Applied Calculus

for business students

Srinivasan Nenmeli -K

NKS-applied calculus 1
 What are Functions?
y= function of x
❖ Functions are the raw materials for
Calculus
❖ A function is an "input-output' relation

❖ Write y = function of x or y= f(x)

❖ x the input,y the output

❖ For every input,there is only one output

in most cases
❖ Function is mapping x space to y space.
NKS-applied calculus 2
 Simple functions

1 y= constant = c example: y= 3.0

2 y= mx where m is a constant
Here this is a straight line passing through
the origin. When x= 0 , y=0.
Example: Revenue R = 4 (number sold)=
4x $;
x is the quantity sold at $4 each unit
3 Combine both functions 1 and 2 given
above: NKS-applied calculus 3
 Linear Equations
1 Straight line equations : y = mx+c
2 Here m is the slope, c is the y-intercept
3 This is the most useful equation of all.
Example: John runs a bakery in his garage.The
initial cost [ovens,mixers,trays] is $300.The cost
for making each cake is $1.5
What is the Cost Equation?
4 Total cost TC=fixed cost + variable cost
TC = 300 + 1.5 Q where Q is the quantity of
cakes made.
5 Is this a straight line equation? y= mx+c ?
what
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 Examples of linear equations

1. Revenue R = price x quantity ;If price is

constant, R (Q)= p Q
2. The demand for an item Q,in
general,decreases with increasing
price.The "demand equation":
Q=a-bp where p is
the price
3. John employs four persons with total
wages $500 per day.They make n cakes
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 Rational expressions

1 We get x values in the denominator

too.--called 'Rational expressions'
2 The total cost for John:
TC = 500 + 2 Q per day to produce Q
number of cakes. $500 is the labor cost.
3 What is the cost for making one cake at
this production level?
4 Average cost = total cost/Q
Avcost = 500/Q + 2
This is not a straight line equation! Watch
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 Average Cost

Av-cost = 500/Q +2
Find the average cost for 500 cakes per
day and 1000 cakes per day.
Q = 500 -----> av-cost = 500/500 +2
=3$
Q= 1000 -----> av-cost = 500/1000 +2 =
2$
When Q increases, av-cost decreases.
Plot avcost versus Q. What do you find?
NKS-applied calculus 7
 Combined Expression

A function with rational term and linear term is:

y= f(x) = a/x + b x + c
Example: Joseph finds that his truck is getting old.The
capital cost of the truck decreases each year:
CC=40000/x where x is the year of usage.
The operating and maintenace cost keeps increasing:
O&M cost = 5000x
Fixed cost=insurance and so on =2000$
The total cost = TC = 40000/x +5000x +2000
Plot this curve
This equation has a minimum at x= 2.8 years.
Would you replace the truck by a new one at 2.9
years? NKS-applied calculus 8
 Quadratic Equation
Add an x.x {x squared term} to a linear
equation.
y= axx + b x + c
They are shaped as parabolas.
Parabolas have maximum or minimum points.!
Example 1: Revenue R = price x quantity sold
= pQ
Using Demand equation: p = c - d Q
R = p Q = (c-dQ)Q= cQ - dQ.Q
This Revenue Equation is quadratic.
Example 2 : Cost to produce Q units of any
item decreases with increasing Q.Larger the
NKS-applied calculus 9
 Use of differential calculus
A common use is to find the max or min points.
revenue equation: R = cQ - dQQ
Find when this is maximum.
dR/dQ = c - 2dQ [see the differentiation
rules -slide no:30]
Let dR/dQ =0 -----> Q* = c/2d
Max revenue R* = cQ* - dQ*Q*
Example: The revenue equation for cakes is:
[price p = 4 - 0.01Q ]
Revenue= pQ= 4Q -0.01QQ
Here c= 4, d=0.01
Q*=c/2d=4/0.02=200
NKS-applied calculus 10
 The Profit Equation
What is profit? Profit = Revenue - Cost
For John making and selling cakes:
revenue equation is: R= 4 Q -0.01QQ
His cost equation: C = 100 + 0.2 Q
Profit equation becomes:
Profit = Pr = R - C= -100+(4-0.2)Q-0.01QQ
This is also a quadratic equation.The max profit is
found as before:
d (Pr)/dQ = 3.8 - 0.02Q =0
Q*= 3.8/0.02=190 cakes.
Max profit = -100 + 3.8x190 -0.01(190)(190)
=-100 + 722-361= 261$
NKS-applied calculus 11

Is it okay to conclude that greater the production,you

 Break-even point

profit = revenue - cost

profit =0 ------>when revenue = cost
Find the quantity sold for zero profit---> break-even point
Example: Linda's 'Home Bakers' bakery sells each cake for $3
to the local store.If Q cakes are sold so far, revenue R = 3Q
The cost of making cakes is given by the cost equation:
cost = fixed cost + variable cost per cake x Q
Fixed cost per month =500$ [rent, power,equipment cost etc]
variable cost = $1.25 [fluor,sugar,mixer power,oven
power,labor]
Cost C = 500 + 1.25 Q
What is the break even point Q*?
Let R = C and solve for Q
3Q* = 500 + 1.25Q*
3Q* - 1.25Q*NKS-applied
= 500calculus 12

Q*=500/(3-1.25)=500/1.75 = 286 cakes.

 Marginal Costing

Linda is producing cakes for local store at the rate of 200 cakes
per day.Her cost equation is:
C = 300 - 0.5 Q + 0.01Q.Q
Suppose her demand increases to 250 cakes per day.What
would be the additional cost for the 50 cakes at her current
level of production.
The marginal cost is the change in cost for unit increase or one
cake at that level.
Differentiate first: dC/dQ= -0.5 + 0.02Q
For one cake , dC/dQ = -0.5+0.02 (200) = -0.5 +4 = 3.5$
For making 50 more cakes, she has to spend : 3.5x 50 = 165 $
If Linda sells the cakes at $5, she gets a revenue of 5x50 =250
$ ;she gets a profit of 250-165= 85 $
Note that average cost of making donuts at the level of 200 per
day: NKS-applied calculus 13

Av-cost= 300/200 -0.5 +0.01(200) = 1.5 -0.5 +2 = $3

 Exponential Function
This function is an extension of the compound interest
formula.---useful for rapid growth or rapid decay of
anything.
The growth in sales of mobile phones in the past few
years is found to be:
t =0 [say 2002] sales s=0.2 million
t=2 2004 s= 0.4 million
t =4 2006 s= 0.8 million
t =6 2008 s = 1.6 million
What pattern you find in this data?
Every two years, the sales in doubling!
Doubling time=2 years.
This is a case of exponential growth: S= 0.2exp(rt)
NKS-applied calculus 14
Here r= 0.347 [exp] stands for a strange
 Exponential Function

The number of houses built in Sonoma county was 10000 in

theyear 2000. Take 2000 as t=0.The number of houses built in
2003 was 14000.If the growth is exponential,what is the
exponential function for the housing growth?
y(t) = y(0) exp (kt)
y(0) = 10000
To find k, y(3) = 14000=10000exp(k.3)
exp(3k) = 14/10=1.4
Take logarithms both sides: 3k = ln (1.4)=0.336
k =0.112
y(t) = 10000 exp(0.112t)
What is the doubling time,t* : t* = ln2/k =0.693/0.112=6.19
years.
What would be the numberNKS-applied
of newly built houses in 2006?
calculus 15
Using the doubling time: 2000+6.19 years=2006.19
 Exponential Drop

Many variables decrease rapidly.--use exponential drop

equations:
y(t) = y(0)exp(-kt) Note the (-kt) in the exponential function.
Example: A text book has market value of $100 in the year of
publication.Let that year be t=0.
Amanda, a bookstore manager learns that the value y(t)
decreases rapidly and follows the equation:
y(t) = y(0)exp(-t) where t is the year.
Find its value after 1 year, after 2years, after 3 years.
y(1) =100 exp(-1) = 100/e = 100/2.72=36.8$
y(2) = 100exp(-2) = 100/(2.72^2)=13.53$
y(3) = 100exp(-3) = 100/ (2.72)^3 =4.97$
Note the rapid drop in market value of the book in 3 years.!
Like doubling time,for exponential drop or decay, we use 'Half
NKS-applied calculus 16
life'-the time for the original value to drop by 50%
 Exponential Drop

Linda, the advertising executive for Skonda motor

bikes find that the present sales figure of 50 million$
will drop if advertising is totally stopped for next three
months according to this model:
Sales S(t) = S(0)exp(-1.5t) where t is time in years.
Find the predicted sales after two quarters: t=0.5
years
S(t) = 50 (exp ( -1.5x0.5)= 50 exp( -.75)=
Using the calculator: exp(0.75)=2.12
exp(-.75) = 1/2.12=0.472
S(1/2) = 50 x 0.472 =23.62 million.
The sales has droppedNKS-applied
by almost
calculus
50%. 17
What is the half life for sales? Half-life =
 Limited Growth

Many growth processes do not grow indefinitely.Soon the

growth rate falls and the growth comes to a stop--mainly due to
limited resources.
1Population growth may get slowed due to lack of food or
space or epidemics or wars.[as Malthus discussed.]
2Markets reach a saturation value because potential buyers
have already bought the item.
Here we use the exponential function in a modified way:
y(t) = a [1- exp(-kt)]
At t=0, exp(-kt) =exp(0)=1 y(t)=0
y increases gradually; when t is large, exp(-kt) goes to 0;
y(t) approaches 'a', the saturation value.
Example: From experience, a sales manager estimates that
there are 40000 customers in Santa Clara county for large
fridges.The market share of his company
NKS-applied calculus nationwide is 70%.So18
he hopes to sell 28000 units there.If the growth rate k=0.12,find
 Limited Growth -2

y(t) = 28000 [ 1- exp( -0.12 t)]

To find the time when y= 14000,
14 = 28[ 1-exp(-.12t)]
1-exp(-.12t)= 0.5
exp(-.12t)=0.5
Taking log both sides: -0.12t = ln(0.5)=-0.693
t = 5.8 years

NKS-applied calculus 19
 Logarithmic Function

This function is the inverse function of exponential

function:
If y=exp(x) then ln y = x.
While exponential is useful for rapid growth, log
function is useful for slow growth.
Linda is a training manager at Toy-train works.Inc and
finds that the productivity of new employees
increases with training period for x hours following
this equation:
prod p(x) = a + b ln(x)=2.0 + 1.5 ln (x)
Find the productivity figures for: no training,for 10
hours and 20 hours of training:
x=0 p(x) =2.0 NKS-applied calculus 20
 Other Simple Functions

y(t) = a + b sqroot(t)
y(t) = a/t + bt
y(t)= at/(t+b)
Example: The cost of transportation of corn flakes is
given by :c1=8000/x where x is the number of
containers used;cost of storing goes linearly with
number of containers: c2=200x
Find the number of containers for minimum total cost:
TC= 8000/x +200x
Differentiate: d(TC)/dx= -8000/x.x +200
Set to zero: -8000 + 200xx =0
x.x=40
NKS-applied calculus 21
x=6.3 0r just 6 containers
 What is differentiation?

Differentiation is a process of finding the

instantaneous rate of change of y for a
small change of x at given value of x.
The number of bacterias in a broth is
given by : y= 5 t.t where t is in minutes
Find the rate of change at t= 10 minutes.
Using the formula: dy/dt = 5 (2t) = 10 t
Instantanous change at 10 minutes :
dy/dt at t=10 mins =10x 10 =100 bacterias
per minute.That is the growth rate at 10
NKS-applied calculus 22
 Finding the maximum revenue

The revenue function for selling cakes is given by:

R = price x quantity = p Q The price varies with quantity
sold:
p = 4 - 0.01Q for the quantity between min order of
100 cakes and max order of 250 cakes.
For 100 cakes, price = 4 - 0.01 x 100= 4-1 =3$
For 200 cakes ,price = 4-0.01x 200= 2$ and so on.
Revenue R = pQ = (4-0.01Q)Q= 4Q-0.01Q.Q

To find max revenue: differentiate R with respect to Q,the

quantity sold. dR/dQ =4 -0.02Q
Set dR/dQ=0 to get the quantity for max revenue.
4 - 0.02Q*=0 ------> Q*=4/0.02 = 200 cakes.
Max revenue: R* = 4 x200 - 0.01 (200)(200)= 400$
To check whether this is maximum: take two values of Q higher23
NKS-applied calculus

and lower than Q* and find R:

 Finding the minimum cost

The cost function in simplest form:

Total cost = fixed cost + variable cost
= a + b Q where q is the quantity produced.
To this we add one more term cQQ which includes a slight
increase in cost at higher quantities.[Q is in thousands of
cakes,, C is also in 1000$]
Example: C= 4 -0.01Q + 0.0005Q.Q
for making cakes in large quantities.
Find the minimum cost with Q* the optimal quantity.
Differentiate: dC/dQ = -0.01 +0.0005(2Q) = -0.01 + 0.001Q
Q = 10 or 10000 cakes..
The min cost : C* = 4 - 0.01x10 + 0.0005(100)= 4 - 0.10+.05
C*= 4.04 x 1000$
NKS-applied calculus 24
 Logistic Growth Curve

New activities and businesses grow slowly at first

,then become rapid,later grow slowly and come to
zero growth.Suppose you analyse the sale of mobile
phones in a region : S(t) = a/ ( 1+ b exp(-ct)) where t is
in months.
We have used the exponential function exp(-ct) which
is placed in the denominator.
This function is called Logistic curve or sigmoidal
curve.
After a long time ,exp(-ct) goes to zero, S(t) reaches
'a' ,the saturation value. The market is then
saturated.Still sales continue at 'a' mobile phones per 25
NKS-applied calculus
month--a constant. The sales rate goes to zero.
 Integrating Profit

If you plot profit versus time,the curve will be rarely

smooth.The curve will be zig-zag.We can use
functions to smoothen it and then integrate over some
time-period.
Mr Chou Chan found that his chip manufacture
showed a steady increase in revenue from 2000 to
2005,with the equation: R(t) = 15 + 0.23 t where t is
the time.[take t=0 for 2000 and t=5 for 2005]
During the same period ,the cost of making chips also
went up: C(t) = 6 + 0.05 t
Find the total profit over the period.
Profit = P(t) =NKS-applied
R(t) calculus
- C(t) =15 -6 + (.23 - 26
0.05)t
 Using the integrals

Example: An oil well produces 50 x1000 barrels

of oil in the beginning [t=0] and then the
pumping rate decreases as follows:
pumping rate=p'=dp/dt = 50 -4t
where t is in years.
Using integration find the total production over
15 years.
Integ {p'dt} from 1 to 15.
p = 50 t - 4t^2/2 = 50t -2t^2
Substituting t=15,we get: p =50x15 - 2 (15)(15)
p = 750 -450 = 300 [x1000] barrels
NKS-applied calculus 27
 Integration-Finding the Average

Suppose you have a zig-zag function.How do you find the

average value of the function?
Find the area under the curve between limits x=a and x=b and
then divide by the interval d=b-a.
To find the area,integrate the function from a [the lower limit] to
b
[the upper limit.]
Example: The inventory of motor bikes of a particular model
has been varying over 12 month period according to the
function:
y(t) = 4+2.4 t +3t.t
Find the average inventory between months t=3 to t=6.
Integ{y(t)} = 4t +2.4t^2/2+3t^3/3
= 4t + 1.2t.t + NKS-applied
t^3 calculus 28
Integ{6} = 24 +7.2 +216=247.2
 Useful Life

The useful life or a product line or a mine is reached

when the rate of revenue =rate of cost as a function of
time:
R' = dr/dt = C'=dc/dt
Example:A copper mine was operated for a few years.
R'=20exp(-0.1t) C'= 4 [value in millions of $]
Equating the two, we get: exp(-.1t)=4/20= 0.25
taking logarithms: -0.1t = ln(.25)=-1.39
t= 13.9 or nearly 14 years.
Note: A wise manager will shut down the mine after
14 years.
Find the total profit from the mine over 14 years.
NKS-applied calculus 29
Integ{[R'-C']dt=integ{20exp(-0.1t)-4}=-200exp(-.1t)-4t
 A short table of differentiation rules

Function y = f(x) dy/dx =y'(x)

y= constant y' (x) =0

y =x --------------> y'(x) =1

y=x^2------------> y'(x) = 2x
y=x ^3-----------> y'(x) =3x^2
y=x^n -----------> y'(x) = nx^(n-1)

y= exp(x) ---------- y' = exp(x)

> y' = 1/x
y= ln
(x)--------------> y' = - 1/x.x

y=1/x y' = (1/2)1/sqroot(x)

NKS-applied calculus 30
--------------->
 Functions of two variables

Consider a function z which is a function of two

variables: x and y.
z=f(x,y)
Example: Volume of a right circular cylinder V =
pi(r^2).h
V (r,h) = (pi r^2).h
V is a function of two variables ,radius r and height,h
Example : The production function of a petroleum
plant is a function of utilization of capital (x) and
utilization of labor (y).
A well-known model,called "Cobb-Douglas model"
applied here: production = z=f(x,y) = 20 [x^0.4][y^0.6]31
NKS-applied calculus
If x= 1200 units and y=2000 units, the production=
 Partial Derivatives
you are given the function : z = f(x,y)
Differentiate z with respect to x, keeping y constant:
f'(x)
Differentiate z with respect to y,keeping x constant:
f'(y)
These are called partial derivatives.
f'(x) gives the rate of change of z for small changes in
x, at some level of x and y.
Take again: V(r,h) = pi (r.r)h
v'(r) = pi (2r)h = 2 pi rh
v'(h) = pi (r.r)1=pi(r.r)
Example: For Cobb-Douglas model for production
function:
z= 20(x^0.4)(y^0.6), find the partial derivatives:
NKS-applied calculus 32
 Contact me:

Srinivasan Nenmeli-K Ph D
(Columbia)
Palo Alto CA 94303
email: nksrinivasan at hotmail dot
com
Mail your feedback and requests for
any specific tutorial
presentations/publishing interests
NKS-applied calculus 33