Exponential and

Logarithmic
Functions

Farjana Eyasmin
Assistant Professor, Department of Economics
Pabna University of Science and Technology,
Bangladesh-6600
Exponential Function
Exponential functions are functions in which a constant base 𝑎 is raised
to a variable exponent 𝑥. The general form of an exponential function
is given by
𝑓 𝑥 = 𝑎𝑥 , 𝑎 > 0 and 𝑎 ≠ 1,

The parameter 𝑎 is known as the base of the exponential function. The

independent variable 𝑥 occurs as the exponent of the base. Its domain
is (– ∞, ∞).
PROPERTIES OF EXPONENTIAL FUNCTIONS

Let f (x) = ax, a > 0, a ≠ 1.

1. The domain of f (x) = ax is (–∞, ∞).

2. The range of f (x) = ax is (0, ∞); the entire graph lies
above the x-axis.
3. For a > 1, Exponential Growth
(i) f is an increasing function, so the graph rises to
the right.
(ii) as x → ∞, y → ∞.
(iii) as x → –∞, y → 0.
4. For 0 < a < 1, - Exponential Decay
(i) f is a decreasing function, so the graph falls to the
right.
(ii) as x → – ∞, y → ∞.

(iii) as x → ∞, y → 0.

5. The graph of f (x) = ax has no x-intercepts, so it never

crosses the x-axis. No value of x will cause f (x) = ax to
equal 0.
6. The graph of is a smooth and continuous curve, and it
passes through the points

7. The x-axis is a horizontal asymptote for every

exponential function of the form f (x) = ax.
Explanation of e
An important base that is useful in many areas of mathematics as well as in applications to
problems in economics is the irrational number e, whose most significant digits are given
by
𝑒 = 2.71828 … … … . .
It can be interpreted as the result of a special mode of interest compounding.
Assume, the principal start with 1tk.
If banker offer unusual interest rate of 100% per annum
After 1 year, number would be, A = 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 1 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
1
1
= 1 1+ =2
1
If the interest amounting 50% of principal will accrue at the end of 6 months and other
50% will accrue at other 6 months,
1 2
𝑓 2 = 1 + 50% 1 + 50% = (1 + )
2
1 1
By analogous reasoning, 𝑓(3) = (1 + 3)3, 𝑓(4) = (1 + 4)4,
1 𝑚
𝑓 𝑚 = 1+ 𝑤ℎ𝑒𝑟𝑒, 𝑚 = 𝑡ℎ𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛 1 𝑦𝑒𝑎𝑟.
𝑚
Now if m becomes infinity, the value of asset grow in a snowball
fashion becoming at the end of the year,
𝑚
1
lim 𝑓(𝑚) = lim 1 + =𝑒
𝑚→∞ 𝑚→∞ 𝑚
Compound Interest
𝐴 = 𝑃(1 + 𝑟)𝑡
𝑟 𝑛𝑡
If compounded n times a year for t years, 𝐴 = 𝑃 1 +
𝑛

A = amount after t years

P = principal
r = annual interest rate (expressed as a decimal)
t = number of years
CONTINUOUS COMPOUND INTEREST
If the compound interest is allows for more years of compounding
𝐴 = 𝑃𝑒 𝑟𝑡
A = amount after t years
P = principal
r = annual rate (expressed as a decimal)
t = number of years
𝑑𝐴
𝑟𝐴
Rate of Growth 𝑑𝑡
= =𝑟
𝐴 𝐴
Law of Exponents Let 𝑎 and 𝑏 be positive numbers and let 𝑥 and 𝑦 be
real numbers. Then,
𝒃𝒙 ⋅ 𝒃𝒚 = 𝒃𝒙+𝒚
𝑏𝑥 𝑦
= 𝑏 𝑥𝑦
𝒃𝒙 𝒙−𝒚
= 𝒃
𝒃𝒚
𝒂𝒃 𝒙 = 𝒂𝒙 𝒃𝒙
𝑎 𝑥 𝑎𝑥
= 𝑥
𝑏 𝑏
Continuous vs Discrete Growth
Continuous Growth: Changes occur continuously over the period. Where
frequency of compounding is relatively high, though not infinity, continuous
pattern of growth may be regarded as an approximation to the true growth
pattern.
Discrete Growth: Changes occur only once per period rather than from
instant to instant. Discreate or discontinuous growth can always be
transformed into an equivalent continuous version.

Suppose 3 that geometric pattern of growth P, P 1 + 𝑟 , 𝑃(1 + 𝑟)2 ,

𝑃(1 + 𝑟) …………
Where, effective interest rate,= r
1 + 𝑟 =𝑡 no. of period covered in the compounding. Suppose, 1 + 𝑟 = b,
then P𝑏 ,
Here, because of discrete nature, t is restricted to integer𝑟 only and b is
positive number and always be expressed as 1 + 𝑟 = b = 𝑒
Discounting and Negative growth
Consider, discreate growth function A = 𝑃(1 + 𝑟)𝑡
𝐴 −𝑡
𝑉= = 𝐴(1 + 𝑟)
1+𝑟 𝑡
This is a negative exponent.
𝑟𝑡 𝐴
For continuous discounting A = 𝑃𝑒 then 𝑉 = = 𝐴𝑒 −𝑟𝑡
𝑒 𝑟𝑡
To find the principal amount P, the exponential growth function is
negative (-r) instantaneous rate of growth of A. Being negative, this
rate is in effect a rate of decay. That’s interest discounting exemplifies
the process of growth, discounting illustrates negative growth.
Example
Juanita deposits Tk. 8000 in a bank at the interest rate of 6% compounded
annually for five years.
a. How much money will she have in her account after five years?
b. How much interest will she receive?

a. Here P = 8000, r = 0.06, and t = 5.

𝐴 = 𝑃(1 + 𝑟)𝑡
= 8000(1 + 0.06)5
= 8000(1.06)5
= 10,705.80
b. Interest = 𝐴 − 𝑃
= 10705 − 8000
= 2705.80
If Tk.1000 is deposited in a bank that pays 5% annual interest, find the future value A
after one year if the interest is compounded
(i)annually. ii) semiannually iii) quarterly iv) monthly. V)daily.

Solution
In the following computations, P = 100, r = 0.05 and t = 1. Only n, the number of times
interest is compounded each year, changes. Since t = 1, nt = n(1) = n.
𝑟 𝑛𝑡
(i) Annual Compounding 𝐴 = 𝑃 1+𝑛 = 1000 1 + 0.05 = 1050.0
𝑟 2 0.05 2
(ii) Semi-annually, 𝐴 = 𝑃 1 + 𝑛 = 1000 1+ 2 ≈ 1050.6
𝑟 4 0.05 4
(iii) Quarterly, 𝐴 = 𝑃 1 + 4 = 1000 1 + 4 ≈ 1050.9
𝑟 12 0.05 12
(iv) Monthly, 𝐴 = 𝑃 1 + 12 = 1000 1 + 12 ≈ 1051.2
𝑟 365 0.05 365
(v) Daily 𝐴 = 𝑃 1 + = 1000 1 + ≈ 1051.3
365 365
• Find the amount when a principal of 8300 is invested at a 7.5% annual
rate of interest compounded continuously for eight years and three
months.
Solution
P = 8300 and r = 0.075. Convert eight years and three months to 8.25
years.
𝐴 = 𝑃𝑒 𝑟𝑡 = 8300𝑒 0.075 8.25 ≈ 15,409.83
• A firm with sales of 150,000 a year expects to grow by 8% a year.
Determine the expected level of sales
Logarithmic Functions
The function f (x) = loga x, is called the logarithmic function with base a.
For x > 0, a > 0, and a ≠ 1, 𝑦 = log 𝑎 𝑥 if and only if 𝑥 = 𝑎 𝑦
The logarithmic function is the inverse function of the exponential function.
Common and Natural Logarithms
The logarithm with base 10 is called the common logarithm and is
denoted by omitting the base: log 𝑥 = log10 𝑥. Thus,
𝑦 = log 𝑥 𝑖𝑓 𝑎𝑛𝑑 𝑜𝑛𝑙𝑦 𝑖𝑓 𝑥 = 10 𝑦.
Applying basic properties of logarithms
log 10 = 1 The logarithm with base e is called the natural logarithm
and is denoted by ln x. That is, ln x = loge x. Thus,
log 1 = 0 𝑦 = ln 𝑥 𝑖𝑓 𝑎𝑛𝑑 𝑜𝑛𝑙𝑦 𝑖𝑓 𝑥 = 𝑒 𝑦.
log 10𝑥 = 𝑥 Applying Basic properties of logarithms
ln 𝑒 = 1
10log 𝑥 = 𝑥 ln 1 = 0
log 𝑒𝑥 = 𝑥
𝑒 ln 𝑥 = 𝑥
Derivatives of Logarithmic and Exponential Function
Log Function rules:
𝑦 = 𝜓 𝑡 = 𝑙𝑛𝑡, has the following value at 𝑡 = 𝑁 𝑎𝑠𝑠𝑢𝑚𝑖𝑛𝑔 𝑡 → 𝑁 +
′
𝜓 𝑡 −𝜓 𝑁 𝜓 𝑁 −𝜓 𝑡
𝜓 (𝑁) = lim+ ≡ lim+
𝑡→𝑁 𝑡−𝑁 𝑡→𝑁
𝑁 𝑁−𝑡
𝑙𝑛𝑁 − 𝑙𝑛𝑡 ln( 𝑡 )
= lim+ = lim+
𝑡→𝑁 𝑁−𝑡 𝑡→𝑁 𝑁 − 𝑡
𝑡 1 𝑚 1 𝑁−𝑡 1
Now 𝑚 ≡ 𝑁−𝑡 then, 𝑁−𝑡 = 𝑡 and t = 1 + 𝑡 = 1 + 𝑚
1 𝑁 𝑚 1 1 1 𝑚
Converted form 𝑁−𝑡
ln 𝑡
= 𝑡
ln 1 +𝑚 = 𝑁 ln 1+𝑚
+ ′ 1 1 𝑚 1 1
Thus t → 𝑁 m tends to infinity 𝜓 (𝑁) = lim+ 𝑡 ln 1+𝑚 = 𝑁
𝑙𝑛𝑒 = 𝑁
𝑡→𝑁
Exponential Function Rule:
𝑦 = 𝑒𝑡
𝑑
𝑒𝑡 = 𝑒𝑡
𝑑𝑡
y = 𝑒𝑡
𝑡 = 𝑙𝑛𝑦
𝑑𝑡 1
=
𝑑𝑦 𝑦
Thus,
𝑑 𝑡 dy 1 1
𝑒 = = = = 𝑦 = 𝑒𝑡
𝑑𝑡 dt dt/𝑑𝑦 1/𝑦
Application
Wine Storage
Consider, a wine dealer is in possession of a particular quantity of wine
which can either sell at present time (t=0) for sum K or store elsewhere
for some length of time and sell them at higher rate.
If the growing value of wine is 𝑉 = 𝐾𝑒 𝑡
Since the wine cost is sunk cost (unrecoverable), and storage cost
suppose to be nil. Still, the V is calculated by the sum of different V at
different time t,
To solve this problem, calculating K is in present value,
So, 𝐴 𝑡 = 𝑉𝑒 −𝑟𝑡 = 𝐾𝑒 𝑡 𝑒 −𝑟𝑡 = 𝐾𝑒 𝑡−𝑟𝑡
Maximising Conditions:
𝑑𝐴
The first order condition for maximising A is to have 𝑑𝑡
= 0.
𝑡−𝑟𝑡
From the equation 𝐴 𝑡 = 𝐾𝑒
1
⇒ ln 𝐴 𝑡 = 𝑙𝑛𝐾 + 𝑡 − 𝑟𝑡 𝑙𝑛𝑒 = 𝑙𝑛𝐾 + 𝑡2 − 𝑟𝑡
1 𝑑𝐴 1 −1 𝑑𝐴 1 −1
𝐴 𝑑𝑡
= 2 𝑡 2 − 𝑟 ⇒ 𝑑𝑡 = 𝐴 2 𝑡 2 −𝑟
𝑑𝐴
𝐴 ≠ 0, 𝑑𝑡 = 0 when
1 −1 1 −1
2
𝑡 2 −𝑟 = 0⇒ 𝑟 = 𝑡 2
2
1
1
⇒ 𝑡 = 2𝑟
2

1 2
⇒ 𝑡 = 2𝑟
The next order is to check whether the profit is maximised.
𝑑2𝐴 𝑑 1 −1 𝑑 1 −1 1 −1 𝑑
2
= 𝐴 𝑡 2−𝑟 =𝐴 𝑡 2−𝑟 + 𝑡 2−𝑟 𝐴
𝑑𝑡 𝑑𝑡 2 𝑑𝑡 2 2 𝑑𝑡
𝑑
As 𝐴=0
𝑑𝑡
𝑑2 𝐴 𝑑 1 −1 1 −3 𝐴
= 𝐴 𝑡 2 −𝑟 = − 𝑡 2 =−
𝑑𝑡 2 𝑑𝑡 2 4 4 𝑡3
𝐴
When A>0, the − < 0 the profit would maximise.
4 𝑡3
Timber Cutting
Suppose the value of timber is following 𝑉 = 2 𝑡
We should convert V to present value
𝐴 𝑡 = 𝑉𝑒 −𝑟𝑡 = 2 𝑡 𝑒 −𝑟𝑡
⇒ 𝑙𝑛𝐴 𝑡 = 𝑡𝑙𝑛2 − 𝑟𝑡
Finding Rate of growth
When a variable y is a function of time 𝑦 = 𝑓(𝑡), its instantaneous rate
𝑑𝑦/𝑑𝑡 𝑓′ 𝑡 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛
of growth is defined as 𝑟𝑦 = = =
𝑦 𝑓 𝑡 𝑡𝑜𝑡𝑎𝑙 𝐹𝑢𝑛𝑐𝑡𝑖𝑜𝑛
Precisely, 𝑙𝑛𝑓 𝑡 = 𝑙𝑛𝑦
Finding Rate of growth of Combination Function
Consider, 𝑦 = 𝑢𝑣 where 𝑢 = 𝑓 𝑡 ; 𝑣 = 𝑔(𝑡)
Then 𝑙𝑛𝑦 = 𝑙𝑛𝑢 + 𝑙𝑛𝑣
𝑑 𝑑 𝑑
Then the desired rate of growth 𝑟𝑦 = 𝑑𝑡 𝑙𝑛𝑦 = 𝑑𝑡 𝑙𝑛𝑢 + 𝑑𝑡 𝑙𝑛𝑣 = 𝑟𝑢 + 𝑟𝑣 for
instantaneous growth rate.
Similarly, 𝑟𝑦 = 𝑟𝑢/𝑣 = 𝑟𝑢 − 𝑟𝑣
Point Elasticity
Consider, 𝑢 ≡ 𝑙𝑛𝑦 and v ≡ 𝑙𝑛𝑥
The linkage 𝑢 ≡ 𝑙𝑛𝑦, y = 𝑓(𝑥) and x ≡ 𝑒 𝑙𝑛𝑥 ≡ 𝑒 𝑣
According, the derivative of 𝑙𝑛𝑦 with respect to 𝑙𝑛𝑥
𝑑 𝑙𝑛𝑦 𝑑𝑢
=
𝑑𝑙𝑛𝑥 𝑑𝑣
𝑑𝑢 𝑑𝑦 𝑑𝑥
=
𝑑𝑦 𝑑𝑥 𝑑𝑣
𝑑 𝑑𝑦 𝑑
= 𝑙𝑛𝑦 𝑒𝑣
𝑑𝑦 𝑑𝑥 𝑑𝑣
1 𝑑𝑦 𝑥 𝑑𝑦
= 𝑒𝑣 =
𝑦 𝑑𝑥 𝑦 𝑑𝑥