APPLICATION OF DERIVATIVES

Differentiation plays a vital role in Economics and Commerce.

Before we embark on demonstrating applications of differentiation in these fields, we introduce a
few Economic terminologies with usual notations.
FUNCTIONS IN ECONOMICS AND COMMERCE
1 Demand Function
Let q be the demand (quantity) of a commodity and p the price of that commodity. The demand
function is defined as q = f(p) where p and q are positive. Generally, p and q are inversely
related.
Observe the graph of the demand function q = f(p)

Following observations can be made from the graph (Fig 3.1)

(i) Only the first quadrant portion of the graph of the demand function is shown since p
and q are positive.
(ii) Slope of the demand curve is negative.
2 Supply Function
Let x denotes amount of a particular commodity that sellers offer in the market at various price p,
then the supply function is given by x = f(p) where x and p are positive.
Generally x and p are directly related

Observe the graph of the supply function, x = f (p)

Following observations can be made from the graph (Fig 3.2)
(i) Only the first quadrant portion of the graph of the supply function is shown since the function
has meaning only for nonnegative values of q and p.
(ii) Slope of the supply function is positive.
3 Cost Function
Normally total cost consists of two parts.
(i) Variable cost and (ii) fixed cost. Variable cost is a single - valued function of output,
but fixed cost is independent of the level of output.
(ii)
Let f (x ) be the variable cost and k be the fixed cost
when the output is x units. The total cost function is defined as
C(x) = f(x) + k, where x is positive.
Note that f(x) does not contain constant term.
We define Average Cost (AC), Average Variable Cost
(AVC), Average Fixed Cost (AFC), Marginal Cost (MC), and
Marginal Average Cost (MAC) as follows.
f ( x )+ k Total Cost
(i) Average Cost (AC) = =
X output
f ( x ) Variable Cost
(ii) Average Variable Cost (AVC) = =
X output
k ¿ Cost
(iii) Average Fixed Cost (AFC) = =
X output
d '
(iv) Marginal Cost (MC) = C ( x )=C ( x )
dx
d
(v) Marginal Average Cost (MAC) = ( AC )
dx
Note
If C(x) is the total cost of producing x units of some product then its derivative C(x) is the
marginal cost which is the approximate cost of producing 1 more unit when the production level
is x units.
The graphical representation is shown here.

A = C(x + 1) C(x)

B = C(x) = Marginal Cost

4 Revenue Function
Let x units be sold at Rs. p per unit. Then the total revenue
R(x) is defined as R(x) = px, where p and x are positive.
Total Revenue px
Average revenue (AR) = =¿ =p
Quantity Sold x
(i.e. Average revenue and price are the same)
d '
Marginal revenue (MR) = ( R)=R (x )
dx
Note
If R(x) be the total revenue gained from selling x units of some product, then its derivative, R(x)
is the marginal revenue, which is approximate revenue gained from selling 1 more unit when the
sales level is x units. The graphical representation is shown below
A = R(x+1) R(x)

B = R(x) = marginal revenue

5 Profit Function
The profit function P(x) is defined as the difference between the total revenue and the total cost.
i.e. P(x) = R(x) C(x).
6. Elasticity
The elasticity of a function y = f(x), with respect to x, is
defined as
∆y
Ey y
= = lim
Ex ∆ x →0 ∆ x
x
x dy
=
y dx

Thus the elasticity of y with respect to x is the limit of the ratio of the relative increment in y to
the relative increment in x, as the increment in x tends to zero. The elasticity is a pure number,
independent of the units in x and y.
7 Elasticity of Demand
Let q = f(p) be the demand function, where q is the demand and p is the price. Then the elasticity
p dq
of demand is d =
q dp

Since the slope of the demand curve is negative and elasticity is a positive quantity the elasticity
of demand is given by
 p dq
d = -
q dp

8. Elasticity of Supply
Let x = f(p) be the supply function, where x is the supply and p is the price. The elasticity of
supply is defined as
p dx
s =
x dp

9 Equilibrium Price
The price at which quantity demanded is equal to quantity supplied is called equilibrium price.
10 Equilibrium Quantity
The quantity obtained by substituting the value of equilibrium price in any one of the given
demand or supply functions is called equilibrium quantity.
11 Rela tion between Marginal Revenue and Elasticity of
Demand
Let q units be demanded at unit price p so that p = f(q)where f is differentiable. The revenue is
given by
R(q) = qp
R(q) = q f(q) [p = f(q)]
Marginal revenue is obtained by differentiating R(q) with respect to q.
R(q) = q f (q) + f(q)
dq
=q +p ¿ f (q)]
dp
q dq
R(q) = p(1 + ¿
p dp

[ { }]
1
1+
=p − p dq
q dp

[ { }]
−1
1+
=p − p dq
q dp
 p dq
Since d = -
q dp
Marginal Revenue = R’(q) = p[1- 1/d]

Example 1
A firm produces x tonnes of output at a total cost
1
C(x) = x3 - 4x2 + 20x + 5
10
Find (i) Average cost (ii) Average Variable Cost
(iii) Average Fixed Cost (iv) Marginal Cost and
(v) Marginal Average Cost.

Solution:
1 3
C(x) = x - 4x2 + 20x + 5
10

Total Cost
(i) Average Cost =
Output

1 2 5
= x - 4x + 20 +
10 x
Variable Cost
(ii) Average Variable Cost =
Output
1 2
¿ x - 4x + 20
10

¿ Cost 5
(iii) Average Fixed Cost = =¿
Output x
 d
(iv) Marginal Cost = C( x)
dx
d 1
= ( x 3−4 x 2+20 x +5)
dx 10

3 2
= x - 8x + 20
10
d
(v) Marginal Average Cost = ( AC )
dx
d 1 2 5
= ( x - 4x + 20 + )
dx 10 x

Example 2
The total cost C of making x units of product is
C = 0.00005x3 - 0.06x2 + 10x + 20,000. Find the marginal cost at 1000 units of output.
Solution:
C = 0.00005x3 - 0.06x2 + 10x + 20,000
dC
Marginal Cost = = (0.00005) (3x2) - (0.06) 2x + 10
dx
= 0.00015 x2 - 0.12x + 10
when x = 1000
dC
= (0.00015)(1000)2 - (0.12)(1000) + 10
dx
= 150 - 120 + 10 = 40. At x = 1000 units, Marginal Cost is Rs. 40
Example 3
Find the elasticity of demand for the function
x = 100 - p - p2 when p = 5.
Solution:
x = 100 - p - p2
dx
= -1-2p.
dp
 p dx
Elasticity of demand d = -
x dp

p (−1−2 p) p+2 p2
=- 2
=
100− p−p 100−p− p2

5+50
When p = 5, d =
100−5−25

55 11
= =
70 14
Example 4
Find the elasticity of supply for the supply function
x = 2p2+8p+10
Solution:
dx
x = 2p2+8p+10 = 4p+8
dp
p dx
Elasticity of supply s =
x dp
4 p2 +8 p 2 p2 +4 p
= =
2 p2 +8 p+10 p 2+ 4 p+5
Example 5
For the function y = 4x-8 find the elasticity and also obtain the value when x = 6.
Solution:
y = 4x8
dy
=4
dx

x dy
Elasticity =
y dx
x x
= ( 4 )=¿
4 x−8 x−2
6 3
When x = = =¿
6−2 2
Example 6
1−2 x Ey
If y = find . Obtain the values of  when
2+ 3 x Ex
x = 0 and x = 2.
Solution:
1−2 x
We have y =
2+ 3 x
Differentiating with respect to x, we get
dy ( 2+ 3 x ) (−2 )−(1−2 x)(3)
=
dx (2+ 3 x )
2

−4−6 x−3+ 6 x −7
 2
= 2
(2+3 x) (2+ 3 x )

Ey x dy
= =
Ex y dx
x ( 2+3 x ) −7
= x 2
1−2 x (2+3 x)
−7 x

(1−2 x ) ( 2+3 x )
when x = 0, = 0
7
when x = 2, =
12

Example 7
A demand function is given by xpn = k, where n and k are constants. Calculate price
elasticity of demand.
Solution:
Given x pn = k
x = k p-n
dx
= -nk p-n-1
dp
p dx
Elasticity of demand d = -
x dp
 p
=- −n (-nk p
-n-1
)
kp
= n, which is a constant.
Example 8
The demand curve for a monopolist is given by x = 100-4p
(i) Find the total revenue, average revenue and marginal revenue.
(ii) At what value of x, the marginal revenue is equal to zero?
Solution:
We have x = 100 - 4p
100−x
p=
4
Total revenue R= px
100−x
=
4
Average revenue = p =

( )
2
d 100 x−x
Marginal revenue = =
dx 4
1 50−x
= [100 – 2x] =
4 2
50−x
(ii) Marginal revenue is zero implies = 0, x = 50
2
Marginal revenue is zero when x = 50.

Example 9
Find the equilibrium price and equilibrium quantity for the following demand and supply
functions, Qd = 4-0.06p and Qs = 0.6+0.11p
Solution:
At the equilibrium price
Qd = Qs
4-0.06p = 0.6 + 0.11p
0.17p = 3.4
3.4
p=
0.17
p = 20
when p = 20, Qd = 4 - (0.06)(20)
= 4-1.2 = 2.8
Equilibrium price = 20 and Equilibrium quantity = 2.8

Example 10
p
The demand for a given commodity is given by q = (p>5), where p is the unit price.
p−5
Find the elasticity of demand when p =7. Interpret the result.
Solution:
p
Demand function q =
p−5
Differentiating with respect to p, we get
dq ( p−5 ) ( 1 )− p(1)
=
dp ¿¿
p dq −p ( p−5 )
Elasticity of demand d = - = ¿
q dp p
5
=
p−5
5
When p =7, d = =2.5
7−5
This means that if the price increases by 1% when p = 7, the quantity demanded will decrease by
approximately 2.5%. Also if the price decreases by 1% when p = 7, the quantity demanded will
increase by approximately 2.5%.
Example 13
The demand for a given commodity is q = - 60p + 480, (0 < p < 7) where p is the price. Find
the elasticity of demand and marginal revenue when p = 6.
Solution:
Demand function q = - 60p + 480
Differentiating with respect to p, we get
dq
= - 60
dp
 p dq −p p
Elasticity of demand d = - = (−60)= -
q dp −60 p+ 480 p−8
−6
when p = 6, d = =3
6−8
Marginal revenue = p (1- 1/d)
1
= 6(1 – ) = 4
3
Marginal revenue = Rs. 4