Chapter 4:

I. The derivative of a function

- Slope/gradient: độ dốc
∆𝑦
𝑠𝑙𝑜𝑝𝑒 =
∆𝑥
- Tangent: tiếp tuyến
𝑑𝑦
- Derivative/differentiation: đạo hàm
𝑑𝑥

𝑖𝑓 𝑓(𝑥) = 𝑥 𝑛 𝑡ℎ𝑒𝑛 𝑓 ′ (𝑥) = 𝑛𝑥 𝑛−1

II. Rules of differentiation

- Rule 1: The constant rule (for any constant c)
o Differentiate the function and multiply by the constant.
𝑖𝑓 ℎ(𝑥) = 𝑐𝑓(𝑥) 𝑡ℎ𝑒𝑛 ℎ′ (𝑥) = 𝑐𝑓′(𝑥)
o Constants differentiate to zero.
𝑖𝑓 𝑓(𝑥) = 𝑐 𝑡ℎ𝑒𝑛 𝑓 ′ (𝑥) = 0
- Rule 2: The sum rule
o Differentiate each function separately and add.
𝑖𝑓 ℎ(𝑥) = 𝑓(𝑥) + 𝑔(𝑥) 𝑡ℎ𝑒𝑛 ℎ′ (𝑥) = 𝑓 ′ (𝑥) + 𝑔′(𝑥)
- Rule 3: The difference rule
o Differentiate each function separately and subtract.
𝑖𝑓 ℎ(𝑥) = 𝑓(𝑥) − 𝑔(𝑥) 𝑡ℎ𝑒𝑛 ℎ′ (𝑥) = 𝑓 ′ (𝑥) − 𝑔′(𝑥)
Note: given the function
𝑓(𝑥) = 𝑎𝑥 2 + 𝑏𝑥 + 𝑐
- First-order derivative: 𝑓 ′ (𝑥) = 2𝑎𝑥 + 𝑏
- Second-order derivative: 𝑓 ′′ (𝑥) = 2𝑎
o 𝑖𝑓 𝑎 > 0 𝑡ℎ𝑒𝑛 𝑓 ′′ (𝑥) > 0 so the parabola is convex.
o 𝑖𝑓 𝑎 < 0 𝑡ℎ𝑒𝑛 𝑓 ′′ (𝑥) < 0 so the parabola is concave.
III. Marginal functions
1. Revenue and cost

Nguyễn Thị Minh Châu

 𝑑(𝑇𝑅)
- Marginal revenue: 𝑀𝑅 =
𝑑𝑄

Practice problem: If the demand function is

P = 60 – Q
find an expression for TR in terms of Q.
(1) Differentiate TR with respect to Q to find a general expression for MR in terms
of Q. Hence write down the exact value of MR at Q = 50.
(2) Calculate the value of TR when
(a) Q = 50
(b) Q = 51
And hence confirm that the 1 unit increase approach gives a reasonable
approximation to the exact value of MR obtained in part (1).

TR = PxQ = 60Q -
Q2

1) Mr = TR = 60 -
CQ

60 2x50 = 40
Mr
- -

Q = 50 = ) =

R=60x5550D
2) = 45 T

=
-

41
∆(𝑇𝑅) ≅ 𝑀𝑅 × ∆𝑄
Practice problem: If the total revenue function of a good is given by
1000Q − 4Q2
write down an expression for the marginal revenue function. If the current demand
is 30, find the approximate change in the value of TR due to
(a) 3 unit increase in Q
(b) 2 unit decrease in Q.
R)
MR = TR
= = 100-

30 = Mr 1000 8x30 = 760

Q
-

= =

= 760x3 2280
a) DTr =

Nguyễn Thị Minh Châu

6) DTR = 760x) -
2) = -
1520
 𝑑(𝑇𝐶)
- Marginal cost: 𝑀𝐶 =
𝑑𝑄
∆(𝑇𝐶) ≅ 𝑀𝐶 × ∆𝑄
Practice problem: Find the marginal cost given the average cost function
100
𝐴𝐶 = +2
𝑄
Deduce that a 1 unit increase in Q will always result in a 2 unit increase in TC,
irrespective of the current level of output.

TC = AcxQ = 100 + 20

Mc = Tc = 2

Da 2 x 1
DTC = MC X 2
= =

2. Production
𝑑𝑄
- Marginal product of labor: 𝑀𝑃𝐿 =
𝑑𝐿
- Law of diminishing marginal productivity: the increase in output due to a 1
unit increase in labor will eventually decline.
Practice problem: A Cobb–Douglas production function is given by
𝑄 = 5𝐿1/2 𝐾1/2
Assuming that capital, K, is fixed at 100, write down a formula for Q in terms of L
only. Calculate the marginal product of labor when
(a) L = 1
(b) L = 9
(c) L = 10 000
Verify that the law of diminishing marginal productivity holds in this case.
112
51" * 10" 5021
-

Q = = = 1 = MP = 25x1 = 25
112
25xg12
=
-

L 9 8 33
MP 25 =
= MP =
= .

-
112
L = 10000 =>
MP = 25 x 10000

= 0 25
.

Nguyễn Thị Minh Châu

 3. Consumption and savings
𝑌 =𝐶+𝑆
𝑑𝐶
- Marginal propensity to consume: 𝑀𝑃𝐶 =
𝑑𝑌
𝑑𝑆
- Marginal propensity to save: 𝑀𝑃𝑆 =
𝑑𝑌

𝑀𝑃𝑆 + 𝑀𝑃𝐶 = 1
Practice problem: If the savings function is given by
𝑆 = 0.02 𝑌 2 − 𝑌 + 100
Calculate the values of MPS and MPC when Y= 40. Give a brief interpretation of
these results.

MPS
= = 0 .
044-1

0 04x40
-

1 = 0 6
= MPS
.

=
Y 40
.

1 MPS 1 0 6 0 4
MPC
-
=
= - = . .

IV. Further rules of differentiation

- Rule 4: The chain rule
o Differentiate the outer function and multiply by the derivative of the
inner function.
𝑑𝑦 𝑑𝑦 𝑑𝑢
= ×
𝑑𝑥 𝑑𝑢 𝑑𝑥
- Rule 5: The product rule
o Multiply each function by the derivative of the other and add.
𝑑𝑦 𝑑𝑣 𝑑𝑢
𝑖𝑓 𝑦 = 𝑢𝑣 𝑡ℎ𝑒𝑛 =𝑢 +𝑣
𝑑𝑥 𝑑𝑥 𝑑𝑥
- Rule 6: The quotient rule
o Bottom times derivative of top, minus top times derivative of bottom,
all over bottom squared.

Nguyễn Thị Minh Châu

 𝑑𝑢 𝑑𝑣
𝑢 𝑑𝑦 𝑣 𝑑𝑥 − 𝑢 𝑑𝑥
𝑖𝑓 𝑦 = 𝑡ℎ𝑒𝑛 =
𝑣 𝑑𝑥 𝑣2
V. Elasticity
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑
Price elasticity of demand: 𝐸 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑛 𝑝𝑟𝑖𝑐𝑒

- Demand is said to be
o Inelastic if |E| < 1
o Unit elastic if |E| = 1
o elastic if |E| > 1
𝑃1 +𝑃2
Δ𝑄
- arc elasticity: 𝐸 = 2
𝑄1 +𝑄2 ×
Δ𝑃
2

Practice problem: Given the demand function

P = 1000 – 2Q
calculate the arc elasticity as P falls from 210 to 200.

=+200400-395
P1 &10 + Q1 395
YE
= =

↑2 =
200 =
Q2 = 400

𝑃 dΔ𝑄
- point elasticity 𝐸 = ×d -
= 0 26.

𝑄 Δ𝑃

Practice problem: Given the demand function

𝑃 = 100 − 𝑄
calculating the magnitude of the price elasticity of demand when the price is
(a) 10
(b) 50
(c) 90
Is the demand inelastic, unit elastic or elastic at these prices?

Q 100 P
= -t
-

4 = w = a = 90 = E = x -
+ =
-

/E) = 1 = inelastic

4 = 50 = Q = 50 = E
Nguyễn Thị Minh Châu
=

0x -
1 = -

17 (E) = 1 = unit elastic

4 = 90 fa = l
= E =
90x -

1 = 9 = (E) =
97 elastic
 Practice problem: Given the demand equation
E
=
𝑃 = −𝑄2 − 10𝑄 + 150
find the price elasticity of demand when Q = 4. Estimate the percentage change in
price needed to increase demand by 10%.

= -2-10va 4 i -
= = -

42 10x + + 150 94
= P
=
Q = 4 =
- -

%
Q % vont
~
in
E
= x( b) =
-
1 .
31 E =

%~on P

Price elasticity of supply: 𝐸 =

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑢𝑝𝑝𝑙𝑦
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑛 𝑝𝑟𝑖𝑐𝑒
= 7 66 % .

Practice problem: If the supply equation is

𝑄 = 150 + 5𝑃 + 0.1𝑃2
calculating the price elasticity of supply
(a) averaged along an arc between P = 9 and P = 11
(b) at the point P = 10.
9
0 33
a)4 2(9
.

9 = Q1 = 203 1 + 11) 2) 7 1-203 1

1)
= .

= E
. .

=
*
217
* 1 = Q
[1203
=
= .

.
1 + 217 .
1) 11 -

= 0 .
33

b) p = w = Q = 210 E
= x
=
a = 5 + 0 .
2P = 5+ 0 2x10
. = 7
50 33 .

Nguyễn Thị Minh Châu

 VI. Optimization of economic functions
Method for finding and classifying stationary points of a function, f(x):
- Step 1: solve 𝑓 ′ (𝑥) = 0 to find stationary points, 𝑥 = 𝑎
- Step 2: if
o 𝑓 ′′ (𝑎) > 0 then minimum at 𝑥 = 𝑎
o 𝑓 ′′ (𝑎) < 0 then maximum at 𝑥 = 𝑎
o 𝑓 ′′ (𝑎) = 0 then the point cannot be classified.
Practice problem: A firm’s short-run production function is given by
𝑄 = 300𝐿2 − 𝐿4
where L denotes the number of workers. Find the size of the workforce that
maximizes the average product of labor and verify that at this value of L
𝑀𝑃𝐿 = 𝐴𝑃𝐿
13
·
AP =
E = 300 -

AP = 300 - 32 =
EF (invalid
600 = maximum point
·

AP" =
- 6) =
-
6x10 =
-

·
MPl = = 6001
AP
-

=
423
300
=

x
600
10
x

-
10
103
- 4x103
= 2000
=

2000GAP =
MR
Practice problem: The demand equation of a good is given by
𝑃 + 2𝑄 = 20 = ) p 20 2Q =
-

and the total cost function is

𝑄3 − 8 𝑄2 + 20𝑄 + 2 => Mc = 30 2 160 -
+ 20
(a) Find the level of output that maximizes total revenue.
(b) Find the maximum profit and the value of Q at which it is achieved. Verify that,
at this value of Q, MR = MC.
9) TR = 200 -
2Q2 = TR = Mr = 20 -

40 = 0(7)Q = 5

TR" =
-

4 O = maximum point .

ab + 6Q " 6Q 12
b)π 2 +
-
=
= Tr -
Tc = -
-

[linvalid)
-
6x4 + 12 -
12
3Q2
=
=

H = -
+ 120 = 0
= maximum

Nguyễn Thị Minh Châu MR 20 x 4x4

4
=
=

π = -
43 + 6x42 - 2 = 30
Mc = 3 x42 -
16x4 + 20 = 4
 Practice problem: The total cost function of a good is given by
TC = Q2+ 3 Q + 36 TC a 2 + 30 + 36 =

Calculate the level of output that minimizes average cost. Find AC and MC at this
value of Q. What do you observe?
-
A
Ac = TC/Q = a +3 + 36Q

0()[invalid)
2
Ac
-

= = -

360 =

3
AC" 72x6-3
-

= 72Q = = 11370 minimum

-
+

Ac = 6 +
3x36x6 = 15

Mc = Tc = 2a + 3 = 2x6 + 3 =
153A = mc = 15

Practice problem: The supply and demand equations of a good are given by
1
𝑃 = 𝑄S 2 + 25 and 𝑃 = −2𝑄2D+ 50 respectively.
2
The government decides to impose a tax, t, per unit. Find the value of t which
maximizes the government’s total tax revenue on the assumption that equilibrium
conditions prevail in the market.

P -
t =
fag + 25()P =
&Qg + 25 + t

20 + 50
Q Qy(fta 25 + t
= + =

( Q =
-t10

taxnev = + xQ + (10
E+) 1t
3
-

= =
-

[T]

T =
10 -

E+ = 0()t = 12 5 .

Nguyễn Thị Minh Châu

T" =
-) maximum
 VII. Further optimization of economic functions
- If a firm maximizes profit then MR = MC.
- If a firm maximizes average product of labor then AP L = MP L.
Practice problem: A firm has the possibility of charging different prices in its
domestic and foreign markets. The corresponding demand equations are given by
𝑄1 = 300 − 𝑃1 and 𝑄2 = 400 − 2𝑃2
The total cost function is
𝑇𝐶 = 5000 + 100𝑄 where 𝑄 = 𝑄1 + 𝑄2 .
Determine the prices (in dollars) that the firm should charge to maximize profits
(a) with price discrimination
(b) without price discrimination.
Compare the profits obtained in parts (a) and (b).
Mc = TC = 100 .

a) P1 = 300
-

Q1 = Try =
300Q
-

Q ? = ) Mr = 300 -

2Q1
1

MR = M( = 300
-
20 1 = 100 (fQ_ - 100 - P = 200
I

P
2
= 200 -

ta ) Trz = 200Q
=
-

EQ => MR = = 200 -

150
MC(900 -

Q2 =
100()Q = 100 = 4 =

MR1 =

T = TR -

TC

= 100 x 200 +
100 x 150 -
5000 + 100/100 + 100)

= 10000

b) a =
Q + Q2 = 300 -

p + 400 -
24 = 700 -

34

p =

7-TMR
MR = MC =

#30 = 100 = 215 = 161 .

67

Nguyễn Thị Minh Châu

() Firm will get higher profit
T = TR-TC = S259 .
05 =

for different market.

when they can charge different price
 Practice problem: Calculate the price elasticity of demand at the point of maximum
profit for each of the demand functions given in Practice Problem 2 with price
discrimination. Verify that the firm charges the higher price in the market with the
lower value of |E|.
𝑄1 = 300 − 𝑃1 and 𝑄2 = 400 − 2𝑃2

E
= X
200
Q1 100 P1

&
=
=
,

=
E = x-t =

= -
1

=> IE2) = 2

Q2 100 Pr =
15

3
=

=
,

2 3
Ez
=
-

x
-

-2 = (E) = 3

PP2

IE1) < Eat

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