dy Derivatives in Economics

Multiplicative constant: if y = kf (x) then = kf 0 (x)

dx
The marginal cost M C is the rate of change of the total
dy
community project
Addition rule: if y = f (x) ± g(x) then = f (x) ± g (x) cost function T C: M C = dT C , where q is the output.
0 0
dx dq
Product rule: if y = f (x) × g(x) then Similarly, the marginal revenue M R is the rate of change
mathcentre community project dT R
encouraging academics to share maths support resources dy of the total revenue function T R: M R = . When
All mccp resources are released under a Creative Commons licence
0 0
= f (x)g(x) + f (x)g (x) dq
dx M R is positive, T R is an increasing function of q, and
mcccp-richard-5 when M R is negative, T R is a decreasing function of q.
f (x)
For the help you need to support your course Quotient rule: if y = then The elasticity E of a function q = f (p) is the rate of pro-
g(x)
portionate change in q given a proportionate change in p:
Differentiation for Economics and Business Studies 0 0 dq
dy f (x)g(x) − f (x)g (x) q d ln q
Functions of one variable = E = dp = . This is the slope of the function when
dx (g(x))2 d ln p
p
This leaflet is an overview of differentiation and its appli-
plotted on a log-log scale.
cations in Economics. Chain rule (derivative of a function of a function):
Author: Morgiane Richard, University of Aberdeen if y = g(u) with u = f (x) then 2

Reviewer: Anthony Cronin, University College Dublin dy dy du concave decreasing function

= = g 0 (u) × f 0 (x) 1.5
The derivative of a function f is a new function obtained dx du dx
df Shape of Function
by differentiating f . It can be written f 0 or . It is the 1
dx
rate of change of f and gives information on the shape sign of sign of shape of the curve of f
and optimum values of f . dy d2 y 0.5
= f 0 (x) = f 00 (x) convex decreasing
Table of Derivatives dx dx2 function
>0 >0 increasing and convex 0
0 0.5 1 1.5 2
dy >0 <0 increasing and concave
y = f (x) = f 0 (x) <0 >0 decreasing and convex
dx Figure 1: Examples of decreasing concave and convex functions
k constant 0 <0 <0 decreasing and concave
x 1
x2 2x Stationary points 4
xn nxn−1
First Order Condition (FOC): if a point x0 is such that 3.5
ex ex convex increasing function

1 f 0 (x0 ) = 0, then it is a stationary point. It can be a maxi- 3

ln x mum, or a minimum, or an inflection point. 2.5
x
eax+b aeax+b 2
a Second Order Condition (SOC): the sign of the second
ln (ax + b) derivative indicates whether the optimum is a maximum,
1.5
ax0 + b 1
concave increasing function
f (x) minimum or inflection point:
ln (f (x)) 0.5
f (x)
value of sign of Nature of 0
0 1 2 3 4 5
dy d2 y point at x0
Rules of Differentiation (x0 ) = f 0 (x0 ) (x0 ) = f 00 (x0 )
dx dx2 Figure 2: Examples of increasing concave and convex functions
For any function f and g and any constant value k: 0 >0 minimum
0 <0 maximum
dy
Additive constant: if y = f (x) + k then = f 0 (x) 0 0 inflection
dx www.mathcentre.ac.uk