Is the equation given below represents a FUNCTION?

FUNCTION
Y

x +y =r
Is this a function?

r X

Let s first try to understand what is a function?

A Function relates each element of a set (called Domain) with exactly one element of another set (possibly the same set; called Co-Domain).

(one-to-many) This is NOT OK in a function

(many-to-one) But this is OK in a function

Applying the basic Definition of a Function, how can we that the following is a function? Y

x +y =r
Is this a function?

r X

Now, before we proceed further, lets look back and recall what we did in the previous class

We started with LIMITS

We understand Limit of a function

The limit of a function is a concept concerning the behavior of a function near a particular input. A function f assigns an output f(x) to every input x. The function has a limit L at an input p if f(x) is "close" to L whenever x is "close" to p. Or, f(x) becomes closer and closer to L as x moves closer and closer to p. More specifically, when f is applied to each input sufficiently close to p, the result is an output value that is arbitrarily close to L. If the inputs "close" to p are taken to values that are very different, the limit is said to not exist.

We also noted
the following important limits:

Then, we moved to understand

CONTINUITY

CONTINUITY
Intuitively, the idea of continuity is given by the common statement that a continuous function is a function whose graph can be drawn without lifting the chalk from the blackboard; or can be traced without lifting the pencil on the graph of the function. A function f(x) is said to be continuous at a point x = c if the following three conditions for continuity of f(x) at a point x = c are satisfied:
a. The function must be defined at c, or f(c) must exist. b. xpc f(x) must exist; and lim c.
xpc f(x) = f(c). lim

1. 2. 3. 4.

Differential Calculus Increasing/Decreasing Function Concave and Convex Function Maxima and Minima (without constraint) One independent variable More than one independent variables

Derivative of a Function
The derivative is a measure of how the value of a function changes as its input changes. Loosely speaking, a derivative can be thought of as how much one quantity is changing in response to changes in some other quantity.

Differentiation is a way to get Derivative!!! Differentiation is a method to compute the rate at which a dependent output y changes with respect to the change in the independent input x.

This rate of change is called the derivative of y with respect to x.

Formally, we can define Derivative

Let y = f(x) be continuous function and the following limit exists. Then, f'(x0) defined as below will be the Derivative of the function y = f(x) at x0 with respect to x.

Derivative of a function at a point is nothing but the slope of Tangent at that point!!!!!!!!!!

Derivative of Some Standard Functions

1 . D e riv a tiv e o f a C o n s ta n t: y =0 x 2 . D e riv a tiv e o f a L in e a r F u n c tio n et y f(x ) c. T h en , et y f(x ) m x + c. T h en , y =m x

3 . D e riv a tiv e o f x n et y f(x ) x n . T h en , y = n x n -1 x y = ex x y 1 = x x

4 . D e riv a tiv e o f e x et y f(x ) e x . T h en ,

5 . D e riv a tiv e o f ln x L et y f(x ) ln x . T h en ,

Some Rules of Differentiation

1 . D e riv a tiv e o f S c a la r M u ltip le o f a F un c tio n : L et y T h en , cf(x) h ere c is con st n t. y = cf ' (x) x 2 . D e riv a tiv e o f a S u m (D iffe re n c e ) o f F un c tio n s : L et y v ... h ere ,v, n d re d ifferen ti le

dy du dv dw = ... dx dx dx dx 3 . D e riv a tiv e o f th e P ro d u c t o f T w o F u n ctio n s : fu n ction s of x. T h en , L et y u .v w h ere u , n d v re d ifferen ti le dy dv du +v =u dx dx dx 4 . D e riv a tiv e o f t h e Q u o tie n t o f T w o F u n c tio n s : fu n ction s of x. T h en , L et y u w h ere u , n d v v re d ifferen ti v du dv -u dx dx 2 v le

dy fu n ction s of x. T h en , = dx

Chain Rule of Differentiation

If y = f (t) is a differential function of t and t is a function of x, i.e. t = g(x) is a differential function of x, then y = f ( g(x)) is a differential function of x. In that case, the derivative of y with respect to x is given by dy dy dt = . dx dt dx

Such a rule is called the Chain Rule of Differentiation.

Can derivative of a function tell us about the nature of a function?

A POSITIVE derivative means that the function is increasing. Role of FIRST
DERIVATIVE !!!

A NEGATIVE derivative means that the function is decreasing. A ZERO derivative means that the function has a local maximum, a local minimum, (or it may be called, a "turning" or stationary point)

What can be told by a Second Derivative of a function about the nature of a function?
If a function f is twice differentiable at x = c, then Role of SECOND the function f is DERIVATIVE !!!

CONCAVE if f(x)>0. CONVEX if f<0. AN INFLECTION POINT of the graph of f if f=0

Application of Calculus - #1
Total cost C(x) of a firm is given by, C(x) = 20 + 2x + 0.5x2, in terms of the output x. Determine1. Average Cost 2. Rate of Change in Average Cost 3. Marginal Cost 4. Rate of Change in the Marginal Cost

Application of Calculus - #2
The demand x (in Kg) for a commodity when its price p is given by p = 108-3x/5. Determine1. Average Revenue 2. Rate of Change in Average Revenue 3. Marginal Revenue 4. Rate of Change in the Marginal Revenue

Application of Calculus - #3
The rate of change of total cost (Y) of a commodity per unit of output (X) is called the Marginal Cost of the commodity. Suppose that for a firm, there exists a relation between Y and X as given below:
Y = 3X ( X + 7) + 5 ( X + 5)

1.

Determine Marginal Cost. the output increases.

2. Prove that the marginal cost falls continuously as

Application of Calculus - #4
Assume that the Average Cost Function (AC) for a commodity is given by
AC = X +

where x is the output.

36 + X

Find the output for which AC is increasing and the output for which AC is decreasing. Also, find the Total Cost, C, and the Marginal Cost, MC as functions of x.

Application of calculus to the Bond Valuation

Before we apply calculus to Bonds, lets spend few minutes on understanding of valuation of a bond!!!!

How do we decide that

What price one should pay for a bond? bond?

HOW TO VALUE A BOND?

The value of a bond should be equal to the sum of the present values of future cashflows coming from a bond.
c1 c2 c n  RV   ...  P ! 1 2 (1  r ) (1  r ) (1  r ) n where P ! price c i ! coupon RV r ! discount of bond of i th period value rate or YTM

! redemption

Relation between BOND PRICES and YIELD-TO-MATURITY YIELD-TOcan be depicted by the graph

RELATION BETWEEN BOND VALUATION AND BOND YIELD

700

600

500

PRICE (Rs.)

400

Us C lc l s y t r is N l ti t ric Yi

s g ti B l .

300

200

100

0 1% 7% 13% 20% 30% 50%

YIELD

Further, the Relation between BOND PRICES and YIELD-TOYIELD-TOMATURITY is CONVEX

as depicted by the graph

RELATION BETWEEN BOND VALUATION AND BOND YIELD

700

600

500

GAINS BECOME GREATER!!

PRICE (Rs.)

Us C lc l s s y t r is CONVEX l ti t B ric Yi l .

400

300

CONVEX SHAPE OF THE CURVE

200

100

LOSSES BECOME SMALLER!!

0 1% 7% 13% 20% 30% 50%

YIELD

Now, let use the concept of Concave Function to define a concept of Risk Averse!!!!

Risk Averse Investor

Most of the Portfolio Theory is based on the assumption that an investor is Risk Averse. And, a Risk Averse Investor is one that demands more and more for additional units of risk and is characterized by a CONCAVE UTILITY FUNCTION. Accordingly, a Utility Function U is defined as Risk Averse if it is concave. Show that an investor with a utility function: U = ln X is Risk Averse; here U is Utility and X is amount of wealth in terms of rupees.

The next task is Using Taylors Series for Forecasting Bond Prices!!!!

Taylors Series
A function can be expanded around a value x0 as thus:
f '' ( x0 )( x - x0 )2 f ''' ( x0 )( x - x0 )3 f ( x) = f ( x0 ) + f ' ( x0 )( x - x0 ) + + + ... 2! 3!

Using the above Taylor Series upto second derivative, develop a bond price predictive model that can provide fairly good approximation.

Show how it can be used to Predict BOND PRICES?

Now, lets talk about MINIMA and MAXIMA using Calculus One Independent Variable Case
QUESTIONS FOR CLASS ROOM DISCUSSION#2

MINIMA AND MAXIMA ONE INDEPENDENT VARIABLE (X) WITHOUT CONSTRAINTS

Necessary Condition for Maxima and Minima: If a function f(x) is
continuous and differentiable at a point x = c in the interval [a,b], and has a maxima or minima, then f' (c) = 0.

Sufficient Condition for Maxima and Minima: If f(x) is continuous and twice differentiable at x = c, c [a,b] and f' (c) = 0, then f (x) has
o Maximum Value at x = c if f'' (c) < 0; and o Minimum Value at x = c if f'' (c) > 0.