Induction on

Preliminary Econometrics
(Basics on the Use of Mathematics on Economics)
Ace Institute of Management
Executive MBA Program

Session 2: Use of Basic Calculus in Economics

Instructor
Sandeep Basnyat
Sandeep_basnyat@yahoo.com
9841 892281

Understanding Slope of a straight line

Assume an equation:
Y = 10 + x2
In this equation,
If x = 1 then y = 11
Say, x1 = 1 and y1 = 11

Y
20
15

(2, 14)
10

Again for the same equation:

If x = 2 then y = 14

(1, 11)
1

Say, x2 = 2 and y2 = 14
What is the slope of this straight line?

Understanding Slope of a straight line

Y

Slope of a straight line is:

20

y
x

y2 y1
x2 x1

14 11
21

= 3

Meaning:
Every time x changes by 1 unit, y
changes by 3 unit.
So, y = f(x)

15

(2, 14)
10

(1, 11)
1

Positive and Negative Slopes

Find the slope of line L1 (Blue line
between P3 and P4)
Find the slope of line L2 (Yellow
line between P1 and P2)

Understanding Slope of a straight line

Y

Slope of a straight line is:

20

y
x

y2 y1
x2 x1

14 11
21

= 3

Meaning:
Every time x changes by 1 unit, y
changes by 3 unit.
So, y = f(x)

15

(2, 14)
10

(1, 11)
1

Alternatively,
When the distance between two
variables in x-axis is 1, the value of Y
is 3. (Derivative of function Y).

dy
dx

Some Important Rules for finding

derivatives

The derivative of a constant

Assume and equation: y = f(x) = 5
What is the derivative of this function?
0

General rules for differentiation

The derivative of y = f(x) = xn
Where n is a positive integer, is:

d(xn)

dy
dx

dx

= nxn-1

Exercise
Find the first derivative of the function: y = x2

d(x2)

dy

dx

dx

2-1
2x
= 2x
=

The Derivative of a Constant times a

Function
Find the derivative of y = axn

dy
dx

= a

d(xn)
dx

= anxn-1

Find the derivative of Y = 3x2

Derivative = 6x

The Derivative of a Sum or Difference

Find the derivatives of y = x7+x3

d(x7)

dy
dx

dx

d(x3)

dx

= 7x6+3x2

Exercise
Find the derivative of

1
f x 7 .
x

1
1
1 7

f x 7 . = f x
= f x x
17
x
x
1 1 71
1 1 7 7 7
1 8 7
f x x
x
x
7
7
7

Exercise
Find the slope of the curve (derivative) of y = x5 at
x = -2.

f x x

f x 5x = f 2 5 2

f 2 516 80

Therefore, the slope of the original function at

x = -2 is 80 (or 80/1).

The Derivative of a Constant times a

Function
Find the derivative of y = af(x) = axn

dy
dx

= a

d(xn)
dx

= anxn-1

Find the derivative of Y = 3x2 at x = 4

Slope = 24

Exercise
Find the derivative of Y = 3x

d(3x)

dy
dx

dx

= 3x1-1 = 3x0 = 3

Exercise
Find the derivatives of y = 10 + 5x + 6x2
dy /dx = 5 + 12x
Find the derivatives of y = 2x3 - 6x-2 4x +10
dy /dx = 6x2 + 12x-3 4

Calculus in Managerial Economics

Marginal Applications

Q
Marginal Product of the Labour (MPL) = L

TR
Marginal Revenue (MR) = Q
TC
Marginal Cost (MC) = Q

Meaning:
Incremental changes in numerator due to 1 unit
change in denominator
y
dy
similar to:
=

dx

Calculus in Managerial Economics

Marginal Applications
Assume a function: y = 3x
To find a incremental (marginal) changes in y due to
marginal (very small) change in x, we differentiate:

dy
d(3x)
=
= 3 (marginal value of
dx
dx
y due to marginal change
in x)

Based on the concept:

How can we obtain MP, MR and MC?
By differentiating
Total Product, Total Revenue and Total Cost

Calculus in Managerial Economics

Recall : Marginal Applications

Q
Marginal Product of the Labour (MPL) = L

TR
Marginal Revenue (MR) = Q
TC
Marginal Cost (MC) = Q
MPL can be obtained by finding first derivative of Q
(Total Product) with respect to Total Labour.
MR is found by differentiating TR with respect to Q
MC is found by differentiating TC with respect to Q

Exercise
Assume a cost function:
TC = 150Q 20Q2 +Q3
Find the Marginal cost for this function.

Ans:
2 +Q3)
d(150Q

20Q
d(TC)
MC = ____ =
dQ
dQ

MC = 150 40Q + 3Q2

Exercise
Given the cost function:
TC = 1000 + 10Q - 0.9Q2 + 0.04Q3
Find: MC, TVC, AVC functions

TC = 1000 + 10Q - 0.9Q2 + 0.04Q3

1) MC
= 10-1.8Q+ 0.12Q2
2) TVC
= 10Q - 0.9Q2 + 0.04Q3
3) AVC
= 10 - 0.9Q + 0.04Q2

Exercise
Suppose the Total Cost function (TC) = 500 + 20Q2
Total Revenue function (TR) = 400Q 20Q2
Find MC and MR functions.
MR = dTR / dQ = 400 - 40Q
MC = dTC / dQ = 40Q

Exercise
Suppose the Total Cost function (TC) = 500 + 20Q2
Total Revenue function (TR) = 400Q 20Q2
Assume that MC and MR are equal for this firm. How
much quantity (Q) will be produced at that level?
40Q = 400 - 40Q
Q = 5 units.

At, Q = 5, how much is

a) Total Revenue
b) Total Cost
c) Total Profit
d) Per unit selling Price

1500
1000
500
300

Exercise
Assume that demand function for a firm is:
P = 14 2Q. Find TR and MR for this firm.
TR = (14 2Q)Q = 14Q 2Q2
MR = 14 4Q

Assume that the firm has constant MC = 2. At the

level where MC = MR, find total quantity produced.
Q=3

At Q = 3, find: P, TR, TC and Profit.

P = 8;

TR = 24;

TC = 6;

Profit = 18

Thank You