Demand Curve and Derivatives

Introductory Concepts

Samuel Nocito

TA Lecture 1

Principles of Economics

September 17, 2024

General Info

Samuel Nocito

▶ e-mail address: [email protected]

▶ web-site: https://sites.google.com/site/samuelnocito/home

▶ Oce hour: email appointment (Skype, Zoom, WebEx)

Info About TA Lectures

▶ True or False questions & Exercises

(training for exam's multiple choice questions);

▶ Last lecture: review and correction of mock exam.

Ask questions if you do not understand or miss something!!

Class Material

▶ Luiss Learn PoE's page.

Section: Class Material - TA sessions

▶ Text slides with T/F answers are available

▶ Problems' solutions in class (you need to follow!)

True or False: Q1

Economics deals primarily with the

concept of money.
True or False: Q1 Answer

FALSE!
Economics deals primarily to the concept of scarcity of
resources and their allocation among individuals.
True or False: Q2

A competitive market is characterized by

interacting groups of buyers and sellers

that determine quantities and prices.

True or False: Q2 Answer

FALSE!
In a competitive market buyers and sellers are price takers.
They choose only the supplied and demanded quantity for
specic levels of price, respectively.
True or False: Q3

A good is said to be a "Normal good" if an

income increase generates an increase in

demand for that good.

True or False: Q3 Answer

TRUE!
Actually, this is the denition of "Normal goods". Inferior
goods follow exactly the opposite reasoning: an increase in
income leads to a decrease in demand for that good.
True or False: Q4

A decrease in the price of apples increases

the quantity demanded of apples and

causes a rightward shift in the demand

curve for apples.

True or False: Q4 Answer

FALSE!
A change in price always causes a movement along the
demand curve of the good experiencing the price change.
Shifts in the demand curve are caused by factors other than
a change in the price of the good (e.g., a change in the
price of a related good).
Denition of Derivative

Conceptual Denition
The derivative of a function at some point characterizes the rate of
change of the function at this point. We can estimate the rate of
change by calculating the ratio of change of the function ∆y to the
change of the independent variable ∆x. In the denition of derivative,
this ratio is considered in the limit as ∆x → 0.

Formal Denition
Let f (x) be a function whose domain contains an open interval
about some point x0 . Then the function f (x) is said to be
dierentiable at x0 , and the derivative of f (x) at x0 is given by:

∆y f (x0 + ∆x) − f (x0 )

f ′ (x0 ) = lim = lim
∆x→0 ∆x ∆x→0 ∆x
Fundamental Derivatives

a. Derivative of a constant (k): y = k

∂y
y′ = ∂x = ∂k
∂x =0

▶ Example: y=k=2
Fundamental Derivatives

a. Derivative of a constant (k): y = k

∂y
y′ = ∂x = ∂k
∂x =0

▶ Example: y=k=2

∂y ∂k ∂2
= = =0
∂x ∂x ∂x
Fundamental Derivatives

b. Derivative of the power function: y = x n, n∈R

∂y ∂xn
y′ = ∂x = ∂x = n · xn−1

▶ Example: y = xn = x2 , so n=2
Fundamental Derivatives

b. Derivative of the power function: y = x n, n∈R

∂y ∂xn
y′ = ∂x = ∂x = n · xn−1

▶ Example: y = xn = x2 , so n=2

∂y ∂x2
y′ = = = 2x
∂x ∂x
Fundamental Derivatives

c. Derivative of a constant (k) for a function:

y = k · f (x)
∂y ∂[k·f (x)]
y′ = ∂x = ∂x = k · f ′ (x)

▶ Example: y = k · f (x) = k · x2 , so f (x) = x2

Fundamental Derivatives

c. Derivative of a constant (k) for a function:

y = k · f (x)
∂y ∂[k·f (x)]
y′ = ∂x = ∂x = k · f ′ (x)

▶ Example: y = k · f (x) = k · x2 , so f (x) = x2

∂y ∂[k · f (x)]
y′ = = = k · f ′ (x)
∂x ∂x

∂[k · x2 ]
= = k · 2x
∂x
Fundamental Derivatives

d. Derivative of a sum of functions:

y = f (x) + g(x) + h(x)
∂y ∂[f (x)+g(x)+h(x)]
y′ = ∂x = ∂x = f ′ (x) + g ′ (x) + h′ (x)

▶ Example: y = f (x) + g(x) + h(x) = x + x2 + x3

Fundamental Derivatives

d. Derivative of a sum of functions:

y = f (x) + g(x) + h(x)
∂y ∂[f (x)+g(x)+h(x)]
y′ = ∂x = ∂x = f ′ (x) + g ′ (x) + h′ (x)

▶ Example: y = f (x) + g(x) + h(x) = x + x2 + x3

∂y ∂[f (x) + g(x) + h(x)]

y′ = = = f ′ (x) + g ′ (x) + h′ (x)
∂x ∂x

∂[x + x2 + x3 ]
= = 1 + 2x + 3x2
∂x
Fundamental Derivatives

e. Derivative of a product of functions: y = f (x) · g(x)

∂y ∂[f (x)·g(x)]
y′ = ∂x = ∂x = f ′ (x) · g(x) + f (x) · g ′ (x)

▶ Example: y = f (x) · g(x) = x(1 + x2 )

Fundamental Derivatives

e. Derivative of a product of functions: y = f (x) · g(x)

∂y ∂[f (x)·g(x)]
y′ = ∂x = ∂x = f ′ (x) · g(x) + f (x) · g ′ (x)

▶ Example: y = f (x) · g(x) = x(1 + x2 )

∂y ∂[f (x) · g(x)]

y′ = = = f ′ (x) · g(x) + f (x) · g ′ (x)
∂x ∂x

∂[x(1 + x2 )]
= = (1 + x2 ) + x(2x)
∂x

= 1 + x2 + 2x2 = 1 + 3x2

Notice that y = f (x) · g(x) = x(1 + x2 ) = x + x3 , apply formulae b) and d).

Fundamental Derivatives
f. Derivative of a ratio of functions: y = f (x)
g(x)
 f (x) 
∂y ∂ f ′ (x)·g(x)−f (x)·g ′ (x)
y′ = ∂x = g(x)
∂x = [g(x)]2
, with g(x) ̸= 0

▶ f (x) 2+x2
Example: y= g(x) = x3
Fundamental Derivatives
f. Derivative of a ratio of functions: y = f (x)
g(x)
 f (x) 
∂y ∂ f ′ (x)·g(x)−f (x)·g ′ (x)
y′ = ∂x = g(x)
∂x = [g(x)]2
, with g(x) ̸= 0

▶ f (x) 2+x2
Example: y= g(x) = x3

∂ fg(x)
 (x) 
′ ∂y f ′ (x) · g(x) − f (x) · g ′ (x)
y = = =
∂x ∂x [g(x)]2

 2+x2 
∂ x3 2x(x3 ) − (2 + x2 )3x2
= =
∂x x6

2x4 − 6x2 − 3x4 x4 + 6x2

= = −
x6 x6
Fundamental Derivatives

A simple table of fundamental derivatives is available at:

https://www.math.it/formulario/derivate.htm
Market Equilibrium, Elasticity and its
Application

Samuel Nocito
TA Lecture 2

Principles of Economics

October 2, 2024
Practical Activity

The Bouncing Ball Example

▶ It requires two "volunteers"!

True or False: Q1

The price elasticity of demand is a measure of how

much the quantity demanded of a good responds
to a change in the price of that good, calculated as
the absolute change in quantity demanded divided
by the absolute change in price.
True or False: Q1 Answer

FALSE!
The rst part of the sentence is correct according to the
denition. However, price elasticity of demand is calculated as
the ratio between percentage changes in quantity and price.
The slope of a linear demand curve is determined by the ratio
between absolute variations of quantity and price.
True or False: Q2

When the elasticity is greater that one, the demand

is said to be elastic, whereas it is considered to be
inelastic when elasticity is less than one.
True or False: Q2 Answer

TRUE!
When the elasticity is greater than one (in absolute value) it
means that quantity demanded responds strongly to changes in
price. The opposite applies when elasticity is less than one.
True or False: Q3

When the elasticity is innite, the demand is

perfectly elastic and is a vertical line.
True or False: Q3 Answer

FALSE!
It is true that when elasticity is innite the demand is
perfectly elastic. However, it is graphically represented by
horizontal line. When the demand is a vertical line, it
means the demand is inelastic so elasticity is equal to zero.
True or False: Q4

Luxury goods tend to have a small income

elasticity.
True or False: Q4 Answer

FALSE!
Necessities tend to have a small income elasticity, while
luxuries tend to have large income elasticity.
True or False: Q5

Substitutes have positive cross-price

elasticities, while complements have

negative cross-price elasticities.

True or False: Q5 Answer

TRUE!

By denition:
▶ if EQA ,PB > 0: an increase in price of B increases the
demand of A (substitutes)
▶ if EQA ,PB < 0: an increase in price of B decreases the
demand of A (complements)
Exercises: Problem 1

Suppose that in the year 2005 the number of births is

temporarily high.

How might this baby boom aect the price of

babysitting services in 2010 and 2020?
(Hint: 5-year-olds need babysitters, whereas 15-year-olds can be babysitters.)
Exercises: Problem 2

Consider the following events:

Scientists reveal that eating oranges decreases the risk of
diabetes, and at the same time, farmers in Spain use a new
fertilizer which increases the yield of oranges per tree.

Illustrate and explain what eect these changes have on

the equilibrium price and quantity of oranges.
Exercises: Problem 3

Market research has revealed the following information about

the market for chocolate bars: Qd = 1600 − 300P , and the
supply schedule is Qs = 1400 + 700P .

Calculate the equilibrium price and quantity in the

market for chocolate bars.
Exercises: Problem 4

Consider public policy aimed at smoking.

a. Studies indicate that the price elasticity of demand for

cigarettes is about 0.4. If a packet of cigarettes is currently
priced at e6 and the government wants to reduce smoking
by 20 per cent, by how much should it increase the price
through levying a tax?
b. If the government permanently increases the price of
cigarettes, will the policy have a larger eect on smoking
one year from now or ve years from now? Explain.
c. Studies also nd that teenagers have a higher price
elasticity of demand for cigarettes than do adults. Why
might this be true?
Exercises: Problem 5

Suppose that business travelers (B) and holidaymakers

(H) have the following demand for airline tickets from
Munich to Naples:
Price e QB QH
150 2100 1000
200 2000 800
250 1900 600
300 1800 400
a. As the price of tickets rises from e200 to e250, what is the
price elasticity of demand for business travelers and
holidaymakers?
b. Why might holidaymakers have a dierent price elasticity
to business travelers?
References

Economics, by N. Gregory Mankiw, Mark P. Taylor, Cengage

Learning, 2014 (or later edition). Problems 1-5.
Market Equilibrium and Elasticity

Samuel Nocito
TA Lecture 3
Principles of Economics

October 9, 2024
True or False: Q1

The more the supply curve is atter the higher is

its price elasticity.
True or False: Q1 Answer

TRUE!
Supply price elasticity is perfectly elastic when the supply
curve is at. Price elasticity of supply is perfectly inelastic
when the supply curve is vertical.
True or False: Q2

Given the following linear demand curve: P = 50 − 5Q; when

the price is equal to P = 20 the demand is said to be elastic.
True or False: Q2 Answer

FALSE!
Given such linear demand curve, when the price is equal to
P = 20 the demand is said to be inelastic.
∂Q(P ) P 1 P P P
EQ,P = · = − · = =
∂P Q 5 Q 5Q 50 − P
when P=20, EQ,P < 1.
True or False: Q3

Given the following linear demand curve: P = 100 − 20Q; when

the price is equal to P = 50 the demand is said to be unit
elastic.
True or False: Q3 Answer

TRUE!
Given such linear demand curve, when the price is equal to
P = 50 the demand is said to be unit elastic.
∂Q(P ) P 1 P P P
EQ,P = · = − · = =
∂P Q 20 Q 20Q 100 − P
when P=50, EQ,P = 1.
True or False: Q4

A higher slope (in absolute value) implies a more elastic demand

curve at any given price level.
True or False: Q4 Answer

FALSE!
A higher slope (in absolute value) corresponds to a steeper
demand curve that is less elastic at any given price level.
True or False: Q5

Given a price elastic demand curve, an increase in price leads to

an increase in total revenues.
True or False: Q5 Answer

FALSE!
With a price elastic demand curve, an increase in price
leads to a decrease in quantity that is proportionally larger.
Thus, total revenues decreases.
Exercises: Problem 1

Technological advances have reduced the cost of

producing mobile phones.

a. How do you think this aected the market for mobile

phones?
b. For software used on mobile phones?
c. For landlines?
Exercises: Problem 2

For each of the following pairs of goods, which good

would you expect to have more price elastic demand
and why?

a. Textbooks recommended by lecturers or mystery novels.

b. Downloads of tracks by Jay-Z or downloads of hip-hop
music in general.
c. Heating oil during the next six months or heating oil during
the next ve years.
d. Lemonade or water.
Exercises: Problem 3

Compute the inverse demand and the price elasticity of

the following demand curves:
(a and b are positive integers ̸= 0)

a−Q
a. P = log(b)
3 2
b. P a2 = ab − a bQ
q
2
c. P = a −Q b
Exercises: Problem 4

Suppose that your demand schedule (per year) for

streamed lms is as follows:
Price Qd Qd
(in e) (I = 10000) (I = 12000)
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

a. Calculate your price elasticity of demand as the price of

streaming increases form e8 to e10 per lm, for both levels of
income.
b. Calculate your income elasticity of demand as your income
increases from e10000 to e12000 if the price is e12 and the
price is e16 per lm.
Exercises: Problem 5

The price of apples (A) rises from e1.00 per kilogram

to e1.50 per kg. As a result, the quantity of oranges
(O) demanded rises from 8,000 per week to 9,500.

a. Compute the cross-price elasticity of demand for oranges

with respect to apples price.
b. What is the relation between the two goods? Are they
substitutes or complements?
References

Economics, by N. Gregory Mankiw, Mark P. Taylor, Cengage

Learning, 2014 (or later edition). Problems 1, and 5.