Mathematics for Economics and Business

Nguyen Thi Thu Van

September 14, 2024

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1 Chapter 1. Matrices
1.1. What is a matrix?
1.2. Matrix Operations

2 Chapter 2. Solving a System of Linear Equations

2.1. Inverse Matrix
2.2. Determinant
2.3. Cramer’s rule
2.4. Rank of a Matrix
2.5. Solving a System of Linear Equations
2.6. Applications of Linear Systems in Economics

3 Chapter 3. Differentiation
3.1. Limits
3.2. Continuity
3.3. Tangent and Velocity Problems
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 3.4. Derivative
3.5. Rules of Differentiation
3.6. Applications in Maths
3.7. Applications in Business

4 Chapter 4. Partial Differentiation

4.1. Functions of Several Variables
4.2. Optimization Problems

5 Chapter 5. Differential Equations

5.1. Modeling with Differential Equations
5.2. Solving Differential Equations

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References

Haeussler, Paul, and Wood: Introductory mathematical analysis for

business, economics, and the life and social sciences, 14th edition, Pearson
(2022)

This textbook is also available in a Vietnamese translation.

The lecture slides will be updated periodically to enhance readability.

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 Chapter 1. Matrices 1.1. What is a matrix?

A rectangular table consisting of m rows and n columns

 
a11 a12 . . . a1n
 a21 a22 . . . a2n 
 
A= . 
 .
.


am1 am2 . . . amn

is called a matrix of order m × n.

Rows of a matrix are horizontal, columns of a matrix are vertical.

Notation. Am×n = [aij ], i = 1, . . . , m, j = 1, . . . , n in which aij is called

the ij entry. The set of matrices of order m × n is denoted Mm×n .

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 Chapter 1. Matrices 1.1. What is a matrix?

In particular,
If m = 1 then A is also called row vector.
If n = 1 then A is called column vector.
If m = n then the matrix is said to be square and in this case, we call
A is the square matrix of order n.

Identity matrix of order n: aii = 1 for i = 1, . . . , n and aij = 0 for

i ̸= j, i, j = 1, . . . , n
 
1 0 ... 0
0 1 . . . 0
 
In =  ≡I
 ..
.


0 0 ... 1

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 Chapter 1. Matrices 1.2. Matrix Operations

Let A = [aij ] and B = [bij ] be two matrices of order m × n, i.e.,

A, B ∈ Mm×n .

Equality.
A = B ⇔ aij = bij

Addition/Subtraction.
A ± B = [aij ± bij ]

Scalar Multiplication. Let k be a real number.

k A = [k aij ]

Transposition. Let A = (aij ) be a matrix of order m × n. The transposition of A

denoted by AT is defined by symbolically AT = (aji ). This means that the first
row of AT is the first column of A, the second row of AT is the second column of
A, and so on. Thus A ∈ Mm×n , while AT ∈ Mn×m

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 Chapter 1. Matrices 1.2. Matrix Operations

Scalar/Dot/Inner product. Given a = (a1 a2 . . . an ) and

b = (b1 b2 . . . bn ). The scalar product of a and b is defined by

n
X
⟨a, b⟩ = ab T = a1 b1 + a2 b2 + · · · + an bn = ai bi
i=1

Example
a = (1 3 5), b = (−1 0 4) ⇒ ab T = 1 × (−1) + 3 × 0 + 5 × 4 = 19

Recall that the product of 2 vectors perpendicular to each other is 0. For

instance

a = (1 0), b = (0 1) ⇒ ab T = 0

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 Chapter 1. Matrices 1.2. Matrix Operations

Matrix Multiplication. Let A be a matrix of order m × n and B be a

matrix of n × p. The product of A and B is

n
X
AB = [cij ] where cij = aik bkj
k=1

Note that we can only multiply two matrices when the number of columns
in the first matrix is equal to the number of rows in the second matrix.

" # " #
1 × 7 + 2 × 9 + 3 × 11 1 × 8 + 2 × 10 + 3 × 12 58 64
= =
4 × 7 + 5 × 9 + 6 × 11 4 × 8 + 5 × 10 + 6 × 12 139 154
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 Chapter 1. Matrices 1.2. Matrix Operations

Observe that
" #" # " #
1 0 a11 a12 a11 a12
=
0 1 a21 a22 a21 a22
and
" #" # " #
a11 a12 1 0 a11 a12
=
a21 a22 0 1 a21 a22

In general, we have that

(1) AIn = A = In A

(2) An = A × A × · · · × A where A appears n times on the right side.

(3) AB ̸= BA

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 Chapter 1. Matrices 1.2. Matrix Operations

Tabulations are handy while storing the raw data as we will see in the
following examples.
Example
A firm orders 12, 30 and 25 items of goods G1, G2 and G3. The cost of
each item of G1, G2 and G3 is $8, $30 and $15, respectively.
(a) Write down suitable price and quantity vectors, and use matrix
multiplication to work out the total cost of the order.

(b) Write down the new price vector when the cost of G1 rises by 20%,
the cost of G2 falls by 10% and the cost of G3 is unaltered. Use
matrix multiplication to work out the new cost of the order and hence
find the overall percentage change in total cost.

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 Chapter 1. Matrices 1.2. Matrix Operations

Example
A chain of sports shops, A, B and C , sells T-shirts, trainers and tennis racquets.
The weekly sales and profit per item are shown in the tables below:

The 3 × 3 matrices formed from the sales and profit tables are denoted by S and
P, respectively.

(a) If A = SP T , find the element a11 and give a brief interpretation of this
number.

(b) If B = S T P, find the element b33 and give a brief interpretation of this
number.
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 Chapter 2. Solving a System of Linear Equations 2.1. Inverse Matrix

By using multiplication matrix operation, we can easily convert a system of linear

equations into a matrix equation that



 a11 x1 + a12 x2 + · · · + a1n xn = b1


a21 x1 + a22 x2 + · · · + a2n xn

= b2
..



 .

+ am2 x2 + · · · + amn xn

a
m1 x1 = bm

⇔
    
a11 a12 ... a1n x1 b1
 a21 a22 ... a2n  x2   b2 
    
 . .=  .  ⇔ AX = B
 . .  . 
 . .  . 
am1 am2 ... amn xn bm
We know that the ordinary equation ax = b has a solution x = a−1 b if a ̸= 0,
where a−1 = 1a . Now, being seeking solution of the matrix equation above, we
will define A−1 .
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 Chapter 2. Solving a System of Linear Equations 2.1. Inverse Matrix

Let A be a matrix of order n × n. If there exists a matrix B such that

AB = In = BA

then A is said to be invertible and B is called the inverse matrix of A,

denoted by A−1 . Otherwise, A is called singular.
Example
# " " #
1 2 −2 1
Let a matrix A = . Verify that is the inverse of A.
3 4 3/2 −1/2

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 Chapter 2. Solving a System of Linear Equations 2.1. Inverse Matrix

How to find an inverse matrix?

1. Write an augmented matrix consisting of A on the left side and the
identity matrix on the right side
 
a11 a12 . . . a1n | 1 0 . . . 0
a21 a22 . . . a2n | 0 1 . . . 0
 
 . 
 .
 .


an1 an2 . . . ann | 0 0 . . . 1
2. Then we attempt to transform the augmented matrix by row
equivalent operations called Gaussian elimination method to one of
the form  
1 0 . . . 0 | b11 b12 . . . b1n
0 1 . . . 0 | b21 b22 . . . b2n 
 
. 
.
.


0 0 ... 1 | bn1 bn2 . . . bnn
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 Chapter 2. Solving a System of Linear Equations 2.1. Inverse Matrix

Gaussian elimination method

1. Interchange any two rows

 
3x + 4y = −5 x + 2y = 1
⇔
x + 2y = 1 3x + 4y = −5

2. Multiply each entry in a row by the same nonzero constant

 
x + 2y = 1 2x + 4y = 2
⇔
3x + 4y = −5 3x + 4y = −5

3. 
Add a nonzero multiple ofone row to another row.
x + 2y = 1 x + 2y = 1
⇔
3x + 4y = −5 0x − 2y = −8

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 Chapter 2. Solving a System of Linear Equations 2.1. Inverse Matrix

Example. Solve the following system




x + 3y + 2z =9

x − y + 3z = 16


3x − 4y + 2z

= 28

(a) by the Gaussian elimination method,

(b) by the inverse matrix.

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 Chapter 2. Solving a System of Linear Equations 2.2. Determinant

How to check a matrix invertible or not? one of the ways is finding its
determinant. If the determinant of a matrix is non-zero then the matrix is
invertible.
Matrix of order 2 × 2

a b
= ad − cb
c d
Matrix of 3 × 3:
a11 a12 a13
a21 a22 a23 =
a31 a32 a33

a22 a23 a21 a23 a21 a22

a11 - a12 + a13
a32 a33 a31 a33 a31 a32

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 Chapter 2. Solving a System of Linear Equations 2.2. Determinant

Now the determinant of matrix of order n × n is defined inductively as

follows

For a square matrix A = [aij ]. The cofactor Aij of an element aij is

Aij = (−1)i+j Mij ,

where Mij is the determinant of the matrix formed by deleting the ith row
and the jth column of A.

The determinant of A of n × n is defined by

n
X
|A| = aij Aij ,
j=1

where i ∈ 1, n.

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 Chapter 2. Solving a System of Linear Equations 2.2. Determinant

Otherwise, the determinant of a square matrix can be found by using the basic
elementary transformations on rows or columns as follows:

1. Choose any row or column

2. Multiply each element in that row or column by its cofactor and add the
results

Properties: Let A, B ∈ Mn

det(λA) = λn det A

det(AT ) = det A

det(AB) = det A × det B

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 Chapter 2. Solving a System of Linear Equations 2.3. Cramer’s rule

Solving systems of linear equations using determinants

Cramer’s rule for 2 × 2 systems

The solution of the system


a x + b y = c
1 1 1
a x + b y = c
2 2 2

Dx Dy
is given by x = ;y=
D D

a1 b1 c1 b1 a1 c1
where D = ; Dx = Dy = ; and D ̸= 0
a2 b2 c2 b2 a2 c2

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 Chapter 2. Solving a System of Linear Equations 2.3. Cramer’s rule

Cramer’s rule for 3 × 3 systems

The solution of the system


 a x + b1 y + c1 z = d1
 1


a2 x + b2 y + c2 z = d2


a3 x + b3 y + c3 z = d3


Dx Dy Dz
is given by x = ;y= ;z=
D D D
a1 b1 c1 d1 b1 c1 a1 d1 c1
where D = a2 b2 c2 ; Dx = d2 b2 c2 Dy = a2 d2 c2 ;
a3 b3 c3 d3 b3 c3 a3 d3 c3
a1 b1 d1
Dz = a2 b2 d2 ; and D ̸= 0
a3 b3 d3
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 Chapter 2. Solving a System of Linear Equations 2.3. Cramer’s rule

As for n × n systems, we do the same. Cramer’s rule in general case

gives

D1 D2 Dn
x1 = , x2 = , . . . , xn =
D D D

provided that D ̸= 0.

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 Chapter 2. Solving a System of Linear Equations 2.3. Cramer’s rule

Example. Solve the following system




x + 3y + 2z =9

x − y + 3z = 16


3x − 4y + 2z

= 28
by the Cramer rule.

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 Chapter 2. Solving a System of Linear Equations 2.4. Rank of a Matrix

How to determine the number of solutions of a system?

A system of linear equations may have either a unique solution, or many
solutions, or no solution.

To determine the number of solutions, we can use Kronecker-Capelli Theorem:

Given the system AX = B where A ∈ Mm×n and B ∈ Mm×1 .

If rank(A) = rank(A|B) = n then the system has a unique solution.

If rank(A) = rank(A|B) < n then the system has many infinitely solutions.

If rank(A) ̸= rank(A|B) then the system has no solution.

How to find the rank of a matrix?
Use the basic elementary transformations on rows to transform the matrix
into an echelon matrix.

The rank of the matrix is the number of non-zero rows of the echelon matrix.
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 Chapter 2. Solving a System of Linear Equations 2.4. Rank of a Matrix

Example. Argue on the number of solutions of the following system:




x + y − 3z = −1

x + my + 3z =2


2x + y + mz

=m+1

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 Chapter 2. Solving a System of Linear Equations 2.5. Solving a System of Linear Equations

Solvable methods for a system of linear equations

(1) We can solve a general system of m linear equations and n variables by

Gaussian elimination method,

Reducing matrix using elementary row operations to row echelon form.

For example,

(2) For a system of n linear equations and n variables, we can possibly solve by
Using inverse matrix,

Using Cramer rule.

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 Chapter 2. Solving a System of Linear Equations 2.6. Applications of Linear Systems in Economics

A firm produces 3 products A, B, and C that require processing of 3

machines M1, M2, and M3. The time in hours required for processing one
unit of each product by the three machines is given by the following table:

M1 is available for 440 hours, M2 for 310 hours, and M3 for 560 hours.
Find how many units of each product should be produced to make use of
all available time on the machines.

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 Chapter 2. Solving a System of Linear Equations 2.6. Applications of Linear Systems in Economics

An investment company three types of pooled funds: Standard (S), Deluxe (D),
and Gold Star (G). Each unit of S contains 12 shares of stock A, 16 stocks B, and
8 of stock C. Each unit of D contains 20 shares of stock A, 12 stocks B, and 28
of stock C. Each unit of G contains 32 shares of stock A, 28 stocks B, and 36 of
stock C.

Suppose an investor wishes to purchase exactly 220 shares of stock A, 176 shares
of stock B, and 264 shares of stock C by buying units of the three funds.

(a) Determine those combinations of units of S, D, and G that will meet the
investor’s requirement exactly.

(b) Suppose the investor pays $ 300 for each unit of S, $ 400 for each unit of D,
and $ 600 for each unit of G. Which of the combination from part (a) will
minimize the total cost to the investor?

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 Chapter 2. Solving a System of Linear Equations 2.6. Applications of Linear Systems in Economics

Homogeneous system in Economics

Suppose an economy consists of the Coal, Electric (power), and Steel sectors, and
the output of each sector is distributed as in the following table.

The entries in a column represent the fractional parts of a sector’s total output.
Denote the prices (i.e., dollar values) of the total annual outputs of the Coal,
Electric, and Steel sectors by pC ,pE , and pS , respectively. What are equilibrium
prices that make each sector’s income match its expenditures?

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 Chapter 2. Solving a System of Linear Equations 2.6. Applications of Linear Systems in Economics

Network flow
The network in the following figure shows the traffic flow (in vehicles per
hour) over several one-way streets in downtown Baltimore during a typical
early afternoon. What is the general flow pattern for the network?

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 Chapter 2. Solving a System of Linear Equations 2.6. Applications of Linear Systems in Economics

Leontief’s input - output analysis

Input–output models developed by Wassily W. Leontief divide the economy into

sectors where each sector produces goods and services not only for itself but also
for other sectors. These sectors are dependent on each other and the total input
always equals the total output.

Example. Suppose the economy consists of three people, the farmer F, the
carpenter C, and the tailor T. Assume that whatever the farmer produces, 20% is
used by him, 15% by the carpenter, 10% by the tailor, and the consumer uses the
other 40 billion dollars worth of the food. Ten percent of the carpenter’s
production is used by him, 25% by the farmer, 5% by the tailor, and 50 billion
dollars worth by the consumer. Fifteen percent of the clothing is used by the
tailor, 10% by the farmer, 5% by the carpenter, and the remaining 60 billion
dollars worth by the consumer. What should be, in billions of dollars, the required
output by each industry to meet the demand?
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 Chapter 2. Solving a System of Linear Equations 2.6. Applications of Linear Systems in Economics

According to the problem, we have the model as follows:

X = AX + D ⇔ (I − A)X = D ⇔ X = (I − A)−1 D

Wassily W. Leontief [1906–1999] won the 1973 Nobel Prize in economic science
for the development of the “input–output” method and its applications to
economic problems.

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 Chapter 3. Differentiation 3.1. Limits

Limits are essential to calculus and are used to define continuity,

derivatives, and integrals.
Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at c. We say loosely that the limit of f when x goes to c is L,
and write limx→c f (x) = L if we can make f (x) arbitrarily close to L by
taking x sufficiently close but not equal to c.

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 Chapter 3. Differentiation 3.1. Limits

Sometimes we also want to talk about limit from one side.

Definition
Let f be a function defined in a neighborhood of a point a but not necessarily at
a. We say that the limit of f when x goes to a on the right (resp., on the left) is
L, and write
limx→a+ f (x) = L (reps., limx→a− f (x) = L)

if we can make f (x) arbitrarily close to L by taking x sufficiently close but bigger
than a (reps., smaller than a ).

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 Chapter 3. Differentiation 3.1. Limits

Theorem
limx→a f (x) exists if and only if limx→a+ f (x) and limx→a− f (x) exist and
are equal. In that case limx→a f (x) = limx→a+ f (x) = limx→a− f (x)

Consequently, if limx→a+ f (x) ̸= limx→a− f (x) then limx→a f (x) does not
exist.

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 Chapter 3. Differentiation 3.1. Limits

We also want to talk about infinity as limit.

Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at a. We say that the limit of f when x goes to a is infinity,
and write
limx→a f (x) = ∞

if we can make f (x) arbitrarily big by taking x sufficiently close but not
equal to a.

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 Chapter 3. Differentiation 3.1. Limits

Definition
If the values of the function f (x) approach a number L as x increases
without bound, we write

limx→∞ f (x) = L

Similarly, we write limx→−∞ f (x) = M when the functional values of f

approach a number M as x decreases without bound.

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 Chapter 3. Differentiation 3.1. Limits

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 Chapter 3. Differentiation 3.1. Limits

Example. The following well-known function

(x−µ) 2
h i
1 −1
f (x) = √ e 2 σ

σ 2π
is called the normal [Gaussian] density function and its graph is shaped
like a bell-curve, in which the parameters µ and σ are the mean and the
standard deviation of data values observed, respectively.

We have that limx→±∞ f (x) = 0.

The Gaussian density function is after the German mathematician Carl Friedrich
Gauss [1777–1855]
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 Chapter 3. Differentiation 3.1. Limits

Theorem
If c ∈ R then the constant function f (x) ≡ c is often denoted c itself.
And we have
lim c = c and lim x = a
x→a x→a

It’d be worth introducing one of the important theorems of Euler:

1 x
 
1
lim (1 + x) x = e and lim 1+ =e
x→0 x→∞ x

The number e is named after the Swiss mathematician Leonhard Euler

m
[1707–1783] and is limm→∞ 1 + m1 .

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 Chapter 3. Differentiation 3.1. Limits

Limit Laws
Theorem
If limx→a f (x) and limx→a g (x) exist then
(a) limx→a [f (x) ± g (x)] = limx→a f (x) ± limx→a g (x)

(b) limx→a f (x)g (x) = [limx→a f (x)][limx→a g (x)]

(c) limx→a gf (x)

(x) =
limx→a f (x)
limx→a g (x) if limx→a g (x) ̸= 0.

The laws are still valid with the process x → ∞ instead of x → a.

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 Chapter 3. Differentiation 3.1. Limits

Below are some remarks that are worth noting:

the limit of function f when x → a can be thought of as the limiting
value of f as x is very close to a, that is,

lim f (x) = L ⇔ [f (x) ≈ L as x ≈ a]

x→a

the limit of function if exists must be unique.

Finally in reality nothing is exactly one hundred percent, so limits are

essential and you should know how to compute/use them proficiently!

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 Chapter 3. Differentiation 3.2. Continuity

In mathematics, a continuous function is a function that does not have

any abrupt changes in value. More precisely,
Definition
f is said to be continuous at a if limx→a f (x) = f (a)

which also means that sufficiently small changes in the input of a

continuous function result in arbitrarily small changes in its output. A
function that is not continuous is called a discontinuous function.

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 Chapter 3. Differentiation 3.2. Continuity

Economists speak quite often about the continuity and discontinuity of

economic functions/relationships.

Example. Suppose that a salesperson receives a salary according to a

contract that stipulates that the salesperson’s monthly salary will be
composed of three parts:
(i) a basic amount of $800,
(ii) a commission of 10%,
(iii) a lump-sum bonus of $500 if the salesperson’s sales for the month
reach or exceed $20,000.

Describe the salesperson’s monthly salary against the monthly sales.

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 Chapter 3. Differentiation 3.2. Continuity

The definition of continuity of functions at a point is also extended to an

interval as follows.
Definition
A function f is continuous on an interval [a, b) if it is continuous at every
point in the interval and limx→a+ f (x) = f (a).

A function f is continuous on an interval (a, b] if it is continuous at every

point in the interval and limx→b− f (x) = f (b).

Accordingly, a function f is continuous on an interval [a, b] if it is

continuous at every point in the interval and limx→a+ f (x) = f (a) and
limx→b− f (x) = f (b).
Intuitively, a continuous function at a is a function that its graph has no
holes at a or is not broken into two pieces at a.

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 Chapter 3. Differentiation 3.2. Continuity

One often says that a picture is worth more than thousand words. So in
order to understand the concepts of continuity, let do the example below.
Example
Let f be given by the graph in the figure below. Which intervals is f
continuous on?

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 Chapter 3. Differentiation 3.2. Continuity

Example
Suppose the long-distance rate for a telephone call from Hazleton,
Pennsylvania to Los Angeles, California, is $0.08 for the first minute or
fraction thereof and $0.04 for each additional minute or fraction thereof. If
y = f (t) is a function that indicates the total charge y for a call of t
minutes duration then
Formulate the charge function

Sketch the graph of f for 0 < t ≤ 3 21

Determine the values of t at which discontinuity occurs.

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Recall that a linear function f (x) = mx + b changes at a constant rate m

w.r.t. x, that is, the rate of change of f (x) is the slope or the steepness of
the line y = mx + b.

However if a function f (x) is not linear, the rate of change is not a

constant but varies with x. In particular, when x = c, the rate is given by
the steepness of the graph of f (x) at the point P(c, f (c)), which can be
measured by the slope of the tangent line to the graph at P.

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Tangent problem. Find the slope of a tangent line at P(c, f (c)) on the
curve C of equation y = f (x).

Strategy: consider a point Q(c + h, f (c + h)) nearby P (Q ̸= P). The

slope of the secant line PQ is the difference quotient:
rise change in f f (c + h) − f (c)
mPQ = = =
run change in x h

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Observe that if we let Q approach P by letting c + h approach c then the

pink lines PQ approach the blue line at P. In other words, the blue line is
considered as the limiting line of the pink lines. As a result, the slope of
the tangent line at P can be calculated as
f (c + h) − f (c)
m = lim mPQ = lim
Q→P h→0 h

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

Velocity problem. If an object is moving along a straight line according

to an equation s = f (t), where s is the displacement of the object from
the origin at time t, then the average velocity denoted va of the object
moving in the time interval from time a to time a + h is the following
difference quotient
displacement f (a + h) − f (a)
va = =
elapsed time h

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 Chapter 3. Differentiation 3.3. Tangent and Velocity Problems

If we consider the movement of the object in a shorter and shorter time

interval, the average velocity becomes the instantaneous velocity

f (a + h) − f (a)
v (a) = limh→0
h

Note that we are not concerned with the direction in which the movement
occurs, but displacement and velocity. The speed of the movement is
|velocity |.

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 Chapter 3. Differentiation 3.4. Derivative

Both problems lead to finding limit

f (a + h) − f (a) f (a + ∆x) − f (a)

lim ≡ lim .
h→0 h ∆x→0 ∆x
This limit arises actually not only in geometry and physics but in many
other practical situations, so it is given a special name: DERIVATIVE!

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 Chapter 3. Differentiation 3.4. Derivative

Definition
Given y = f (x). The derivative of a function at the number a, denoted by
f ′ (x = a) (followed by Newton’s notation) which is read ’f dashed of x‘ or
denoted by dx df
(x = a) ≡ dy
dx (x = a) (followed by Leibnitz’s), is

f (a + ∆x) − f (a) ∆f df
f ′ (a) = lim = lim = (x = a)
∆x→0 ∆x ∆x→0 ∆x dx
if the limit exists and, in this case, f is said to be derivable (or also called
differentiable) at a.

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 Chapter 3. Differentiation 3.4. Derivative

Example. Find the derivative of the following functions by definition:

1. f (x) = 2x + 3. Find f ′ (1) and f ′ (a), a ∈ R.

√
2. f (x) = x

3. f (x) = x 2 − x + 1

4. Let n ∈ N and f (x) = x n . Find f ′ (x).

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 Chapter 3. Differentiation 3.4. Derivative

Noting that not all functions are derivable. For example, function is not
continuous at a point then it is not derivable at that point, that is, the graph at
this point is broken into two pieces or has a hole.

Even continuous functions that whose graph has a sharp corner are also not
derivable.

Example. Find the derivative of f (x) = 2|x| + 1 at a = −2, a = 1, and at a = 0.

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 Chapter 3. Differentiation 3.5. Rules of Differentiation

Theorem
If f and g are derivable and c is a constant then
c′ = 0
(f ± g )′ = f ′ ± g ′
(fg )′ = f ′ g + fg ′ and thus (cf )′ = cf ′
 ′ ′ ′
f
g = f gg−fg
2

Theorem (Chain rule)

If f = f (g ) and g = g (x), then f (x) ≡ f (g (x)) and

df df dg
= ×
dx dg dx
when f and g are derivable.

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 Chapter 3. Differentiation 3.5. Rules of Differentiation

Example
Given two functions f , g whose graphs are shown below. Let
u(x) = f (g (x)), v (x) = g (f (x)), and w (x) = g (g (x))

Find u ′ (1), v ′ (1), and w ′ (1).

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 Chapter 3. Differentiation 3.6. Applications in Maths

Based on the definition of derivative, we have that

If f ′ > 0 on a certain interval then the curve of f rises from the left to the
right of the interval and thus the function is said to be increasing.

If f ′ < 0, the curve of f drops and the function is decreasing.

The point at which f ′ = 0 is called the critical/stationary point. The point where
the curve changes from moving ups to moving down or v.v. is called the turning
point!

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 Chapter 3. Differentiation 3.6. Applications in Maths

Recall that the global/absolute max (min, reps.) value of f is the biggest
(smallest, reps.) value of f in its domain. The local/relative max (min, reps.)
point of f is the point at which its value is the biggest (smallest, reps.) compared
to values of points in its vicinity.

Theorem (First order derivative)

If f ′ (a) = 0 and f ′ changes sign around a, a is an extreme point, meaning either
local minimum point or local maximum point.

Example. Find the extreme point(s) of the function f (x) = x 3 − 2x 2 + x + 8 by

using the first order derivative theorem.
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 Chapter 3. Differentiation 3.6. Applications in Maths

The second order is defined by f ′′ (x) = (f ′ (x))′ . Moreover, the sign of f ′′ enables
us to identify the behavior of the function f . Precisely,

If f ′′ > 0 on a certain interval then the curve of f bends upwards on that

interval and the function is said to be convex.

If f ′′ < 0, the curve of f bends downwards and the function is said to be

concave.

The point at which f ′ = 0 and the curve changes the concavity is called the point
of inflection.

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 Chapter 3. Differentiation 3.6. Applications in Maths

Theorem (Second order derivative)

If f ′ (a) = 0 then
if f ′′ (a) > 0 then f attains a minimum value at a. The curve will
bends up ward at x = a.

if f ′′ (a) < 0 then f attains a maximum value at a. The curve will

bends down ward at x = a.

Example. Find the extreme point(s) of the function

f (x) = x 3 − 2x 2 + x + 8 by using the second order derivative theorem.

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 Chapter 3. Differentiation 3.7. Applications in Business

You may wonder what on earth differentiation has to do with economics?

In fact we cannot get very far with economic theory without making use of
calculus. In this section, we focus on the following topics:

Rate of change - Relative rate of change - Percentage rate of change

Elasticity

Marginal analysis

Optimization in Business

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 Chapter 3. Differentiation 3.7. Applications in Business

Rate of change

The rate of change of f (x), i.e, the rate of increase/decrease at x is

defined by f ′ (x).

Example
An efficiency study of the morning shift [from 8:00 a.m. til 12:00 noon] at
a certain factory indicates that an average worker arriving on the job at
8:00 a.m. will have produced Q(t) = −t 3 + 8t 2 + 15t units t hours later.
At what time is the worker performing most efficiently? and least
efficiently?

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 Chapter 3. Differentiation 3.7. Applications in Business

Relative rate of change

In many practical situations, the rate of change of a quantity f is not as

significant as its relative rate of change, which is defined as change in f
size of f .

Example
The air ticket price increased by $25. If the price currently is $2,500, then the
change represents a 1% increase. But if the price currently is $25, then the
change is 100% increase, meaning the price is double.

∆f
The relative rate of change in f = f and the corresponding percentage rate of
change in f = 100f ∆f %.

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 Chapter 3. Differentiation 3.7. Applications in Business

Elasticity

We are known that demand, in general, is a decreasing function, that is,

an increase in the unit price of a commodity will result in decreased
demand. However, the sensitivity or responsiveness of demand to a change
in price varies from one product to another.

For instance, the demand for products such as soap, flashlight batteries, or
salt will not be much affected by a small percentage change in unit price,
while a comparable percentage change in the price of airline tickets or
home loans can affect demand dramatically.

Economists use a quantity called elasticity of demand to measure the

sensitivity of the change.

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 Chapter 3. Differentiation 3.7. Applications in Business

Elasticity of demand is defined, supposed that q is a demand function in terms of

unit price p (q0 = q(p0 )), by
∆q
" #
percentage rate of change in demand q p ∆q p 1
E (p) = = ∆p = × = × ∆p
percentage rate of change in price p
q ∆p q ∆q

Therefore, when ∆p ≈ 0 and ∆q ≈ 0, we have that

 
p0 ∆q p0 dq p0 ′ p0 1
E (p0 ) = × lim = × (p0 ) ≡ × q (p0 ) = × ′
q0 ∆p→0 ∆p q0 dp q0 q0 p (q0 )

Demand is said to be
elastic if |E | > 1 ⇒ the percentage decrease in demand is greater than the
percentage increase in price that caused it, and thus, demand is relatively
sensitive to changes in price

inelastic if |E | < 1 ⇒ demand is relatively insensitive to changes in price

unit elasticity if |E | = 1
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 Chapter 3. Differentiation 3.7. Applications in Business

Example
The manager of a bookstore determines that when a certain new
paperback novel is priced at p dollars per copy, the daily demand will be
√
q = 300 − p 2 copies, where 0 ≤ p ≤ 300
(a) Determine where the demand is elastic, inelastic, and of unit elasticity
with respect to price.

(b) Interpret the results of part (a) in terms of the behavior of total
revenue as a function of price.

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 Chapter 3. Differentiation 3.7. Applications in Business

The relationship between revenue and price is shown below. Note that the
revenue curve is rising where demand is inelastic, falling where demand is
elastic, and has a horizontal tangent line where the demand is of unit
elasticity.

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 Chapter 3. Differentiation 3.7. Applications in Business

Example. Given a demand equation as

q = p 2 − 20p + 100

where p is the price per unit (in hundred dollars) and q is the quantity
demanded (in hundreds).

(a) Find the point elasticity of demand for $500.

(b) If this change in price of $500 is increased by 2%, what is the

approximate change in demand?

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 Chapter 4. Partial Differentiation 4.1. Functions of Several Variables

Most relationships in economics involve more than one variable. For

instance, the demand for a good depends not only on its own price but
also on the price of substitute and complementary goods, incomes of
consumers, advertising expenditure and so on.

Note that
Substitutes are products/services in different forms that have the same
functionality. For example, butter and margarine are substitute goods.

Complementary goods/services is an item used in conjunction with another

good/service. Usually the complementary good has little to no value when
consumed alone, but when combined with another goods/services, it adds to
the overall value of the offering. For example, an iPhone and apps with it
are complementary products.

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 Chapter 4. Partial Differentiation 4.1. Functions of Several Variables

To analyze general economic behavior we must extend the concept of a function

of one variable, and particularly the differential calculus, to functions of several
variables.
Definition
A function, f , of n independent variables is a rule that assigns to each incoming
tuple of numbers, (x1 , x2 , . . . , xn ), a uniquely defined outgoing number which is
called the dependent variable z. In symbols we write this as
z = f (x1 , x2 , . . . , xn ).

Domain of a function of n variables is defined by

{(x1 , x2 , . . . , xn )|f (x1 , x2 , . . . , xn ) is well defined}

a subset of IR × IR × · · · × IR ≡ IRn called the n dimensional space. In particular, if

n = 2 then it is a two dimensional space or a real plane.
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 Chapter 4. Partial Differentiation 4.1. Functions of Several Variables

Graph of a function involving two variables is a surface in three

dimensional space. It is necessary to bear in mind that the graph of
function of one variable is a curve in xy −plane.

To help you have a feeling of what is the graph of a function of two

variables, let us analyze how to sketch the graph of the following functions.
Example
Graph of the function f (x, y ) = x 2 + y 2 (D is the whole xy − plane)

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 Chapter 4. Partial Differentiation 4.1. Functions of Several Variables

First-order derivatives.
Definition
First-order partial derivative w.r.t. x:
∂f f (x0 +∆x,y0 )−f (x0 ,y0 )
∂x (x0 , y0 ) ≡ fx (x0 , y0 ) = lim∆x→0 ∆x

First-order partial derivative w.r.t. y :

∂f f (x0 ,y0 +∆y )−f (x0 ,y0 )
∂y (x0 , y0 ) ≡ fy (x0 , y0 ) = lim∆y →0 ∆y

∂f
Accordingly to compute for example ∂x , we need only to differentiate
mathematical expressions with respect to x and let all remaining letters in
the mathematical expressions constants in disguise. It is the same for
other variables.

Gradient vector of f at (x0 , y0 ) is denoted ∇f and determined by

∇f (x0 , y0 ) = [fx (x0 , y0 ); fy (x0 , y0 )]

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 Chapter 4. Partial Differentiation 4.1. Functions of Several Variables

Second-order derivatives.
∂2f
Second-order partial derivative w.r.t. x: ∂x 2
≡ fxx = (fx )x
∂2f
Second-order partial derivative w.r.t. y : ∂y 2
≡ fyy = (fy )y
∂2f
Second-order partial derivative w.r.t. x and y : ∂x∂y ≡ fxy = (fy )x
∂2f
Second-order partial derivative w.r.t. y and x: ∂x∂y ≡ fyx = (fx )y

Note that in general (fx )y ̸= (fy )x . In the scope of this course, we will
consider functions that satisfy (fx )y = (fy )x . [According to Clairaut’s
theorem, (fx )y (x0 , y0 ) = (fy )x (x0 , y0 ) if the first order partial derivatives
are continuous at (x0 , y0 ).]

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 Chapter 4. Partial Differentiation 4.1. Functions of Several Variables

All variables to change: • If x changes a small amount ∆x and y changes a small

amount ∆y , the net change in z = f (x, y ) is

∂f ∂f
∆z ≈ × ∆x + × ∆y
∂x ∂y
which is called the small increments formula. The differential form of the small
increments formula states that
∂f ∂f
dz = × dx + × dy
∂x ∂y

• If z = f (x, y ) is a constant, then dz = 0. At this stage, after rearrangement, we

have that
∂z
dy
= − ∂x
∂z
dx ∂y

This formula is called the implicit differentiation and is a useful tool to compute
the derivative of an implicit function.

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 Chapter 4. Partial Differentiation 4.1. Functions of Several Variables

Example. Use the small increments formula to estimate the change in

z = x 2 y 4 − x 6 + 4y

when
(a) x increases from 1 to 1.1 and y remains fixed at 0;

(b) x remains fixed at 1 and y decreases from 0 to -0.5;

(c) x increases from 1 to 1.1 and y decreases from 0 to -0.5.

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Recall that a local/relative minimum point is a point whose value is

smallest compared to the value of points around. It is analogous to
definition of relative/local maximum point.

A global/absolute minimum point is a point whose value is smallest

compared to every points in the domain.

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Let’s look at the three particular surfaces:

Example
Graph of the function f (x, y ) = x 2 + y 2 has the shape of a paraboloid
opened upwards.

(x = 0, y = 0) is called a minimum of f . Note that the tangent plane to

the surface at the minimum point is the xy −plane and the surface is
convex, which means it holds water in itself.

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Example
Graph of the function f (x, y ) = −x 2 − y 2 has the shape of a paraboloid
opened downwards

(x = 0, y = 0) is called the maximum of f . Note that the tangent plane to

the surface at the maximum point is the xy −plane and the surface is
concave, which means it pours water.

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Example
Graph of the function f (x, y ) = x 2 − y 2 has the shape of a hyperbolic
paraboloid

(x = 0, y = 0) is called the saddle point or minimax point of f . This

surface is neither convex nor concave at (0, 0).

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Steps to solve the unconstrained problem Min/Max z = f (x, y )

S1. [Fermat’s necessary condition] Find the stationary point/candidates (x0 , y0 )
of the function f by solving the simultaneous system fx = fy = 0
S2. [Sufficient condition investigating the concavity of the function] Classify the
candidates as minimum or maximum or saddle points by determining
∆ = fxx (x0 , y0 ) × fyy (x0 , y0 ) − fxy2 (x0 , y0 ). If
∆ > 0 then (x0 , y0 ) is an extreme point. This point is the local
minimum if fxx (x0 , y0 ) > 0 and is the local maximum if fxx (x0 , y0 ) < 0.
Note that if ∆ does not consist of (x0 , y0 ) then minimum/maximum
obtained will be global.
∆ < 0 then (x0 , y0 ) is the saddle point or so called minimax, that is,
neither min nor max.
∆ = 0 then no conclusion is stated yet. To get further information, we
have to consider δ = f (x, y ) − f (x0 , y0 ). If
δ ≤ 0 for all x, y then (x0 , y0 ) is a maximum
δ ≥ 0 for all x, y then (x0 , y0 ) is a minimum
Otherwise, (x0 , y0 ) is a saddle point.
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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Example. Find the critical points of the following functions and classify
them as a relative minimum, a relative maximum, or as a minimax point.

(1) f (x, y ) = x 2 + 4y 2 − 6x − 32y + 1

(2) f (x, y ) = x 2 + 3xy + y 2 − 9x − 11y + 3

(3) f (x, y ) = 1/3(x 3 + 8y 3 ) − 2(x 2 + y 2 ) + 1

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Example. [Price discrimination] Suppose a monopolist is practicing

price discrimination in the sale of a product by charging different prices in
two separate markets.

In market A, the demand function is pA = 100 − qA and in market B it is

pB = 84 − qB , where qA and qB are the quantities sold per week in A and
B, and pA and pB are the respective prices per unit.

If the monopolist’s cost function is C = 600 + 4(qA + qB ), how much

should be sold in each market to maximize the profit?

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Example. [Constraint problem] A firm produces two goods A and B.

The weekly cost of producing x items of A and y items of B is

TC (x, y ) = 0.2x 2 + 0.05y 2 − 0.1xy + 2x − 5y + 1000

(a) State the minimum value of TC in the case when there are no
constraints.

(b) Find the minimum value of TC when the firm is committed to

producing 500 goods of either type in total.

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 Chapter 4. Partial Differentiation 4.2. Optimization Problems

Steps to find the optimal value of Min/Max z = f (x, y ) s.t. g (x, y ) = C

S1. Construct the Lagrangian function L(x, y , λ) = f (x, y ) − λ × [g (x, y ) − C ],

in which λ is called the Lagrange multiplier.

S2. Optimal conditions: ∇f = λ∇g [⇔ fx = λgx ; fy = λgy ] and g (x, y ) − C = 0.

Therefore, to find the optimal value we need to solve simultaneous system
Lx = Ly = Lλ = 0 for (x0 , y0 ) [and λ if necessary].

Example. Use Lagrange multiplier method to optimize the function z = 2x 2 − xy

subject to x + y = 12.

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 Chapter 5. Differential Equations 5.1. Modeling with Differential Equations

A differential equation is an equation that contains an unknown function and

some of its rate of change.

Example 1. A bank pays 3.6 % interest on its certificate of deposit accounts, but
charges a $10 annual fee. Write an equation for the rate of change of the balance.

If the balance V (t) has a unit of dollars, the rate of change of the balance is
V ′ (t) which has a unit of dollars per year. Since the amount of increase in the
balance is 0.036V (t) dollars/year and the fee is 10 dollars/year, we obtain that

V ′ (t) = 0.036V (t) − 10.

This is an example of differential equation.

Example 2. The elasticity of demand of a commodity is given by

p dq
E= × .
q dp
If E = −2, what is the quantity demanded q with respect to the unit price p?
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 Chapter 5. Differential Equations 5.1. Modeling with Differential Equations

Ideal growth models

If a quantity or population y grows at a rate proportional that quantity’s

size, it can be modeled with unlimited growth, which has the differential
equation:
y ′ = ky ,

where k is the proportionality constant.

Example
A population grows by 3.6% each year. If the current population is 5, 000,
a growth model for the population after t years can be y ′ = 0.036y
subject to y (0) = 5, 000.

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 Chapter 5. Differential Equations 5.1. Modeling with Differential Equations

Logistic models

Many populations start by increasing in an exponential manner, but the

population levels off when it approaches its carrying capacity M (or decreases
toward M if it ever exceeds M). For a model to take into account both trends, we
make two assumptions: y ′ ≈ ky if y is small and y ′ < 0 if y > M.

A simple model called logistic model that incorporates both assumptions above
proposed by Pierre-François Verhulst in the 1840s is given by the equation
 y 
y ′ = ky 1 −
M
Example. A colony of 20 rabbits is introduced to a reclaimed forest. After 1
year, the population has grown to 40. It is estimated the forest can sustain 500
rabbits. The forest service plans to reintroduce wolves to the forest when the
rabbit population reaches 150 rabbits. When will that occur?

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 Chapter 5. Differential Equations 5.2. Solving Differential Equations

Separable equations

A separable equation is a first-order differential equation in which the expression

for dy
dx can be factored as a function of x times a function of y . Eventually,

dy g (x)
= g (x) × f (y ) ≡ ⇔ h(y )dy = g (x)dx.
dx h(y )

We can use the Chain rule and the Fundamental theorem of Calculus to derive
R R
that h(y )dy = g (x)dx.

Example
Solve the following equation
dy x2
a. dx = y2 .

b. Find the solution of this equation that satisfies the initial condition y (0) = 2.

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 Chapter 5. Differential Equations 5.2. Solving Differential Equations

Linear equations

A first-order linear differential equation is one that can be put into the form
dy
+ P(x)y = Q(x).
dx
It has been proved that the solution of the equation above is
Z 
1 R
P(x)dx
y (x) = I (x)Q(x)dx + C with I (x) = e
I (x)

Example
Solve the differential equation

a. x 2 y ′ + xy = 1 subject to x > 0.

b. Find the solution when y (1) = 2.

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 Chapter 5. Differential Equations 5.2. Solving Differential Equations

Second order equations with constant coefficients

A second-order linear differential equation with constant coefficients has the form

ay ′′ + by ′ + cy = G (x),

where a, b, c are constant and G is continuous function.

If

G (x) = 0 then the equation is called homogeneous and the solution is

y = yc (x).

G (x) ̸= 0 then the equation is called nonhomogeneous and the solution is

y = yp (x) + yc (x).

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 Chapter 5. Differential Equations 5.2. Solving Differential Equations

The solution yc is calculated by solving the characteristic equation:

ar 2 + br + c = 0. If roots of the equation are
1. r1 ̸= r2 and both real numbers then yc = c1 e r1 x + c2 e r2 x , c1 , c2 ∈ IR.

2. r1 = r2 = r , a real number, then yc = c1 e rx + c2 xe rx , c1 , c2 ∈ IR.

3. r1 , r2 complex α ± iβ, then yc = e αx (c1 cos βx + c2 sin βx),

c1 , c2 ∈ IR.

Example
Solve the boundary-value problem y ′′ + 2y ′ + y = 0 subject to y (0) = 1
and y (1) = 3.

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 Chapter 5. Differential Equations 5.2. Solving Differential Equations

The solution yp is determined by

If G (x) = e kx P(x) then yp = x γ e kx Q(x), where either γ = 0 if k is not a
root of the characteristic equation, or γ = 1 if k is a simple root, or γ = 2 if
k is a root of multiplicity 2.
If G (x) = e kx P(x) cos mx or G (x) = e kx P(x) sin mx then

yp = x γ e kx Q(x) cos mx + e kx R(x) sin mx

 

where P, Q, R are polynomial of degree n;

γ = 1 if α ± β is a root of the characteristic equation.

γ = 0 if α ± β is not a root of the characteristic equation.

Example. Determine the form of the solution for the differential equations
1. y ′′ − 2y ′ = 12x 2 + 4x + 2 subject to y (0) = −1; y ′ (0) = −3.
2. y ′′ + 4y ′ − 5y = xe x .
3. y ′′ − 4y ′ + 13y = e 2x cos 3x.
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 Chapter 5. Differential Equations 5.2. Solving Differential Equations

To be continued ...

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