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    1.3 Product Chain Rules

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    Newter Nels ON Router

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    1.3 Product Chain Rules

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    1.3 Product Chain Rules

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    of 7

    Product and Chain Rules

    Basic Math for Economics – Refresher

    Eric Dunaway [email protected] 1


    Introduction
     There are times when calculating the derivative of a
    function is too cumbersome to simply use the power rule.
     Itcould be a situation where one function is multiplied
    by another, or it could be a function within a function.
    While it may be possible to distribute everything and
    then apply the power rule, it might be much easier to
    use a different technique.
    We classify these techniques into two main types
    (there are others that are rarely used in economics),
    depending on how the functions are organized: the
    product rule and the chain rule.

    Eric Dunaway [email protected] 2


    Product Rule
     The product rule is useful when we have situations where two
    functions are multiplied by each other.
     Suppose we have functions 𝑔(𝑥) and ℎ(𝑥). We can define
    function 𝑓 𝑥 as,
    𝑓 𝑥 = 𝑔 𝑥 ⋅ ℎ(𝑥)
     The Product Rule gives us a quick way to calculate the
    derivative of 𝑓(𝑥) and is defined as follows:
    𝑓 ′ 𝑥 = 𝑔′ 𝑥 ⋅ ℎ 𝑥 + 𝑔 𝑥 ⋅ ℎ′(𝑥)
    Inwords, the derivative of 𝑓(𝑥) is simply the derivative of
    the first function times the second function plus the
    derivative of the second function times the first function.

    Eric Dunaway [email protected] 3


    Product Rule
     Let’s practice this by calculating the marginal revenue
    function.
     Suppose a monopolist faced the inverse demand function
    𝑝 = 100 − 2𝑞
     We can find the monopolist’s total revenue function by
    multiplying the price they charge and the quantity they sell,
    𝑇𝑅 = 𝑝 ⋅ 𝑞.
    Infact, we can make this solely a function of the quantity
    by substituting the inverse demand function for 𝑝,
    𝑇𝑅 = 𝑝 ⋅ 𝑞 = 100 − 2𝑞 ⋅ 𝑞

    Eric Dunaway [email protected] 4


    Product Rule
    𝑇𝑅 = 100 − 2𝑞 𝑞
     We could easily solve this by distributing the 𝑞 through the
    parenthesis, but let’s apply the product rule.
     We have two functions multiplied by each other, 𝑔 𝑞 =
    100 − 2𝑞 and ℎ 𝑞 = 𝑞.
     From the power rule, we can obtain the derivatives of each
    of these functions, 𝑔′ 𝑞 = −2 and ℎ′ 𝑞 = 1.
     Using our definition of the product rule,
    MR = 𝑓 ′ 𝑞 = 𝑔′ 𝑞 ⋅ ℎ 𝑞 + 𝑔 𝑞 ⋅ ℎ′ 𝑞 = −2 ⋅ 𝑞 + 100 − 2𝑞 ⋅ 1
    𝑀𝑅 = −2𝑞 + 100 − 2𝑞 = 100 − 4𝑞

    Eric Dunaway [email protected] 5


    Chain Rule
     Lastly, we have the chain rule. The chain rule is useful when we
    are dealing with functions of functions.
     Suppose we have functions 𝑔(𝑥) and ℎ(𝑥). We can define
    function 𝑓 𝑥 as,
    𝑓 𝑥 =𝑔 ℎ 𝑥
     The chain rule gives us a quick way to calculate the derivative
    of 𝑓(𝑥) and is defined as follows:
    𝑓 ′ 𝑥 = 𝑔′ ℎ 𝑥 ⋅ ℎ′(𝑥)
    Inwords, the derivative of 𝑓(𝑥) is simply the derivative of
    the outer function (where the inner function acts as the
    argument of the outer function) times the derivative of
    the inner function.

    Eric Dunaway [email protected] 6


    Chain Rule
     Let’s look at the chain rule through another utility function,
    𝑈 𝑥 = log 𝑥 2 . Let’s calculate the marginal utility, 𝑈′(𝑥).
     In this case, 𝑔 𝑥 = log 𝑥 and ℎ 𝑥 = 𝑥 2 . In this case, ℎ(𝑥)
    serves as the argument of 𝑔(𝑥), but is also a function of 𝑥.
     As before, we can calculate both of their derivatives as
    1
    𝑔 𝑥 = and ℎ′ 𝑥 = 2𝑥.
    ′
    𝑥
     Using our definition of the chain rule,
    1
    𝑈′ 𝑥 = 𝑔′ℎ 𝑥 ⋅ 𝑥 = ℎ′ ⋅ 2𝑥
    ℎ 𝑥
    2𝑥 2
    𝑈′(𝑥) = 2 =
    𝑥 𝑥
    Eric Dunaway [email protected] 7

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