Chapter 3

Using the first derivative for graphing

If f(x0)>0, there is an open interval containing x0 on

which f is increasing. If f(x0)<0, there is an open interval containing x0 on which f is decreasing. These statements imply that if f is a continuously differentiable function, then:
If f> 0 on interval (a,b), then f is increasing on (a,b)

If f<0 on interval (a,b), then f is decreasing on (a,b)

If f is increasing on (a,b), then f0 on (a,b) If f is decreasing on (a,b), then f0 on (a,b)

Convex and Concave Functions

A differentiable function f for which f (x) 0 on an

interval I (so that f is increasing on I) is said to be convex on I. A differentiable function f for which f (x) 0 on an interval I (so that f is decreasing on I) is said to be concave on I. Convex Function: A function f is called convex on an interval I if and only if: f [(1-t)a + tb)] (1-t)f(a) + tf(b) for all a,b I and all t[0,1]

Convex and Concave Functions

If the inequality is strict for all ab and all t(0,1), then

f is strictly convex. Concave Function: A function f is called concave on an interval I if and only if: f [(1-t)a + tb)] (1-t)f(a) + tf(b) for all a,b I and all t[0,1] If the inequality is strict for all ab and all t(0,1), then f is strictly concave.

Maxima and Minima

If f(x0)=0 and f(x0)<0, then x0 is a maximum of f.
If f(x0)=0 and f(x0)>0, then x0 is a minimum of f. If f(x0)=0 and f(x0)=0, then x0 can be a maximum,

minimum or neither. Global Maxima and Minima:

Functions with only one critical point in its domain Functions with nowhere zero second derivatives: The

critical point is a global min if f>0 and a global max if f<0 throughout the domain of f. Functions whose domains are closed finite intervals.

Applications to Economics: Production Functions

Y= f(q)
We assume: It is C2 It is increasing There is a level of input a such that the production function is convex for q< a and concave for q>a These assumptions imply that f(q)>0 for all q. Secondly, f(q)>0 for q[0,a) and f(q)<0 for q>a.

Applications to Economics: Cost Functions

C= f(x)
Naturally increasing functions of output (x) Marginal Cost= dC/dx= C(x)

Average Cost: C(x)/x [Cost per unit produced]

Using calculus we derive the following results: If MC>AC, AC is increasing If MC<AC, AC is decreasing At an interior minimum of AC, AC=MC

Applications to Economics: Revenue and Profit Functions

R= P.x MR= dR/ dx= R(x) In perfect competition: P=AR=MR (x)= R(x) C(x) To maximize profit: d/dx= dR/ dx dC/dx= 0 = MR MC=0 MR= MC Second order condition: (x)= p C(x) "(x)= 0 C(x)<0 C(x)>0 At the optimal output, the firm should have increasing MC.

Applications to Economics: Demand Functions and Elasticity

x= F(P) is the demand function
P= G(x) is the inverse demand function In monopoly: R= P.x

R= G(x).x G(x)= R(x)/x [Average Revenue Function] Elasticity: [Percentage change in quantity]/[Percentage change in price]= (x/P)/(x/P) (x/P) is marginal demand and (x/P) is average demand Marginal demand can be approximated by F(P)= dx/Dp Elasticity= [F(P).P]/F(P)

Applications to Economics: Demand Functions and Elasticity

Price inelastic: -1<<0
Price elastic: <-1 Unit elastic: =-1

For an inelastic good, an increase in price leads to an

increase in total expenditure. For an elastic good, an increase in price leads to a decrease in total expenditure.

Applications to Economics: Monopoly

Linear demand function: x= a bp
Inverse demand function: P= a/b x/b [AR curve] R= P.x

R= ( a/b x/b)x
R= (a/b)x x2/b MR= (a/b) (2x/b) AR= (a/b) (x/b)