THE INSTITUTE OF FINANCE MANAGEMENT (IFM)

Department of Mathematics

Business Mathematics
MTU 07101

Elements of Calculus in Economics

 Calculus
 Calculus deals with rate of change of quantity with

respect to another

 Calculus has two branches

i). Differentiation

ii). Integration
 Differential calculus
 Is the study of
a) Derivative (rate of change of one quantity with
respect to another)
b) Motion of objects in space e.g. Velocity and
acceleration
c) Marginal concepts in economy
d) The growth or decay of Biological population
e) Curve sketching and finding Maximum and
minimum values of functions
 Differentiation

 The derivative f  of a function f is given by

f x  h   f(x)
f (x)  lim
h 0 h

 Provided this limit exist. If f (a) exists, then is said

to be differentiable at x  a.

 The process of finding the derivative is called

differentiation.
 Symbols for Derivatives
 If y  f(x), then the derivative of y ( or f) at x
symbols used for differentiation are
dy d
 
y , f (x), , f(x), Dy or Df(x)
dx dx

Rules of Differentiation
• There some rules or derivative formula used for
differentiation of functions
 The derivative of Constant function
 If f is a function such that f(x)  c , then
d
(f(x))  0
dx
derivative of constant is zero.
 Example
 Find the derivative of the following constant
functions
i) f(x)  5 ii). f(x)  c
 Solution
d d
i) f(x)  5 , dx
(5)  0 ii). f(x)  c , (c)  0
dx
 The derivative of x to a power
 If f is a function such that f(x)  x n , then

f (x)  nx n 1
but n  0
The derivative of x to a power n is the exponent
times x to the next lower power
 Example: Find the derivative of functions
1 1
(i) y  x 5
(ii) y 5 (iii) y
x x
 Solution:
Use dy
 
f (x)  nx n 1
dx

(i). yx 5
, dy  d(x 5 )
 5 x4
dx dx
 1 
1 dy d 2 
(ii). y  ,   
x d(x 5
) 6 1
x5 dx  5 x  5 6
dx dx x
  
1
 1  d x 2 
(iii). y  1 , dy d    3
  x    x 2
1 
x dx dx dx 2
 Derivative of sum or difference
 If f is a function such that f(x)  h(x)  g(x) ,then
f (x)  h(x)  g(x)
The derivative of the sum is the sum derivative.
 Example: Find the derivative of functions
1
(i). f(x)  4 x5  3 x 2 (ii). y  x 3  5
 5x
 Solution
x
dy
(i). f(x)  4 x5  3 x 2 ,  20 x 4  6 x
dx

(ii). y  x 3  1  5 x , dy 1
 3x  5 6  5
2
x5 dx x
 Product rule
 If f is a function such that f(x)  h(x) g(x), then

f (x)  h(x) g(x)  g(x) h(x)

derivative of the product is the first factor times the
derivative of the second plus the second factor times
the derivative of the first.

 Example: Differentiate the function

1
 (i) f ( x)  (4 x )(3x ) (ii) y  (x  1)( 5 )
5 2 3

x
Use f (x)  h(x) g(x)  g(x) h(x)

(i). f(x)  (4 x 5
)(3 x 2
)
dy
 (20 x 4 )(3 x 2 )  (6 x)(4 x 5 )
dx
1
(ii). y  (x3  1)( 5
)
x
dy 3 1
 2 x  5 6
dx x
 Derivative of quotient
 If f is a function such that f(x)  h(x) , then
g(x)

g(x) h(x)  h(x) g(x)

f (x) 
g(x) 2
 The derivative of a quotient is the denominator
times the derivative of the numerator minus the
numerator times the derivative of the denominator,
all divided by the denominator squared.
 Example:
2 x3  5 x1
(i) f(x)  (ii) y 5
x2 x  4 x1

 Solution: x1
2 x3  5
(i) f(x)  (ii). y  x 5  4 x  1
x2

dy x 2 (6 x 2 )  (2 x 3  5) 2 x dy (x5  4 x  4) 1  (x 1)(5x 4  4)

 
dx (x 2 )2 dx (x5  4 x  1)2

dy 10
 2 3 dy  4 x 5  5 x 4  3

dx x dx (x5  4 x  1)2
 Chain rule
 Chain rule is used to find the derivative of composite
functions (function of function) fog(x) = f(g(x))

 If f is a function such that f(x) = f(g(x)), then

dy  dy  d g 
   
dx  d g  dx 
 Example: Differentiate
(i). y  (4  3x) 5 (ii).
y  x 3  2x  7
 Solution:
Given y  (4  3 x)
5

let g ( x)  4  3x then y  (g(x))

5

dg dy
 3  5 g4
dg
dx
dy dy dg
use  
dx dg dx
dy
 5 g 4  3  15(4  3 x) 4
dx
Derivative of Parametric Functions
 If y  f(t) and x  f(t) when t is called a parameter,
such equations are parametric equations,

dy  dy  dt 
  
dx  dt  dx 

Example: Givenx  (t 1)2 and y  t 1 , Find

2

 dy  dt  dy dx
 Solution:
dy
   , then  2 t and  2(t 1)
dx  dt  dx  dt dt
 1 
 2 t 
dy

dx  2(t 1) 
dy t

dx t  1
 Derivative of Exponential function
 For exponential function f(x)  e x
, then

f (x)  e x

dy
If y  a , then, Iny  xIna, dx  
x x
yIna a Ina

 Example: Find the derivative of y  e

2 x3

 Solution:y  e 2 x3
Let y  e u
and u  2 x 3

dy du
 eu
dx dx
dy
 6x e
2 2 x3

dx
Derivative of Logarithm of function
 If f(x)  Inx , then
1
f (x) 
x
 Example: Find the derivative of
i).y  In(x 2  4 x 3) ii).y  ln(2 x  5)3
 Solution:
i). y  In(x 2  4 x 3) ii).y  ln(2x  5)3
dy  2 x  4  dy 6
 2  
dx  x  4 x  3  dx 2 x  5
 Higher Derivatives
dy d2y
 If y  f(x) and  g(x) , then g(x) can be 2
dx
2 dx
differentiated with respect to x to give d y2 .
dx
2
d y d  dy 
  
dx 2 dx  dx 
3
 Example: Find d y when y  In x
dx 3
 Solution: Given y  In x
dy 1 d3 y 2
  3
dx x dx 3
x
d2 y 1
 
dx 2 x2
Minimum and maximum
 If f is a function such that y = af(x), then
2
dy d y
Maximum when  0 and 2
0
dx dx
dy d2y
Minimum when 0 and 0
dx 2
dx
 Example: using second derivative find the relative

maximum or minimum points of the curve

1 3 2
f(x)  x  x  8 x  2
3
 Solution
f (x)  x 2  2 x 8
f (x)  2 x  2
When f (x)  0  2 x 8  0 x  2 or x  4
2
x
f (2)  2(2)  2  0 relative maximum
at (-2, f(-2))
1 3
f(2)  (2)  (2) 2  8(2)  2
3
 f (4)  2(4)  2  0 , relative minimum

At (4, f(4))

1
f(4)  (4) 3  4 2  8(4)  2
3
 INTERGRATION

INTERGRATION AS REVERSE PROCESS OF

DIFFERENTIATION (ANTIDERIVATIVES)
 Integration
 Integral is the process of summing. It involve
determination of
a) Areas
b) Anti-derivatives
c) Volumes
d) Revenue, cost and profit functions.
 Properties of integral
Integral of zero
 If f is a function such that f(x)  0 , then

 0 dx  c
The integral of zero is constant

 Example: Find the integral of  0 dx

 Integral of constant
 If f is a function such that f(x)  k , then

 Kdx  Kx  c
The integral of constant k is kX + constant
 Example:
i).  2 dx ii).  ydx
 Solution
i).  2 dx  2 x  c ii). ydx  yx  c
 Integral of Power
 If f is a function such that f(x)  x n , then
n 1
x
 dx  n  1  c
n
x

Increase the exponent of x by one and divide by new

exponent
 Examples: Evaluate the following
3

i).  x dx ii).  x dx
3
4

 Solution: 3 7
x4 4 4
i).  x dx  4  c ii).  x dx  7 x c
3 4
 Integral of coefficient of the function
 If y is a function such that y = kf(x), then

 Kf(x) dx  K  f( x) dx
 Example: Evaluate the following functions

i)  dx
3
4 x
3
ii)  px 4
dx
Solution
i)  4 x 3
dx  4  dx
x 3

  c
3 4
4 x dx x

3 3

ii)  px 4
dx  p  x dx 4

3 7
4 4
 px dx4

7
px  C
 1
The integral of x
1
 If f is a function such that f(x) = , then
x
1
 x dx  ln x  c
 True only when x is positive

The integral of e
x

• If f is a function such that f(x) = e x , then

  c
x x
e dx e
 Integral of sum and difference
 If f is a function such that f(x)  h(x)  g(x) , then

 h(x)  g(x) dx   h(x) dx   g(x) dx

 The integral of the sum is the sum integral
 Example:
i)  (x 5  2 x) dx
ii)  (3 x 3  2 x 2  3x) dx
iii)  (4 x  2e x  3  1 x 2 ) dx
x 2
 Solution
i)  (x 5  2 x) dx   x 5 dx   2 xdx
1 6
  2 x) dx  x  x2  C
5
(x
6

ii)
       dx   3xdx
3 2 3 2
(3 x 2 x 3 x) dx 3 x 2 x
3 4 2 3 3 2
   3 x) dx  x  x  x C
3 2
(3 x 2 x
4 3 2

iii) 3 1 2 3 1
 (4 x  2 e   x ) dx   4 xdx   2 e x dx   dx   x 2 dx
x

x 2 x 2
3 1 2 1
    x ) dx  2 x 2  2e x  3 ln x  x 3  C
x
( 4 x 2e
x 2 6
 Definite integrals
 If the function f(x) is differentiable and
continuous at the interval x = a and x = b,
then
Examples

Use the above properties to evaluate the

following integrals
1.  3xdx
3

2.  2 x  3dx
3

2
Solution
3

1.  3xdx  x  3  1    12

3 3 2 3 2 3 2 27 3
1 2 1 2 2 2 2
2.  2 x  3dx  x  3x  9  9  4  6  2
3 3
2
2 2
 Application of Calculus

 In business mathematics we experience changes of

variable with respects to others.

a) Sales revenue changes with volumes of units sold

b) Cost change with volume of unit produced or sold

c) Sales demand for a product varies with its sale price

 Marginal Functions
Total cost ( C )
 Total cost represents the cost of producing a specific
quantity (X) of commodity

 The total cost consist of two types of costs.

i)Fixed cost is the cost independent of quantity

produced e.g. salaries, rent etc.
ii)Variable cost is the cost depend on the quantity
produced
 C = Fixed cost +Variable cost
Example:
Given a total cost production function
c(x)  4 x5  3 x 2  50,000. Identify the
i). fixed cost
ii). variable cost
Solution:
i). Fixed cost = 50,000
ii). Variable cost = 4 x 5
 3 x 2
 Marginal cost(MC)
• MC is the cost of producing one more unit of a good.
 If c(x) is the total cost of producing “x” units, the
d(C)
 Marginal Cost = MC 
dx

Average cost (AC)

• Average cost function (AC) given the cost per
unity is defined as
Totalcost C
AC  
Quantity X
 Marginal average Cost (MAC)
 The marginal average cost (MAC) is defined as

d(AC)
MAC 
dx

 Example: Give a total cost production function

c(x)  4 x5  3 x 2  50,000. Identify the
a. fixed cost
b. variable cost
c. marginal Cost
d. average cost
e. marginal average cost
 Solution: c(x)  4 x5  3 x 2  50,000.

a. fixed cost  50,000.

b. variable cost  4 x  3 x
5 2

d(C)
c. marginal Cost, MC 
dx
MC  20x4  6 x
d. Average Cost
Totalcost C
AC  
Quantity X

4 x 5  3 x 2  50000
AC 
x
50000
AC  4 x  3 x 
4

x
e. Marginal Average Cost
d(AC)
MAC 
dx

d(AC) 50000
 16 x  3 
3

dx x2
 Total Revenue functions (R).
 Total revenue function is the product of price per
item by quantity.
 Total revenue R  Price (P)  quantity (X)
 Price as a function of quantity expresses the link
between the price and the quantity demanded and
referred to demand function.

Marginal Revenue Function (MR)

• The Marginal Revenue (MR)
• Marginal revenue (MR) = R
'

d(R)
MR 
dx
Average Revenue Function (AR)
 Average revenue function (AR) gives the revenue per
unit. It is defined as
R
AR 
X

 But R  PX where “P” is the price per units, thus

R
P
X
Then the average revenue AR is equal to the price “P”
Marginal Average Revenue Function (MAR)
 The marginal average Revenue (MAR) is defined as
d(AR)
MAR 
dx
 Example: Given the total revenue function
1 3
R(x)  x  3 x 2  45,000.
2
Find the (i). Marginal Revenue Function
(ii). Average Revenue Function
(iii). Price when MR = 0
 Solution
i)Marginal Revenue Function (MR)
d(R) 3 2
MR   x  6x
dx 2

ii)Average Revenue Function(AR)

R 0.5 x3  3x 2  45000
AR  
X x

45000
AR  0.5 x 2  3x 
x
iii) Price when MR = 0
3 2
MR  x  6 x  0
2
3x (0.5x-2) =0
x = 0 or x = 4
Since AR = P
45000
P  0.5 x 2  3x 
x
when x = 4,
45000
P  0.5(4)  3(4) 
2
 11246
4
Hence the price when MR = 0 is 11,246
 Total Profit
 Profit (π) is the difference between the total
revenue and total cost. That is π = R – C

 The aim of any firm is to maximize profit. This

involves finding value of which makes
dπ
0
dx
 Differentiating π = R – C

dπ d(R) d(C)
 
dx dx dx
 dπ
 At maximum profit 0
dx
 There fore MR  MC  0 hence MR  MC

 Example:
The total cost and revenue function for a certain
commodity are R  50 x  x 2
and c  0.01x 2
 20x  100
(a) Derive the total profit function
(b) Find the profit break even point
(c) calculate the level and amount of demand that
maximize profit
 Solution
a) Derive the total profit function
π  R C
π  1.01x 2  30x  100

b) The break - even points are levels of demand

which makes π  0

1.01x2  30x  100  0

x = 26 or x = 4
The break even points is when the demand is
4 or 26 products
 dπ d2π
(c). Profit is maximized when 0 and 0
dx dx 2

Since π  1.01x 2
 30x  100

Then dπ  2.02 x  30
dx
 2.02x  30  0 x  15

d2π
2
 2.02  0 gives maximum profit
dx

when x  15 then π  1.01(15)  30(15)  100  123

2
Hence the maximum profit of 122.5 is raised
when the demand is 15