MATHEMATICS

FOR BUSINESS
Chapter 5
Partial Differentiation
Outlines

● Functions of several variables

● Partial elasticity and marginal functions
● Unconstrained optimization
● Constrained optimization
● Lagrange multipliers
 5.1 Partial Differentiation
z = f(x; y)
o x; y : independent variables
o z : dependent variable
 Firsr-order derivative:
fx or differentiate z with respect to x,
with y held constant.

fy or differentiate z with respect to y,

with x held constant.
 Second-order derivative:

• fxx or differentiate twice with respect to x

• fyy or differentiate twice with respect to y
• fxy or differentiate first with respect to y and then with
respect to x
• fyx or differentiate first with respect to x and then with
respect to y
Example

z = f(x;y) = x6y2 + 5y3

+ fx = = 6x5y2 fxx = = 30x4y2

+ fy = = 2x6y + 15y2 fyy = = 2x6 + 30y

+ fxy = = 12x5y fyx = = 12x5y

 = or fxy = fyx
 z = f(x;y)
● if x changes by a small amount Δx and y is held fixed then the corresponding
change in z:
z x
● if y changes by Δy and x is fixed then z changes by:
z y
● If x and z change simultaneously:
z x+ y
 This is the small increments formula

 Implicit differentiation
If f(x;y) = constant then =
 Example Solution
x = 1.1 – 1 = 0.1
Use the small increments y = -0.5 – 0 = -0.5
formula to estimate the = 2xy4 – 6x5
change in = 4x2y3 + 4
z = x2y4 – x6 + 4y At x = 1 and y = 0:
When x increases from 1 to 1.1 = 2x1x04 – 6x15 = -6
and y decreases from 0 to −0.5. = 4x12x03 + 4 = 4
 z x + y = (-6)x0.1 + 4x(-0.5)
= -2.6
 5.2 Partial elasticity and marginal
functions
5.2.1 Elasticity of demand
Q = f(P,PA,Y)
Price elasticity of demand Cross-price elasticity of demand Income elasticity of demand

Formula EP = = EY =
= x = x = x

< 1 : inelastic < 0 : complementary goods EY < 0 : inferior goods

= 1 : unit elastic > 0 : substitute goods EY > 0 : normal goods
> 1 : elastic EY > 1 : superior goods
 Solution
Example
Q = 200 – 2x10 – 15 + 0.1x100 2 = 1165
Given the demand function: a/ - -2
Q = 200 − 2P – PA + 0.1Y2 EP = x = x (-2) = -
where P = 10, PA = 15 and Y = 100, find
(a) the price elasticity of demand b/ = -1
(b) the cross-price elasticity of demand = x = x (-1) = -
(c) the income elasticity of demand.
c/ = 0.2Y = 0.2x100 = 20
EY = x = x 20 =
5.2.2 Utility

• Utility: The satisfaction gained from the consumption of a good.

• Suppose that there are two goods, G1 and G2, and that the consumer buys x1 items of G1
and x2 items of G2.
U = U(x1; x2)

• Indifference map: A diagram showing the graphs of a set of indifference curves. The
further the curve is from the origin, the greater the level of utility.

• Indifference curves: A curve indicating all combinations of two goods which give the
same level of utility.
• If xi changes by a small amount Δxi and the other variable is held fixed
then the change in U
U = xi
• Marginal utility of xi :
 give the rate of change of U with respect to xi
• If x1 and x2 both change:
U = x1 + x2
• Law of diminishing marginal utility: The law which states that the
increase in utility due to the consumption of an additional good will
eventually decline.
<0
• Marginal rate of commodity substitution (MRCS): the increase in x2
necessary to maintain a constant value of utility when x 1 decreases by 1
unit.
MRCS = - =
 Example Solution
Given the utility function:
U = x11/2x21/3 = x1-1/2x21/3  =
determine the value of the marginal = x11/2x2-2/3  =
utilities The change in utility:
and a/ U = x1 + x2 = x1 + x1 =
at the point (25, 8). Hence
(a) Estimate the change in utility when x 1 b/ MRCS = = : =
and x2 both increase by 1 unit
(b) Find the marginal rate of commodity
substitution at this point.
 5.2.3 Production

Q = f(K; L)
• Marginal product of capital: MPK =
 If capital changes by a small amount ΔK , with labour held constant:
ΔQ ≅ ΔK
• Marginal product of labour: MPL =
 If labour changes by a small amount ΔL , with capital held constant:
ΔQ ≅ ΔL
• If K and L both change simultaneously:
ΔQ ≅ ΔK + ΔL
• Marginal rate of technical substitution(MRTS): The amount by which capital needs to
rise to maintain a constant level of output when labour decreases by 1 unit
MRTS = =
 5.4 Unconstrained
Optimisation  z = f(x; y)
• Step 1
Find fx , fy , fxx , fyy , fxy
 How to find and classify stationary
points of functions of two variable? • Step 2
Solve the simultaneous equations to find
stationary points, (a,b).
fx = 0
fy = 0

• Step 3: If
+ fxx > 0, fyy > 0 and fxxfyy – fxy2 > 0 at (a,b)
 the function has a minimum at (a,b)
+ fxx < 0, fyy < 0 and fxxfyy – fxy2> 0 at (a ,b)
 the function has a maximum at (a,b)
+ fxxfyy – fxy2 < 0 at (a,b)
 9TH GRADE

Example Solution
fx = 4x -12
fy = 2y - 8
Find x and y that minimise value of fxx = 4 ; fyy = 2 ; fxy = 0
the function: We have : fx = 0
z = 2x2 + y2 – 12x - 8y + 50
fy = 0
 4x - 12=0 and 2y – 8 = 0
 x = 3 and y = 4
fxxfyy – fxy2 = 4x2 – 02 = 8 >0
Because fxx >0; fyy >0 and fxxfyy – fxy2 >0, the
function has a minimum at (3;4)
5.5 Constrained Optimisation
 Optimise z = f(x,y) subject to (x,y) = M

Step 1
Use the constraint (x,y) = M to The substitution
express y in terms of x
method

Step 2 Step 3
Substitute this expression for y Use the theory of stationary
into the objective function z = points of functions of one
f(x,y) variable to optimise z
 Example Solution
y – x2 = 2  y = x2 + 2 (1)
Substituting y = x2 + 2 into z :
Find the maximum value of z = 6x – 3x2 + 2(x2 + 2 )
z = 6x − 3x2 + 2y = 6x – 3x2 + 2x2 + 4 = -x2 + 6x + 4
subject to the constraint
y – x2 = 2 z’ = -2x + 6
We have : z’ = 0  -2x + 6 = 0  x = 3
Substituting x = 3 into (1):
y = 32 + 2 = 11
The maximum value of z:
z = 6x3 – 3x32 + 2x11 = 13
 Optimise z = f(x,y) subject to (x,y) = M

Step 1
Define a new function: Lagrange
g(x, y, λ) = f(x, y) + λ[M − (x, y)]
multipliers

Step 2 Step 3
Solve the simultaneous
Substitute values for x and y to
equations:
find optimal value of z
=0; =0; =0

 Note: the value of λ gives the approximate change in the

optimal value of f due to a 1 unit increase in M
 Example Solution

g(x, y, λ) = x + 2xy + λ[5 − x – 2y]

Use Lagrange multipliers to find the = 1 + 2y – λ = 0
maximum value of = 2x - 2λ = 0
z = x + 2xy = 5 – x – 2y = 0
subject to the constraint  x=3;y=1;λ=3
x + 2y = 5 The maximum value of z:
z = 3 + 2x3x1 = 9