Chapter One

Review of Basic Concepts

1.1. Aims and objectives

After completing this chapter students will be able to

- recall the definition and geometric interpretation of derivative

- use the different rules of differentiation to find the derivative of different types of
functions
- apply the concept of derivative in economic applications
- apply the techniques they learn in solving optimization problems in economics
- Recall the antiderivative of a function.
- explain the different rules of integration.
- Apply the concept of integral calculus in solving economic problems.
- recall the concept of matrix and basic matrix manipulation;

Introduction
this chapter is concerned with revising the basic concepts related with quantitative methods
in economics. These concepts are discussed in detail in quantitative method for economists
I&II courses. So, the discussions in this chapter will be very brief.

1.1 The concept of calculus.

Definition: calculus, in simple terms, in a mathematical technique which is used to deal with
change, motion and growth. It is a result of great advancement in the area of mathematics which
is used to solve mathematical problems that can’t be solved using ordinary methods. In
economics, it is frequently used to solve static and dynamic economic problem. Differential
calculus, which indicates the rate of change of the dependent variable with respect to the
independent variable, is used in static economic analysis; On the other hand, Integral calculus,
difference equation & differential equation are use in dealing with dynamic economic problems.
These applications are dealt with in a separate chapter but for this section you will be reminded
about only the basic concepts which you have dealt with your Quantitative methods course.
 1.1.1 Differential calculus
1. Derivatives

Given a function y=f ( x ) , the derivative of f ( x ) at any point ‘x’ is given by

dy f ( x+ Δx )−f ( x ) '
=ℓ im =f ( x ) :
dx Δx →0 Δx if this limit exists then f ( x ) is said to be differentiable
function at ‘x’.
f ( x+ Δx )−f ( x )
,
The term Δx is simply slope of the functions which is an equivalent
Δy
,
expression to Δx and it represents average rate of change of a function .But the derivative
approximates the rate of change of the positive function when Δx is infinitesimal i.e. slope of
a function at a point or instantaneous rate of change.
2
Example: find the derivative of f (x )=x
2
Solution: f ( x +Δx ) =( x+ Δx ) =f ( x+ h ) →subsituting . Δx=h
2
f ( x )=x
df ( x ) f ( x + λ )−f ( x )
=f ( x )=ℓ im =ℓ im 2 x+ h=2 x
dx h→0 h h→

Differentiability and continuity

It the derivative of a function, say f ( x ) , exists at point ‘c’ then f ( x ) is said to be

differentiable at ‘c’.

To say a function f ( x ) is differentiable at ‘c’ the following conditions should be fulfilled

1. f ( x ) should be continuous at ‘c’

2. f ( x ) should have a unique (only one ) slope at ‘c’

The 1st condition requires the fulfillment of continuity conditions i.e.
ℓ im f ( x )∧ℓ im f ( x )
1. x → c+ x→c − should exist
ℓ im f ( x )=ℓ im f ( x )= ℓ im f ( x )
2. x → c+ x →c − x →c

ℓ im f ( x )=f ( c )
3. x →c
From this we can understand that continuity doesn’t necessarily mean differentiability.
Continuality rules out jumps and gaps at a point while differentiability condition requires
smoothness of the curve at the given point in addition to continuity conditions. In other
words, differentiability rules out jumps, gaps, sharps & cusp corners, while continuity rules
out only the first two

Example show the function f ( x )=|x−2| is not differentiable at x = 2.

Steps 1 Testing continuity of the function
ℓ im|x−2|=0
1. x → 2+

ℓ im|x−2|=0
2. x → 2+

ℓ im f ( x )=f ( 2 )=0 . ,
3. x →2 so, f ( x ) is continuous at x=2
Step 2 in this step we will see weather the limit of the difference quotient exist or not.

Since f ( x ) is an absolute value functions, it can be redefined as follows:

f ( x )= {
x−2 , for . x≥
2−x , for . x<2
To see the existence of the limit of the difference quotient, we find its left & right side
limits .i.e.
f ( x +h )−f ( x ) ( ( x+ h )−2 ) ( x−2 )
ℓ im =ℓ im =1
h→0 + h h→ 0
+ h

From the above result, we can see that the left & right side limits are not equal. There fore
the limit of the difference quotient doesn’t exist which intern means that the function

f (x )=|x−2| is not differentiable at x=2.

Rules of differentiation
1) Constant function rule

Given f ( x )=k , where K is a constant,

f ' ( x )=0
2) Power function rule
2
f ( x )=x
' 1−1
f ( x )=nx
Rules of differentiation involving two or more functions of the some variables
3) Sum/ difference Rule

Given f (x ) and g( x)
d
( f ( x )±g( x ))=f ' ( x )±g' ( x )
dx
4) Product Rule :

If f (x ) & g( x) are differentiable; then

d [ f ( x ). g( x ) ] ' '
=f ( x )g ( x )+ f ( x )g( x )
dx

Corollary:- Given φ( x)=f ( x ).g ( x),h ( x)

' ' '
φ ( x )= f ( x ) . g ( x ) h ( x )+f ( x ) g ( x ) h ( x ) +f ( x ) g ( x ) h ( x )
'

Note that the above corollary is a direct extension of the product rule of differentiation.
The rule follows the same pattern for any number of functions and it can be proved using
the same rule.
Example: Given AR = 25 –Q2, find MR?
Dear distance learners, we think you know from preceding economics courses about the
relation ship between the marginal, average and total revenue functions. If you have
forgot the relation ships please revise your micro economics module. The solution for the
above problem can be found by using the relation ship between the marginal, average and
total revenue functions
TR dTR dAR .Q
AR= ⇒ AR. Q MR= ⇒
Q , dQ dQ using the product rule of differentiation we
get
 dAR dQ
MR= Q+ AR
dQ dQ
d ( 25−Q ) Q
2
+ ( 25−Q )
2
=
dQ
¿−2Q2 +25−Q2
¿ 25−3 Q2

5) Quotient Rule

Given f (x ) and g( x) , where g ( x ) ≠0

d
[ f ( x)
g( x ) ] = ' '
f ( x ) g ( x )−f ( x ) g ( x )
dx [ g ( x )]
2

2
ax +b
f (x )= , '
Eg. Given cx find f ( x )?
2
Since f (x ) is a quotient of two functions, let g( x )=ax +b and h( x )=cx .
g(x) g ' h−h ' g
⇒ f ( x )= ⇔ f ' ( x )= 2
h( x ) g
g ' ( x )=2 ax , h ' ( x )=c
2 ax . cx−c ( ax 2 +b )
⇒ f ' ( x) = 2
( cx )
2
ax +b
¿ 2
cx
Rules of Differentiation Involving functions of Different Variables
6) Chain Rule ( composite function rule)

Given Z =f ( y ), and y=g( x )

dz dz dy
= .
dx dy dx
10 dz
Z =( x 2 +3 x−2 ) , find . ?
Eg. Given dx
2 10
Solution: let y=x +3 x−2 then Z =( y )
 dz dz dy dy
= =10 y 9
dx dy dx dx
9
¿ 10 y ( 2 x +3 )
¿ 10 ( x2 +3 x−2 ) ( 2 x +3 )
7) Inverse function Rule

Given y=f ( x)
dx 1
=
dy dy
dx
y−1 dy
x= , ?
Eg. Given y+1 find dx
dx ( y +1 )− ( y−1 ) 2
= =
dy ( y +1 )2 ( y +1 )2
dy 1
=
dx dx
Using inverse function rule, dy

=
[ ]
( y +1 )2
2
Example : find the derivatives of the following functions.
3 2
i) f (x )=3 x +4 x −3 x +2 Using rules (1), (2) and 3 above
' 3−1 2−1 1−1
f ( x )=3 ( 3 ) x +4 ( 2 ) x −3 ( 1 ) x +0
2
=9 x +8 x−3
6
ii) ( 2 x+1 ) Here the function is a composite function where the outer function is power
function.
g( x )=2 x +1
6
f (x )=x
6
f ( g ( x ) )=( 2 x+1 )
df ( g ( x ) ) ' 5 5
=f ( g ( x ) ) . g ( x )=6 (2 x +1 ) .2=12 ( 2 x +1 )
'
dx
 1
3 x+1 ' ( x 2 −3 x ) ( 3 x +1 )1− (3 x +1 ) ( x2 −3 x )
g (x ) 2 ⇒ g (x )=
iii) x −3 x ( x 2−3 x )2
3 x ( x 2 −3 x ) −( 3 x+1 ) ( 2 x −3 )
=
( x 2 −3 x )2
−3 x 2−2 x+3
=
( x2−3 x )2
Derivatives of Exponential and Logarithmic Functions
Before dealing with derivatives of exponential and logarithmic functions, it is important to
remind you about some special limits which you have discussed in your Quantitative Methods I.
h
α −1
ℓ im =ℓ na
1. h→ 0 h
h
e −1
ℓ im =ℓ ne=1:
2. h→ 0 h We will use these special limits in proving the derivatives of
exponential and logarithmic functions.
Derivatives of Exponential functions
x
de
=e x
1. dx
de x e x +h −e x
=ℓ im
Proof:- by definition :- dx h →0 h

e x ( eh −1 )
=ℓ im →
h→0 h factoring out ex
h
x e −1
=ℓ im e . ℓ im →
h→0 h→0 h Product rule of limits (Quant –I)
x
=e . ℓ ne
x
=e
x
da
=a x ℓ na
2. dx

da x a x+h −ax ( ah −1 ) ( a h−1 ) x

=ℓ im =ℓ im a x =ℓ imax ℓ im =a ℓ na
Proof dx h→ 0 h h→0 h h→0 h→0 h
 f (x)
da ' f (x) f (x) '
=f ( x ) .a ℓ na=a f ( x ) ℓ na=
3. dx Using composite function rule

Derivatives of Logarithmic functions

dℓ nx
=( ℓ nx )′ =1
1. dx
ℓn ( x +h ) −ℓ nx
( ℓ nx )′ =ℓ im
Proof : by definition h→0 h

=ℓ im ℓn
h→0 ( ( ))x +h
x
→
Using logarithmic properties
1
( )
=ℓ im ℓn 1+
h→0 n
h
x

=ℓ im . ℓn (1+ )−
1 x h x
→1
h→0n x x Multiplying by x

( )
x
1 h
=ℓ im ℓn 1+ h
h→0 x x

= ℓn. ℓ im ( 1+ )
x
1 h h
n x
1 1
= ℓ ne=
x x
x
dℓ og a 1
=
2. dx xℓ na

( )
′
ℓ nx ′ ℓ nx
ℓ ogax= so ( )
ℓ ogax =
Proof :- ℓ na ℓ na

( )
′
ℓ nx 1 1
= ( ℓ nx )′ .
ℓ na ℓ na Because ℓ na is constant
1 1 1 1
. = . ( ℓ nx )′ =
ℓ no x xℓ na x
Examples
 3
e−x dy
1) Given y=x , find dx
?

Solution: taking the logarithm of both sides;

3
ln y=e−x ln x Then taking the derivative of both sides, we get
y' 1 −x 3
=−3x 2 e− x ln x+ ( e )
3

y x

( 1 ( −x 3 )
)
3
y '= y −3 x 2 e−x ln x+ e
x

( 1 − x3
(e ) )
3
3
e−x 2 − x3
y '=e−x . x −3 x e ln x +
x

x dy
? x
2) Given y=x find dx → X (1+ℓ nx )
Solution

y=x x ⇒ ln y=x ln x
( ln y ) '=( x ln x ) '
y'
=ln x +1 ⇒ y '= y ( ln x+1 )
y
¿ x x ( ln x +1 )
x2 ℓn3 x dy
3) Given y=e , find dx
?

ln y=x 2 ln3 x ,
y' x2
( ln y ) '=( x ln3 x ) ' ⇒ =2 x ln 3 x+
2
y x
y'= y ( 2 x ln 3 x+x ) =xy ( 2 ln 3 x+1 )
2
=xe x ℓn3 x
( 1+2ℓn 3x )

1.1.2 Integral calculus

In elementary algebra we come across opposite algebraic operations. The opposite of addition is
subtraction and that of division is multiplication in the same way, the opposite of different in
calculus in Integration. It is also called anti differentiation, i. e. the process of finding the integral
of a function.

dF ( x )
=f ( x ) ,
If F(x) is a function such that dx then F(x) is the anti derivative (Integral) of f(x)

symbolically this represented as ∫ f ( x ) dx=F ( x ) +c where ‘c’ is a constant. This type of integral
is called indefinite integral because it represents a family of functions. If we give definite value
for ‘c’, it represents definite integral (to be discussed latter.). As opposed to definite integrals,
indefinite integrals do not possess a definite numerical value.
Rules of Integration
Since integration is the reverse process of differentiation, each rule of integration is
associated with some derivative formal.
d ( kx +c )
∫ kdx=kx+ c ⇒ dx
=k
1.
n+1
x
∫ x n dx= n+1
+c .n≠−1
2.

3. ∫ kf ( x ) dx=k ∫ f ( x ) dx
4. ∫ ( f ( x ) ±g ( x ) ) dx=∫ f ( x ) dx±∫ f ( x ) dx±∫ g ( x ) dx
nx
∫ e dx= e m+c
x
5.
mx
∫ a dx= an ℓmna +k
mx
6.
1
∫ x dx=ℓn|x|+k
7.
 Techniques of integration
Although we have seen some rules of integration, some functions are much more complex
for such functions it is difficult to know their integrals using the above rules. There are
different techniques of finding integrals of these functions. For this chapter, we will calculus
3 of them. I.e. Integration by substitution, integration by parts and integration partial fraction.
Integration by substitution
One of the methods (techniques) which are used to find integrals if complex functions is
substitution method or change of variables. This method consists of transforming the integral
and the variable of integration to some standard form say ‘u’ & ‘du’ completely eliminating
‘X’ & ‘dx’.

Illustration evaluate ∫ √x 2 x+1dx→ since the integrant is the product of two terms x √ 2x=1 .
Where x is factor of 2x+1 we can use substation.
Let U=2 x +1
du du
=2=dx=
dx 2
⇒ substituting the value of ‘U’ & du in place of 2x+1 & dx we get.

du
∫ √x U ,
2 but here we have two variables ‘x’& U. so, we should completely eliminate ‘x’
⇒U =2 x +1
2 x =U−1
U−1
x=
2

∫ ( U −1 ) √U du x=
U−1
2 2 - substituting the value 2
1
4∫
= ( U−1 ) √ udu
Factoring out the constants

( ) du
3 1
1
=
4
∫ u 2 −u 2
 3 1
1
= ∫ u 2 du−∫ u 2 du
4

( )
5 3
1 2 2
= ∫ u 2− u 2
+k
4 5 3

=
2 5 (
1 u52 u32
−
3
+k )
( )( )
5 3
2 2
1 ( 2 x+ 1 ) ( 2 x +1 )
= − +k
2 5 3

Note:-  mostly, the functions to be substituted by ‘u’ (important ‘u’ s) are found in
i) in Exponents
ii) under roots
iii) inside brackets
iv) in the denominators

Integration by parts
Some times, we may not be able to find integrals of products of functions by using substitution
rule. IH this each we use a technique if integration called integration by parts. It is derived from
the product rule of differention.

∫ f ( x ) .g ( x ) dx=f ( x ) G ( x )−∫ f ' ( x ) G ( x ) dx . where G ( x ) is anti- derivative of g ( x ) . Letting

G ( x )=v∧f ( x ) =u we get ∫ udv=uv−∫ vdu.

To see how it is derived from the product rule of differention, let us start from the rule
d ( f ( x ) ) G ( x) ' '
=f ( x ) G ( x ) + g ( x ) f ( x )
dx

f ( x ) G ( x )=∫ f ' ( x ) G ( x ) dx+∫ g' ( x ) f ( x ) dx→ Taking the integral of both sides.

∫ f ( x ) .g ( x ) dx=f ( x ) .G ( x ) −∫ f ' ( x ) G ( x ) dx
∫ udv=uv−∫ vdu
Illustration evaluate ∫ xex dx
Simplicity is using integration by parts we should select the one which is easy to integrate as ‘dv’
& the one which is easy to differentiate as ‘u’/ In the above example, exdxis easier to integrate &
‘x’ is easier to differentiate
x
Let u=x ∧dv=e dx
du=dx v =∫ dv=∫ e x dx=e x

Substituting, this values in the formula, we get

∫ xex dx=xe x−∫ ex dx

=xe x −e x +k
x
¿e ( x−1 ) +k
Integration by partial fraction
This technique is used to find integrals of rational functions which can be discomposed
( reduced). The point of partial fraction integration is that integration of a rational function can
be reduced as follows by determining the roots of the polynomial in the denominator.
dx
∫ x−a ℓn|x−a|+c
Illustration :- use partial fraction method to integrate
xdx
∫ ( x−1 )( x−2 )
First we should decompose it as follows
x A B
= +
( x−1 )( x−2 ) x−1 x−2
 now multiplying this equation by ( x-1) (x-2) we get
x= A ( x−2 ) + B ( x−1 )→ comparing the terms on the left and right
x= Ax−2 A+ Bx−B
x=( A+B ) x−2 A−B
The coefficient of ‘x’ on the right is A+B & on the left 1 so
A +B=1
2 A−B=0→ The constant on the let is o
Solving the above equation simultaneously we get A = -1 & B=2
x −1 2
= +
( x−1 )( x−2 ) x−1 x−2
xdx −1 dx 2 dx
∫ ( x−1 )( x−2 ) =∫ ( x−1 ) +∫ x−2
2
x−2
−ℓn|x−1|+2 ℓn|x−2|+c=ℓn| | +c
x−1
DEFINITE INTEGRALS
1 Meaning of Definite Integrals
In the preceeding sections, we have discussed that the integral of a function is a family of
functions due to the fact that functions having different constants have the same
derivative.
In this section we will revise another form of integral called the definite integral.

Let f (x ) is a continuous function and if F( x) is the antiderivative of f (x ) then

∫ f ( x)dx=F( x )+c
If we choose two values of x in the domain, say x=a and, x=b and substitute these values in
to the right side of the equation and taking the difference we get

[ F (b )+c ]−[ F( a)+c ]=F (b )−F (a )

This value is a specific numerical value free of the variable x as well as the arbitrary constant c .

It is called the definite integral of f (x ) from a to b .

Notation:
b
∫a f (x )dx - read as the definite integral of f from a to b
The numbers a and b are called limits of integration.
Letter a is the lower limit of integration.
Letter b is the upper limit of the integration.
 b

Therefore, ∫a f (x )dx =F ( x )]ba=F (b )−F( a)

Let us see some examples on how to find the definite integral of a function.
2 2

Example 1: Evaluate ∫
0
x dx
2
Solution: First find the antiderivative of x
1
∫ x 2 dx= 3 x 3+c
Then evaluate the indefinite integral at the upper and lower limits and take the difference to get

2 1 1 1 8 8
∫0 x 2 dx= 3 x 3 ]20= 3 (2)3− 3 (0 )3= 3 −0= 3
Definite integrals of marginal cost functions
This concept of the definite integral has several applications in economics. To evaluate TVC
from an MC function for a given value of output one simply substitutes the given quantity into
the TVC function. This is the same as evaluating the definite integral between zero and the given
quantity. For example, assume that you wished to find the value of TVC when q = 8 and you are
given the function MC = 7.5 + 0.3q2. This value would be
8 8
TVC=∫ MC =∫ 7. 5+0 . 3 Q2=7 . 5 Q+0 .1 Q3 ]80=111 . 2
0 0

Therefore, TVC is equal to the area under the MC schedule between zero and the given level of
output.
Another application of definite integrals is to find consumers and producer’s surplus. Recall from
your Micro-economics course that, consumer surplus is the difference between what the
consumers are willing to pay and what they actually paid. Geometrically, this is defined as the
area below a demand schedule but above the ruling price. This difference is often used as a
measure of welfare.