and p0 = 9
q0

∫
We know that consumer’s surplus (CS) = D(q )dq − p0 q0
0
4

∫
= (25 − q 2 )dq − 4 × 9
0
= 42.67
q0

∫
Producer’s surplus (PS) = p0 q0 − S(q )dq
0

∫
= 4 × 9 − (2q + 1)dq
0

= 16

Business Mathematics Page-311

School of Business

Example-5:
The demand and supply functions under pure competition for a product
are D ( x ) = 113 − q 2 and S ( x) = ( q + 1) 2 respectively. Find the market
price, consumer’s surplus (CS) and producer’s surplus (PS).
Solution:
For market equilibrium, Demand (D) = Supply (S).
113 − q 2 = (q + 1) 2
Here q = 7, or –8
q0 = 7 (since q cannot be negative)
p0 = 64
q0

∫
We know that consumer’s surplus (CS) = D(q )dq − p0 q0
0
7

∫
= (113 − q 2 )dq − 64 × 7
0
= 228.67
q0

∫
Producer’s surplus (PS) = p0 q0 − S(q )dq
0
7

∫
= 64 × 7 − (q + 1)2 dq
0
= 277.67
Example-6:
Under a monopoly the quantity sold and market price are determined by
the demand function. If the demand function for a profit-maximizing
monopolist is P (Q ) = 274 − Q 2 and MC = 4 + 3Q , find the
consumer’s surplus (CS).
Solution:
Given P (Q ) = 274 − Q 2
TR = PQ = ( 274 − Q 2 ) × Q = 274Q − Q 3
MR = 274 − 3Q 2
The monopolist maximize profit at MR = MC
274 − 3Q 2 = 4 + 3Q
Q0 = 9 and P0 = 193
Q0

∫
We know that consumer’s surplus (CS) = D(Q )dQ − P0Q0
0
9

∫
= (274 - Q 2 ) dQ − 193 × 9
0
= 486 units.

Unit-12 Page-312
 Bangladesh Open University

Example-7:
The demand and supply functions are D ( x ) = (12 − 2 x) 2 and
S ( x ) = 56 + 4 x respectively. Determine consumer’s surplus (CS) under
monopoly (so as to maximize the profit) and the supply function is
identified with the marginal cost function.
Solution:
TR = x × D( x) = x(12 − 2 x) 2 = x(144 − 48 x + 4 x 2 )
= 144 x − 48 x 2 + 4 x 3
MR = 144 − 96 x + 12 x 2
Since supply price is identified with MC, we have
MC = 56 + 4 x
In order to find consumer’s surplus (CS) under monopoly, i.e., to
maximize the profit,
we have MR = MC
144 − 96 x + 12 x 2 = 56 + 4 x
or, 3 x 2 − 25 x + 22 = 0
22
∴ x = 1 or x =
3
When x0 = 1, D(x0) = P0 = (12 – 2)2 = 100
x0

∫
We know that consumer’s surplus (CS) = D(x )dx − p0 x0
0
1

∫
= (12 - 2x )2 dx − 1 × 100
0

64
=
units
3
22 44 64
Again, when x 0 = , D ( x 0 ) = P0 = (12 − ) 2 =
3 3 9
x0

∫
And consumer’s surplus (CS) = D(x )dx − p0 x0
0
22
3
22 64
∫ (12 - 2x ) dx -
2
= ×
0 3 9
19360
= units.
81

Business Mathematics Page-313

School of Business

Questions for Review:

These questions are designed to help you assess how far you have
understood and can apply the learning you have accomplished by
answering (in written form) the following questions:

1. The demand law for a commodity is P = 20 − D − D 2 . Find the

consumer surplus when the demand is 3.

2. The supply and demand functions for a product are S ( x) = 3 x + 9

and D ( x ) = 30 − 4 x respectively, where x represents units of
quantity. Compute consumer’s surplus and producer’s surplus.

3. Determine consumer’s surplus and producer’s surplus if

5 15
S ( q ) = 10 − and D ( q ) = 8 + .
q +1 q +1

Unit-12 Page-314