Addis Ababa University

College of Business and

Economics
Department of Economic
Econ 3051: Mathematical Economics
Tewodros Negash (PhD)
 Tewodros Negash (PhD), Addis Ababa

Introduction University, Department of Economics

1.1. Mathematical economics versus non mathematical

economics
• Mathematical economics
– It is not a distinct branch of economics like public finance or
international trade
– It is an approach to economic analysis and does not
fundamentally differ from non-mathematical approach
• Major differences between mathematical and non-
mathematical economics
– Mathematical economics uses symbols and equations
instead of words and sentences in the statement of
economic assumptions, relationships and conclusions
 Tewodros Negash (PhD), Addis Ababa
Introduction University, Department of Economics

• Advantages of the mathematical approach

– The language is more concise and precise
– Draws on a wealth of mathematical theorems
– Allows us to explicitly state all assumptions
– Allows generalization of analysis to then-variable case
• 𝟎 ≤ 𝑴𝑷𝑪 ≤ 𝟏
𝒏
• 𝑸 = 𝒇(𝒙𝒊 ) = 𝒂𝟏 𝒙𝟏 + 𝒂𝟐 𝒙𝟐 + 𝒂𝟑 𝒙𝟑 + ⋯ + 𝒂𝒏 𝒙𝒏 = 𝒊<𝟏 𝒂𝒊 𝒙
𝒊

Mathematical economics versus Econometrics

• Econometrics
– Concerned mainly with the measurement of economic data
– Deals with the study of empirical observations using statistical
methods of estimation and hypothesis testing
• Mathematical economics
– Refers to the application of mathematics to the purely
theoretical aspects of economic analysis
– It has little or no concern with statistical problems
 Introduction Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

1.2. Review on Deferential And Integral Calculus

→ Differential calculus
Definition of the derivative
• Given 𝑦 = 𝑓(𝑥), the derivative of𝑓(𝑥) at the point
𝑃 = (𝑥1 , 𝑓 𝑥1 ) is the slope of the tangent line at that
point
𝑓 𝑥2 ;𝑓(𝑥1 )
• 𝑓′ 𝑥1 = lim or
∆𝑥→0 𝑥2 ;𝑥1

𝑓 𝑥1 :∆𝑥 ;𝑓(𝑥1 )
𝑓′ 𝑥1 = lim
∆𝑥→0 ∆𝑥

Where ∆𝑥 = 𝑥2 − 𝑥1
• If this limit exists, 𝑓(𝑥) is differentiable.
 Tewodros Negash (PhD), Addis Ababa

Differential calculus University, Department of Economics

1.2.1. Basic rules of differentiation

(I) The constant function rule
Given 𝑦(𝑥) = 𝑐, where 𝑐 is a constant,
𝑑𝑦
𝑓′ 𝑥 = =0
𝑑𝑥
Example: Given 𝑓 𝑥 = 8, 𝑓′ 𝑥 = 0
Given 𝑓 𝑥 = −6, 𝑓′ 𝑥 = 0
(II) The linear function rule
Given 𝑓 𝑥 = 𝑎 + 𝑐𝑥, 𝑓′ 𝑥 = 𝑐
𝑦 𝑥 = 𝑎 + 𝑏𝑓 𝑥 → 𝑦 ′ 𝑥 = 𝑏𝑓′(𝑥)
⇒ Additive constants disappear
⇒ Multiplicative constants preserved
1 1
Example:
10/23/2023
Given 𝑓 𝑥 = 5 − 𝑥, 𝑓′ 𝑥 = −
4 4
 Differential calculus Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(III) The power function rule

Given 𝑓 𝑥 = 𝑐𝑥 𝑛 , 𝑓 ′ (𝑥) = 𝑐. 𝑛. 𝑥 𝑛;1
Example: Given 𝑓 𝑥 = 5𝑥 2 , 𝑓 ′ 𝑥 = 5.2𝑥 2;1 = 10𝑥
(IV) The sum and difference rule
• If 𝑕 𝑥 = 𝑓 𝑥 ± 𝑔 𝑥 then 𝑕′ 𝑥 = 𝑓′ 𝑥 ± 𝑔′ 𝑥
Example: 𝑓 𝑥 = 12𝑥 5 − 4𝑥 4 + 2𝑥 − 3,
𝑓 ′ 𝑥 = 60𝑥 4 − 16𝑥 3 + 2
(V) The product rule
• Given 𝑓 𝑥 = 𝑔 𝑥 . 𝑕(𝑥), 𝑓′(𝑥) = 𝑔 𝑥 . 𝑕′ 𝑥 + 𝑔′ 𝑥 + 𝑕(𝑥)
Example: Given 𝑓 𝑥 = 3𝑥 4 2𝑥 − 5 , let 𝑔 𝑥 = 3𝑥 4 and 𝑕 𝑥 =
2𝑥 − 5
Then 𝑓 ′ (𝑥) = 3𝑥 4 2 + 2𝑥 − 5 12𝑥 3 = 30𝑥 4 − 60𝑥 3
 Differential calculus Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(VI) The quotient rule

′ 𝑔′ 𝑥 .𝑕 𝑥 ;𝑔 𝑥 .𝑕′ 𝑥
• If 𝑓 𝑥 = 𝑔 𝑥 ÷ 𝑕 𝑥 , 𝑓 𝑥 =
𝑕 𝑥 2

5𝑥 3
Example: Given 𝑓 𝑥 = , let 𝑔 𝑥 = 5𝑥 3 and 𝑕 𝑥 = 4𝑥 + 3
4𝑥:3

15𝑥 2 4𝑥 + 3 − 5𝑥 3 (4) 5𝑥 2 (8𝑥 + 9)

𝑓′ 𝑥 = 2
=
4𝑥 + 3 4𝑥 + 3 2
(VII) The generalized power function rule
• If 𝑓 𝑥 = 𝑔(𝑥) 𝑛 then 𝑓 ′ (𝑥) = 𝑛 𝑔 𝑥 𝑛;1 . 𝑔′(𝑥)

Example: Given 𝑓 𝑥 = (𝑥 3 + 6) 5 ,
𝑓′ 𝑥 = 5 𝑥3 + 6 5;1 3𝑥 2 = 15𝑥 2 (𝑥 3 + 6) 4
 Differential calculus Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(VIII) The chain rule

• Given a composite function (a function of a function),
𝑑𝑦 𝑑𝑦 𝑑𝑢
𝑦 = 𝑓(𝑢) and 𝑢 = 𝑔 𝑥 , then 𝑦 = 𝑓 𝑔(𝑥) and = .
𝑑𝑥 𝑑𝑢 𝑑𝑥
Example: Given 𝑓(𝑥) = 5𝑥 2 + 3 4 ,
let 𝑦 = 𝑓 𝑢 = 𝑢4 and 𝑢 = 𝑔 𝑥 = 5𝑥 2 + 3.
𝑑𝑦 𝑑𝑦 𝑑𝑢
Then = . = 4𝑢3 10𝑥 = 4 5𝑥 2 + 3 3 10𝑥
𝑑𝑥 𝑑𝑢 𝑑𝑥
= 40𝑥 5𝑥 2 + 3 3

(IX) The natural exponential function rule

Given 𝑓 𝑥 = 𝑒 𝑔(𝑥) , where 𝑔 𝑥 is a differentiable function of 𝑥, then
𝑓′(𝑥) = 𝑒 𝑔 𝑥 . 𝑔′(𝑥)
𝑥 2 2 2
Example: Given 𝑓 𝑥 = 𝑒 , 𝑓′ 𝑥 = 𝑥
𝑒 . 2𝑥 = 2𝑥𝑒 𝑥
 Differential calculus Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(X) The exponential function rule for base 𝒂 other

than 𝒆
• Given 𝑓 𝑥 = 𝑎 𝑔(𝑥) , where 𝑎 > 0, 𝑎 ≠ 1, and
𝑔(𝑥) is a differentiable function of 𝑥, then
𝑓′ 𝑥 = 𝑎𝑔 𝑥
. 𝑔′ 𝑥 . 𝑙𝑛 𝑎
Example: Given 𝑓 𝑥 = 𝑎1;2𝑥 ,
let 𝑔 𝑥 = 1 − 2𝑥 and 𝑔′ 𝑥 = −2.
Then 𝑓 ′ 𝑥 = 𝑎1;2𝑥 . −2𝑙𝑛 𝑎 = −2𝑎1;2𝑥 𝑙𝑛 𝑎
 Differential calculus Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(XI) The natural logarithmic rule

• Given 𝑓 𝑥 = ln 𝑔(𝑥), where 𝑔(𝑥) is positive and
differentiable,

′ 1 ′ 𝑔′(𝑥)
𝑓 𝑥 = .𝑔 𝑥 =
𝑔 𝑥 𝑔(𝑥)

Example:
• 𝑓 𝑥 = ln 6𝑥 2 , where 𝑔 𝑥 = 6𝑥 2
1 2
𝑓′ 𝑥 = . 12𝑥 =
6𝑥 2 𝑥

• 𝑓 𝑥 = 𝑙𝑛 𝑥 2 + 6𝑥 + 2 ,
2𝑥:6
𝑓′ 𝑥 =
𝑥 2 :6𝑥:2
 Differential calculus Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(XII) The logarithmic function rule for base 𝒂 other than 𝒆

• Given 𝑓 𝑥 = log 𝑎 𝑔(𝑥), where 𝑎 > 0, 𝑎 ≠ 1, and 𝑔(𝑥) is
positive and differentiable,
1 1 1
• 𝑓′ 𝑥 = . 𝑔′ 𝑥 . log 𝑎 𝑒 ⇒ . 𝑔′ 𝑥 .
𝑔 𝑥 𝑔 𝑥 ln 𝑎
Example:
• 𝑓 𝑥 = log 𝑎 2𝑥 2 + 1 , letting 𝑔 𝑥 = 2𝑥 2 + 1

1 4𝑥
→ 𝑓′ 𝑥 = 2 . 4𝑥. log 𝑎 𝑒 =
2𝑥 + 1 2𝑥 2 + 1 ln 𝑎
• 𝑓 𝑥 = log 𝑎 𝑥 , here 𝑔 𝑥 = 𝑥 and 𝑔′ 𝑥 = 1
1 1
→ 𝑓 ′ 𝑥 = ∗ 1 ∗ log 𝑎 𝑒 =
𝑥 𝑥𝑙𝑛𝑎
 Tewodros Negash (PhD), Addis Ababa
Integral calculus University, Department of Economics

1.2.2. Basic rules of integral calculus

• Integration is reversing the process of differentiation and
finding the original function from the derivative
• Letting 𝑓 𝑥 = 𝐹′(𝑥), the anti derivative of 𝑓(𝑥) is

𝑓 𝑥 𝑑𝑥 = 𝐹 𝑥 + 𝑐

(i) The integral of a constant 𝒄: 𝑐𝑑𝑥 = 𝑐𝑥 + 𝑐

1 1
Example: 3𝑑𝑥 = 3𝑥 + 𝑐 ; − 𝑑𝑥 = − 𝑥 +𝑐
2 2

(ii) The integral of 𝟏 : 𝑑𝑥 = 𝑥 + 𝑐

 Integral calculus
Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(iii) The integral of a power function 𝒙𝒏 , where 𝒏 ≠ −𝟏

1
𝑥 𝑛 𝑑𝑥 = 𝑥 𝑛:1 +𝑐 𝑛≠1
𝑛:1

1 1
Example: 𝑥 2 𝑑𝑥 = 𝑥 2:1 + 𝑐 = 𝑥 3 + 𝑐
2:1 3
1 1
𝑥𝑑𝑥 = 𝑥 1 𝑑𝑥 = 𝑥 1:1 + 𝑐 = 𝑥 2 +c
1:1 2
𝟏
(iv) The integral of 𝒙;𝟏 or
𝒙
1
𝑥 ;1 𝑑𝑥 = 𝑑𝑥 = ln 𝑥 + 𝑐 , 𝑥>0
𝑥
• For 𝑥 > 0 because only positive numbers have logarithms.
• For 𝑥 < 0 𝑥 ;1 𝑑𝑥 = ln 𝑥 + 𝑐 , 𝑥 ≠ 0
 Tewodros Negash (PhD), Addis Ababa
Integral calculus University, Department of Economics

(v) The integral of an exponential function

𝑘𝑥
𝑎
𝑎𝑘𝑥 𝑑𝑥 = +𝑐
𝑘𝑙𝑛 𝑎

𝑎5𝑥
Example: 𝑎5𝑥 𝑑𝑥 = +𝑐
5 ln 𝑎

(vi) The integral of a natural exponential function

𝑘𝑥 𝑒 𝑘𝑥
𝑒 𝑑𝑥 = + 𝑐 since ln 𝑒 = 1
𝑘

𝑒 5𝑥
Example: 𝑒 5𝑥 𝑑𝑥 = +𝑐
5
 Integral calculus Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

(vii) The integral of a constant times a function equals the constant

times the integral of the function

𝑘𝑓(𝑥)𝑑𝑥 = 𝑘 𝑓 𝑥 𝑑𝑥

(viii)The integral of the sum or difference of two or more functions

equals the sum or difference of their integrals

𝑓 𝑥 ± 𝑔(𝑥) 𝑑𝑥 = 𝑓 𝑥 𝑑𝑥 ± 𝑔 𝑥 𝑑𝑥

(ix) The integral of the negative of a function equals the negative of the
integral of that function

−𝑓 𝑥 𝑑𝑥 = − 𝑓 𝑥 𝑑𝑥
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

2.1. Elasticities: definition and as logarithmic derivatives

• Elasticity: % change in one variable resulting from a 1%
increase in another.
• Price elasticity of demand: % change in quantity demanded of
a good resulting from a 1% increase in its price.
Arc versus Point Elasticities
• Arc elasticity of demand
– Price elasticity calculated over a range of prices (over some
portion of the demand curve)
• Given 𝑞 = 𝑓 𝑝 ,
∆𝑞 𝑞 ∆𝑞 𝑝
Arc elasticity is ∈𝑞,𝑝 = = :
∆𝑝 𝑝 ∆𝑝 𝑞
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

Example: Price of a particular good increases from 8 to 10 and

quantity demand of that good falls from 6 to 4.
∆𝑞 = −2; ∆𝑝 = 2; 𝑞 = 5; 𝑝 = 9
∆𝑞 𝑝 ;2 9 ;9
• Arc elasticity of demand: ∈𝑞,𝑝 = = . = = −1.8
∆𝑝 𝑞 2 5 5

Point elasticity of demand: Price elasticity at a particular point on

the demand curve.
• Consider a linear demand function given by 𝑞 = 𝛼 − 𝛽𝑝
𝑑𝑞 𝑝 𝑝 ;𝛽𝑝
• ∈𝑞,𝑝 = . = −𝛽 =
𝑑𝑝 𝑞 𝑞 𝛼;𝛽𝑝
→ ∈𝑞,𝑝 is a function of 𝑝
;𝛽𝑝
• ∈𝑞,𝑝 = < −1 ⇒ 𝐸𝑙𝑎𝑠𝑡𝑖𝑐
𝛼;𝛽𝑝
= −1 ⇒ 𝑈𝑛𝑖𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐
> −1 ⇒ 𝐼𝑛𝑒𝑙𝑎𝑠𝑡𝑖𝑐
 Tewodros Negash (PhD), Addis Ababa

Derivatives in Use University, Department of Economics

• ∈𝑞,𝑝 = −1 → 𝑢𝑛𝑖𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐

;𝛽𝑝
→ = −1 → 𝑝 = 𝛼 2𝛽
𝛼;𝛽𝑝

• ∈𝑞,𝑝 < −1 → 𝑒𝑙𝑎𝑠𝑡𝑖𝑐

;𝛽𝑝
→ < −1 → 𝑝 > 𝛼 2𝛽
𝛼;𝛽𝑝

• ∈𝑞,𝑝 > −1 → 𝑖𝑛𝑒𝑙𝑎𝑠𝑡𝑖𝑐

;𝛽𝑝
→ > −1 → 𝑝 < 𝛼 2𝛽
𝛼;𝛽𝑝
Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

𝜶
𝜷

𝜶
𝟐𝜷

q
𝜶 𝜶
𝟐

Price elasticity of demand

 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

Example:
• Consider a simple demand function given by 𝑞 = 8 − 2𝑝
𝑑𝑞 𝑝 𝑝 ;2𝑝
→ 𝜖𝑞,𝑝 = . = −2 =
𝑑𝑝 𝑞 𝑞 8;2𝑝

→ 𝜖𝑞,𝑝 is a function of 𝑝
;2𝑝
• At 𝑝 = 0, 𝜖𝑞,𝑝 = = 0 ⇒ 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑙𝑦 𝑖𝑛𝑒𝑙𝑎𝑠𝑡𝑖𝑐 𝑑𝑒𝑚𝑎𝑛𝑑
8;2𝑝

;2𝑝
• At 𝑝 = 2, 𝜖𝑞,𝑝 = = −1 ⇒ 𝑢𝑛𝑖𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐 𝑑𝑒𝑚𝑎𝑛𝑑
8;2𝑝

;2𝑝
• At 𝑝 = 4, 𝜖𝑞,𝑝 = = ∞ ⇒ 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑙𝑦 𝑒𝑙𝑎𝑠𝑡𝑖𝑐 𝑑𝑒𝑚𝑎𝑛𝑑
8;2𝑝
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

𝟒 𝝐 < −∞

q
𝟒 𝟖

• Perfectly elastic and perfectly inelastic demand

 Tewodros Negash (PhD), Addis Ababa
Derivatives in Use University, Department of Economics

Other elasticities
• Income elasticity of demand: % change in the quantity
demanded of a good resulting from a 1% increase in income

𝜕𝑞 𝐼
→ 𝜖𝑞,𝐼 = .
𝜕𝐼 𝑞
• 𝜖𝑞,𝐼 ≥ 0 (Positive) → 𝑞 is a normal good
• 𝜖𝑞,𝐼 < 0 (Negative) → 𝑞 is an inferior good
• Normal goods are either luxury or necessity
• 0 ≤ 𝜖𝑞,𝐼 ≤ 1 → 𝑞 is a necessity good
• 𝜖𝑞,𝐼 > 1 → 𝑞 is a luxury good
 Tewodros Negash (PhD), Addis Ababa
Derivatives in Use University, Department of Economics

• Cross-price elasticity of demand: % change in the quantity

demanded of one good resulting from a 1% percent increase
in the price of another good
• The elasticity of demand for good 1 with respect to the price
of good 2 is given by

𝑑𝑞1 𝑝2
𝜖𝑞1,𝑝2 = .
𝑑𝑝2 𝑞1
• 𝜖𝑞1,𝑝2 > 0 → the goods are substitutes
• 𝜖𝑞1,𝑝2 < 0 → the goods are complementary
• 𝜖𝑞1,𝑝2 = 0 → the goods are unrelated
 Tewodros Negash (PhD), Addis Ababa
Derivatives in Use University, Department of Economics

• Price elasticity of supply: % change in quantity supplied

resulting from a 1% increase in price.
• Consider a linear demand function given by 𝑞𝑠 = 𝛼 + 𝛽𝑝
𝑑𝑞 𝑝 𝑝 𝛽𝑝
• ∈𝑞𝑠,𝑝 = . = 𝛽 =
𝑑𝑝 𝑞 𝑞 𝛼:𝛽𝑝

→ ∈𝑞𝑠,𝑝 is a function of 𝑝
𝛽𝑝
• ∈𝑞,𝑝 = < 1 ⇒ 𝐼𝑛𝑙𝑎𝑠𝑡𝑖𝑐
𝛼:𝛽𝑝

= 1 ⇒ 𝑈𝑛𝑖𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐
> 1 ⇒ 𝐸𝑙𝑎𝑠𝑡𝑖𝑐
 Derivatives in Use
Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

Example:
The demand for a particular good (good 1) is given by
𝑄1 = 100 − 𝑃1 + 0.75𝑃2 − 0.25𝑃3 + 0.0075𝑌
Where 𝑄1 , 𝑃1, 𝑃2 , 𝑃3 𝑎𝑛𝑑 𝑌 represent quantity demand of good1,
price of good1, price of good 2, price of good 3 and income,
respectively. At 𝑃1 = 10,𝑃2 = 20, 𝑃3 = 40, 𝑌 = 10,000 and
𝑄1 = 170, find
a) The price elasticity of demand for good 1
b) The income elasticity of demand for good 1
c) The cross price elasticity of demand for good 1 with respect to
the price of good 2
d) The cross price elasticity of demand for good 1 with respect to
the price of good 3
e) How are good 2 and good 3 related to good 1?
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

Solution:
𝜕𝑄1 𝑃1 10
a) ∈1,1 = 𝜕𝑃1
∗
𝑄1
= −1 ∗
170
= −0.059
𝜕𝑄1 𝑌 10000
b) ∈1,𝑦 = 𝜕𝑌
∗
𝑄1
= 0.0075 ∗
170
= 58.8
𝜕𝑄1 𝑃2 20
c) ∈1,2 = 𝜕𝑃2
∗
𝑄1
= 0.75 ∗
170
= 0.088
𝜕𝑄1 𝑃3 40
d) ∈1,3 = 𝜕𝑃3
∗
𝑄1
= −0.25 ∗
170
= −0.059
e) Good 1 and good 2 are substitutes; good 1 and
good 3 are complementary goods
 Tewodros Negash (PhD), Addis Ababa
Derivatives in Use University, Department of Economics

Constraint elasticity function

Give 𝑞 = 𝛼𝑝𝛽

𝑑𝑞 𝑝 𝛽;1 𝑝 𝛽𝛼𝑝𝛽 𝑝
→ 𝜖𝑞,𝑝 = . = 𝛽𝛼𝑝 . = . 𝛽 =𝛽
𝑑𝑝 𝑞 𝑞 𝑝 𝛼𝑝

→ Constant elasticity is independent of 𝑝

• If 𝛽 < 0, the curve is downward sloping and represents
demand curve
• If 𝛽 > 0, the curve is upward sloping and represents
supply curve
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

Elasticities as logarithmic derivatives

• Give 𝑞 = 𝛼𝑝𝛽
Take the natural logarithm of each side of the equation
ln 𝑞 = ln 𝛼𝑝𝛽
ln 𝑞 = ln 𝛼 + 𝛽 ln 𝑝 … … … … … (2)
• Equation (2) is a loglinear relation between 𝑞 and 𝑝, i.e., a
loglinear function – linear in logarithms

𝑑𝑙𝑛 𝑞
𝜖𝑞,𝑝 = =𝛽
𝑑𝑙𝑛 𝑝
→ Elasticities are computed directly as logarithmic derivatives
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

Partial elasticity: the case of two variables

• Given 𝑧 = 𝑓 𝑥, 𝑦
𝜕𝑧 𝑥
∈𝑧,𝑥 = .
𝜕𝑥 𝑧
→∈𝑧,𝑥 : Partial elasticity of 𝑧 with respect to 𝑥 with 𝑦 held
constant
𝜕𝑧 𝑦
∈𝑧,𝑦 = .
𝜕𝑦 𝑧
→ ∈𝑧,𝑦 : Partial elasticity of z with respect to y with x held
constant
• Using logarithmic derivatives,
𝜕 ln 𝑧 𝜕 ln 𝑧
∈𝑧,𝑥 = and ∈𝑧,𝑦 =
𝜕 ln 𝑥 𝜕 ln 𝑦
n – Variable case
• Given 𝑧 = 𝑓(𝑥1 , 𝑥2 , 𝑥3 , … , 𝑥𝑛 ), 𝑖 = 1,2,3, … .
𝜕𝑧 𝑥𝑖 𝜕 ln 𝑧
∈𝑧,𝑥𝑖 = ∗ =
𝜕𝑥𝑖 𝑧 𝜕 ln 𝑥𝑖
 Tewodros Negash (PhD), Addis Ababa

Derivatives in Use University, Department of Economics

Example:
• Find the partial elasticity of 𝑧 with respect to 𝑥
and 𝑦 when 𝑧 = 𝐴𝑥 𝑎 𝑦 𝑏
Solution:
• ln 𝑧 = ln 𝐴𝑥 𝑎 𝑦 𝑏
ln 𝑧 = ln 𝐴 + 𝑎 ln 𝑥 + 𝑏 ln 𝑦
→ ln 𝑧 = 𝑓(ln 𝑥, ln 𝑦)
𝜕 ln 𝑧
• ∈𝑧,𝑥 = =𝑎
𝜕 ln 𝑥
𝜕 ln 𝑧
• ∈𝑧,𝑦 = =𝑏
𝜕 ln 𝑦
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

1. Compute the derivatives of the following functions

• 𝑓 𝑥 = 3𝑒 7;2𝑥
• 𝑓 𝑥 = ln 𝑥 2 + 6𝑥 + 2
• 𝑓 𝑥 = log 𝑎 2𝑥 2 + 1
• 𝑓 𝑥 = log 𝑎 𝑥
2. Find the elasticities of the following functions using the elasticity
formula and logarithmic derivatives
a) 𝑦(𝑥) = 3𝑥 100
𝐴
b) 𝑦 𝑥 = 𝑥 𝑥
c) 𝑇 = 0.4𝐾 1.06
𝑎 𝑎 𝑎
3. Suppose 𝑄 = 𝐴𝑥1 1 𝑥2 2 … 𝑥𝑛 𝑛 where 𝐴 > 0, 𝑎𝑖 , 𝑎2 … 𝑎𝑛 are constants
and
𝑥𝑖 > 0
Find the elasticity of 𝑄 with respect to 𝑥𝑖 for 𝑖 = 1,2, . . 𝑛 using
logarithmic derivative
 Derivatives in Use Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

𝑎1 𝑎2 𝑎𝑛
3. Suppose 𝑄 = 𝐴𝑥1 𝑥2 … 𝑥𝑛 where
𝐴 > 0, 𝑎𝑖 , 𝑎2 … 𝑎𝑛 are constants and
𝑥𝑖 > 0
Find the elasticity of 𝑄 with respect to 𝑥𝑖 for 𝑖 =
1,2, . . 𝑛 using logarithmic derivative
4. Find partial elasticities of z with respect to x and y
using logarithmic derivatives when
(a) 𝑧 = 𝑥𝑦
(b) 𝑧 = 𝑥 2 𝑦 5
 Higher-Order Derivatives
Tewodros Negash (PhD), Addis Ababa

2.2. Functions of one variable

University, Department of Economics

Given 𝑦 = 𝑓 𝑥 = 𝑥 4
Taking successive derivatives gives
• The first derivative function : 𝑓 ′ 𝑥 = 4𝑥 3
• The second derivative function : 𝑓 ′′ 𝑥 = 12𝑥 2
• The third derivative function : 𝑓 ′′′ 𝑥 = 24𝑥
• The fourth derivative function : 𝑓 (4) = 24
• The fifth derivative function : 𝑓 (5) = 0
 Increasing and decreasing function
Increasing and decreasing function
• The sign of the first derivative determines whether a
function is increasing or decreasing on an interval 𝐼
• 𝑓 ′ 𝑥 > 0 ⇔ 𝑓(𝑥) is strictly increasing on 𝐼 (𝑥 ∈ 𝐼)
• 𝑓 ′ 𝑥 < 0 ⇔ 𝑓(𝑥) is strictly decreasing on 𝐼
• 𝑓 ′ 𝑥 ≥ 0 ⇔ 𝑓(𝑥) is increasing/non-decreasing on 𝐼
• 𝑓 ′ 𝑥 ≤ 0 ⇔ 𝑓(𝑥) is decreasing/non-increasing on 𝐼

Tewodros Negash (PhD), Addis Ababa

University, Department of Economics
 Increasing and decreasing function
𝒀 = 𝒇(𝒙)
𝒀 = 𝒇(𝒙)
𝒀 = 𝒇(𝒙)

𝒙
𝒙
𝒙 𝒄
𝒃
𝒂 𝒇′(𝒙) ≤ 𝟎
𝒇′(𝒙) > 𝟎
𝒇′(𝒙) ≥ 𝟎 𝒇 𝒙 Decreasing
𝒇(𝒙) Strictly increasing
𝒇 𝒙 Increasing 𝒇(𝒙) Non-increasing
𝒇(𝒙) Non-decreasing 𝒀 = 𝒇(𝒙)

• Increasing and decreasing 𝒙

𝒃
functions Tewodros Negash (PhD), Addis Ababa 𝒇′(𝒙) < 𝟎
University, Department of Economics 𝒇(𝒙) Strictly decreasing
 Increasing and decreasing function
• A function could be increasing in one interval and
decreasing in another interval
𝒚 = 𝒇(𝒙)

𝒙
(𝒄)
(𝒂) (𝒃)

• Interval (𝑎) → 𝑓(𝑥) is strictly increasing

• Interval (𝑏) → 𝑓(𝑥) is strictly decreasing
• At (𝑐) → 𝑓(𝑥) is stationary Tewodros Negash (PhD), Addis Ababa
University, Department of Economics
1. Examine where the following functions are
increasing/decreasing
1 2
(i) 𝑓 𝑥 = 2
𝑥 −2
2
(ii) 𝑓 𝑥 = 𝑥 − 4𝑥 + 3
2. Examine where the following functions are
increasing, decreasing or stationary at 𝑥 = 4
(i) 𝑓 𝑥 = 3𝑥 2 − 14𝑥 + 5
(ii) 𝑓 𝑥 = 𝑥 3 − 7𝑥 2 + 6𝑥 − 2
(iii) 𝑓 𝑥 = 𝑥 4 − 6𝑥 3 + 4𝑥 2 − 13
Tewodros Negash (PhD), Addis Ababa
University, Department of Economics
 Concavity and convexity
Tewodros Negash (PhD), Addis Ababa
Function of two variables University, Department of Economics

• The sign of the second derivative determines whether a function

is concave or convex on an interval 𝐼
Given 𝑦 = 𝑓(𝑥),
• 𝑓′′(𝑥) ≥ 0 on 𝐼 ⇔ 𝑓 ′ 𝑥 is increasing on 𝐼
• 𝑓′′(𝑥) ≤ 0 on 𝐼 ⇔ 𝑓 ′ 𝑥 is decreasing on 𝐼
𝒚 = 𝒇(𝒙) 𝒚 = 𝒇(𝒙)
The slope of the tangent decreases
The slope of the tangent increases as 𝒙 increases.
as 𝒙 increases.

𝒙 𝒙
𝒇′′(𝒙) ≥ 𝟎 𝒇′′(𝒙) ≤ 𝟎
𝒇′ 𝒙 Increasing 𝒇′ 𝒙 Decreasing
 Concavity and convexity
Definition
• A twice differentiable function 𝑓(𝑥) is convex if, at all points on
its domain 𝑓′′(𝑥) ≥ 0
• A twice differentiable function 𝑓(𝑥) is strictly convex if, at all
points on its domain 𝑓′′(𝑥) > 0 except possibly at a single point
• A twice differentiable function 𝑓(𝑥) is concave if, at all points on
its domain 𝑓′′(𝑥) ≤ 0
• A twice differentiable function 𝑓(𝑥) is strictly concave if, at all
points on its domain 𝑓′′(𝑥) < 0 except possibly at a single point

Tewodros Negash (PhD), Addis Ababa

University, Department of Economics
 Concavity and convexity
Tewodros Negash (PhD), Addis Ababa
Geometric definition University, Department of Economics

• A function 𝑓(𝑥) is concave (convex) if a line segment joining any

two points on the graph of the function is below (above) the
graph, or on the graph
𝒚 𝒚

𝒚 = 𝒇(𝒙) 𝒚 = 𝒇(𝒙)

𝒇(𝒙𝟏 ) 𝒇(𝒙𝟏 )

𝒇(𝒙𝟎 ) 𝒇(𝒙𝟎 )

𝒙𝟎 𝒙𝟏 𝒙 𝒙𝟎 𝒙𝟏 𝒙

(a) 𝒇(𝒙) is strictly concave (b) 𝒇(𝒙) is strictly convex

 Concavity and convexity
• Increasing/decreasing, concave/convex
𝒀 = 𝒇(𝒙) 𝒀 = 𝒇(𝒙) 𝒀 = 𝒇(𝒙)

𝑥 𝑥
𝑥
𝒂 𝒃
𝒇′(𝒙) > 𝟎 𝑐
𝒇′(𝒙) > 𝟎
𝒇′′(𝒙) < 𝟎 𝒇′(𝒙) < 𝟎
𝒇′′ 𝒙 > 𝟎
→ Increasing concave 𝒇′′ 𝒙 > 𝟎
→ Increasing convex
→ Decreasing convex
𝒀 = 𝒇(𝒙)

𝒙
𝒅
𝒇′(𝒙) < 𝟎; 𝒇′′(𝒙) < 𝟎
→ Decreasing concave Tewodros Negash (PhD), Addis Ababa
University, Department of Economics
 Tewodros Negash (PhD), Addis Ababa
University, Department of Economics

Concavity and convexity

𝒀 = 𝒇(𝒙)

𝑒
𝒇′(𝒙) < 𝟎
𝒇′′ 𝒙 = 𝟎
→ Both concave and convex

• Linear functions (straight line) are both concave and convex

• Examine the concavity or convexity of the
following functions
1 3
(i) 𝑓 𝑥 = − 𝑥 + 3𝑥 2 − 5𝑥 + 10 𝑥≥0
3

(ii) 𝑓 𝑥 = 𝑥 4
1 3
(iii) 𝑓 𝑥 = − 𝑥 + 3𝑥 2 − 5𝑥 + 10 𝑥≥0
3

(iv) 𝑥 = −𝑥 4

Tewodros Negash (PhD), Addis Ababa

University, Department of Economics