Chapter Six

Multivariate Differential Calculus and its Applications

Learning Objectives: After completing this unit you will be able to
 Understand partial derivatives and their application in economics
 Use partial derivative rules to compute higher order partial derivatives
 Compute total derivatives and derivatives of implicit functions
 Understand economic applications of multivariate calculus

1. Partial Derivatives
Dear students, in the previous section you have discussed about derivative of a function having a single
independent variable. In this section you will be learn one of the important types of derivative for several
variables function known as partial derivatives.

Partial derivative is the derivative of functions of several variables. Let Z = f(x, y) be a function of two
independent variables. If the variable y is held fixed at a value of y = y0 the relation Z = f(x,y0) expresses
Z as a function of one variable x.

So long as the curve of the function is smooth, there will be a tangent line in each point of the curve and
the slope of this tangent line can be calculated by differentiating z with respect to x from the relation Z =
f(x,y0). This derivative is found in usual way as a limit according to the following expression:

df ( x , y 0 ) f ( x + Δx , y 0 )
= lim
dx Δx→ 0 Δx
if the limit exists

∂Z
∂x
This limit is called the partial derivative of Z with respect to x and usually denoted by .

Definition: Let Z = f(x,y) be a function of Z with x and y. Then

∂Z
∂x
The partial derivative of Z with respect to x, denoted as , is defined as

∂Z f ( x+ Δx , y 0 )−f (x , y 0 )
= lim
∂ X Δx → 0 Δx
∂Z
∂y
And the partial derivative of Z with respect to y , denoted as , is defined as
 ∂Z f ( x 0 , y + Δy )−f ( x 0 , y )
= lim
∂ Y Δy →0 Δy

∂Z
∂y
In calculating the variable x is held constant and the differentiation is carried out only with respect
to y. Notice that calculating the partial derivative requires all other independent variables to be constant
except the variable in which the derivative is being carried out. For example, if Z = f(x, y, w, m) and if one
∂Z
∂y
wants to calculate , all the independent variables should be kept constant except variable y and by
doing this the response of the dependent variable Z only due to the change in variable y can be measured.
Remarks

Partial derivatives can be evaluated using essentially the same techniques as those used for evaluating
ordinary derivative (i.e., derivative of y = f(x)). To compute the partial derivatives apply any of the
necessary techniques simply by treating all the independent variables except the one with respect to which
you are differentiating as constant. Therefore, you can use the power rule, product and quotient rules, and
chain rules in the usual way whenever necessary.

∂Z
∂y Z= x 3 +5 xy 2 +2 y 3
Example: Calculate when .

∂Z
∂y
Solution: To finding , you should treat x as a constant and differentiate Z with respect to y.

∂Z
∂y
= 0+5x (2y) +2(3y2) = 10xy+6y2
∂Z
∂x Z=√ x2 + y 2
Example : Calculate for .

∂Z
∂x
Solution: Treat y as constant and use the chain rule to get as

∂Z
1 1
−1 x
∂(x 2 + y 2) 2 1 ( x 2 + y 2 ) 2 (2 x )
∂x
= ∂x =
2
=
√ x 2+ y 2
Young’s Theorem

It states that the mixed (or cross –partials) for a given function will always be equal if both cross partials
exist. i.e.
Given Y = f(X1,X2)

f12 = f21, where f12 & f21 are partial derivatives

3 2
Example: If f ( x 1 , x 2 ) =5 x 1 x 2, show that f12 = f21

Solution:

2 2
f 1=15 x1 x 2
3
f 2=10 x1 x 2
2
f 12=30 x 1 x 2

f 21=30 x 1 x 2 , therefore f12 = f21.

2

2.1. Second-order partial derivatives

Second-order partial derivatives are found by differentiating the first-order partial derivatives of
a function. When a function has two independent variables there will be four second-order partial
derivatives. Take, for example, the production function

Q = 25K0.4L0.3
There are two first-order partial derivatives

∂Q/∂K = 10K−0.6L0.3
∂Q/∂L = 7.5K0.4 L−0.7
These represent the marginal product functions for K and L. Differentiating these functions
a second time we get
∂2Q/∂K2 = −6K−1.6 L0.3
∂2Q/∂L2 = −5.25K0.4 L−1.7
These second-order partial derivatives represent the rate of change of the marginal product
functions. In this example we can see that the slope of MPL (i.e. ∂2Q/∂L2) will always be
negative (assuming positive values of K and L) and as L increases, ceteris paribus, the absolute
value of this slope diminishes. We can also find the rate of change of ∂Q/∂K with respect to
changes in L and the rate of change of ∂Q/∂L with respect to K. These will be

∂Q/∂K∂L = 3K−0.6L−0.7
∂Q/∂L∂K = 3K−0.6L−0.7
and are known as ‘cross partial derivatives’. They show how the rate of change of Q with respect
to one input alters when the other input changes. In this example, the cross partial derivative
∂Q/∂L∂K tells us that the rate of change of MPL with respect to changes in K will be positive and
will fall in value as K increases.

2.2. Total differentials

If the changes in variables x and y become infinitesimally small then even for non-linear
functions

These infinitesimally small changes in x and y are known as ‘differentials’. When y is a function
of more than one independent variable, e.g. y = f(x, z), and there are infinitesimally small
changes in all variables, then the total effect will be

This is known as the ‘total differential’ as it shows the total effect on y of changes in all
independent variables. It is usual to write dy, dx, dz etc. to represent infinitesimally small
changes instead of ∆y, ∆x, ∆z, which usually represent small, but finite, change. Thus,

Example: What is the total differential of y = 6x2 + 8z2 − 0.3xz?

Solution: The total differential is

= (12x − 0.3z)dx + (16z − 0.3x)dz

3. Derivatives of implicit functions

Implicit functions are those functions whose dependent and independent variables are not
explicitly stated. That is, we don’t know whether a given variable is a cause or an effect variable
without any a priori information when we encounter implicit functions. When the dependent and
dy
independent variables are not explicitly stated, one may not easily come up with dx . But using
dy
implicit differentiation one can calculate dx .
Generalized Steps for solving derivates of implicit functions
  Treat y as a function of x and differentiate each term of the equation with respect to x
dy
 Put all terms containing the factor on one side of the equation and the rest of the terms
dx
on the other side.
dy
 Factor out from all terms that contain it
dx
dy
 Solve the equation for
dx
dy
Example: Calculate , given 3 xy− y =2
dx
d d
Solution:
dx
[ ( 3 xy− y ) ] = [2]
dx

3 d (xy) dy
− =0
dx dx
dy d (xy )
=3
dx dx
dy dy dx
=3. x +3 y … Applying product rule
dx dx dx

dy dy 2
−3 x =3 y , since 3 xy− y =2 , y =
dx dx 3 x−1

dy
=
3y
=
2
[−3
dx 1−3 x 3 x−1 3 x−1
= ][ −6
(3 x−1)
2 ][ ]
dy
Example: Calculate , given 3 xy−x=2
dx
d d
Solution:
dx
[ ( 3 xy ) ]= dx [x +2]

dy dx
3(x + y )=1
dx dx
dy 1
x + y=
dx 3
dy 1
x = −y
dx 3
dy 1 y dy 1−3 y
= −
dx 3 x x = dx
=
3 x , you can replace y by its value if you want.
Exercises
1. Find the slope of the line tangent to the circle
 at the point ( √ 2 , √ 2)
dy
2. Use implicit differentiation to find , given that x3 + 4xy2 -7 = y3.
dx

4. Economic Application of Multivariate Calculus

4.1. Production function
In production theory, the slope of an isoquant represents the marginal rate of technical
substitution (MRTS) between two inputs. The use of the total differential can help demonstrate
that the MRTS will equal the ratio of the marginal products of the two inputs. In introductory
economics texts the MRTS of K for L (usually written as MRTSKL) is usually defined as the
amount of K that would be needed to compensate for the loss of one unit of L so that the
production level remains unchanged.

For infinitesimally small changes in K and L the MRTS KL measures the rate at which K needs to
be substituted for L to keep output unchanged, i.e. it is equal to the negative of the slope of the
isoquant at the point corresponding to the given values of K and L, when K is measured on the
vertical axis and L on the horizontal axis. For any given output level, K is effectively a function
of L (and vice versa) and so, moving along an isoquant,

For the production function Q = f(K, L), the total differential is

If we are looking at a movement along the same isoquant then output is unchanged and so dQ is
zero and thus,

We already know that ∂Q/∂L and ∂Q/∂K represent the marginal products of K and L.
Example: A firm faces the production function Q = 12K0.4L0.4 and can buy the inputs K and L at
prices per unit of £40 and £5 respectively. If it has a budget of £800 what combination of K and
L should it use in order to produce the maximum possible output?

Solution: The problem is to maximize the function Q = 12K0.4L0.4 subject to the budget constraint

The theory of the firm tells us that a firm is optimally allocating a fixed budget if the last Birr 1
spent on each input adds the same amount to output, i.e. marginal product over price should be
equal for all inputs. This optimization condition can be written as

The marginal products can be determined by partial differentiation:

Substituting (3) and (4) and the given prices for PK and PL into (2)

Dividing both sides by 4.8 and multiplying by 40 gives

Multiplying both sides by K0.6L0.6 gives

Substituting (5) for L into the budget constraint (1) gives

Thus the optimal value of K is K = 10 and, from (5), the optimal value of L is L = 80
4.2. Utility Function

Suppose that an individual has a utility function of the form

Utility = U(x,y)
The total differential of U is
∂U ∂U
du= dx + dy
∂x ∂y
Along any indifference curve, utility is constant (dU = 0), Therefore, we get:
∂U
−dy ∂ x MU x
MRS= = =
dx ∂ U MU y
∂y