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# Differentiation

Session 3

## The syllabus that this topic covers

deal with calculus only at an
elementary level and require:
familiarity with a few simple rules
an understanding of some relevant
applications

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Rules of calculus

## Rule 1: The derivative of a

constant is zero.
Example:

Let Y = 7
Thus:
dy/dx = 0

0

X
3

## Rule 2: The derivative of a constant times a

variable is simply the constant.
y
Example:
Let y = 13x

26

Thus:
dy/dx = 13

Rule 2

13

x
4

## Rule 3: A power function has the form y =

axn, where a and n are constants. The
derivative of a power function is:

dy
n 1
n ax
dx
Example:
Let y = 4x3
Thus:

dy / dx 12 x

Rule 3

## Special cases of the power

function
Note the following:
y =1/x2 is equivalently written as y = x-2
and

## y x can be written y = x1/2

Hence by rule 3 (or the power rule), the
respective derivatives are given by:
dy/dx = -2x-3
And
dy/dx = .5x-1/2 = .5 / x

Power functions
6

## Rule 4: Suppose the product of two functions :

y = f(x)g(x). Then we have:
dy
df
dg

(g)
(f)
dx dx
dx

Example:
Let y = (4x)(3x2)
Thus:
dy/dx = (4)(3x2) + (6x)(4x) = 36x2

Rule
4

Rule 5
Rule 5: The derivative of the sum of
functions is equal to the sum of the
derivatives.
If y = f(x) + g(x), then:
dy/dx = df/dx + dg/dx
Example:
Let: y = .1x2 2x3
Thus:
dy/dx = .2x 6x2

## Rule 6: Suppose y is a quotient: y =

f(x)/g(x). Then we have:

## dy (df / dx)( g ) (dg / dx)( f )

dx
g2
Example
Suppose we have: y = x/(8 + x)
Thus:
dy/dx = [1 (8 + x) 1 (x)]/ (8 + x)2 = 8/(8 + x)2

Rule 6

## The marginal profit (M) function

Let the profit function be given by:
= 2Q - .1Q2 3.6
To obtain the marginal profit function, we
take the first derivative of profit with
respect to output (Q):
M = d/dQ = 2 - .2Q
To solve for the output level that maximizes
profits, set M =0.
2 - .2Q = 0 Thus: Q = 10

10

Differentiation
Differentiation can be thought of as
a
process which transforms one
function into a different one. The
new function is known as the
derivative of the original one.
The derivative of the simple
function,
dy
b

1
b
y = ax is given by abx

dx

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## The derivative of the sum of two or

more simple functions is the sum of
the separate derivatives of the
functions.
Differentiation can be repeated as
many times as necessary on any
given function.
dy
is the first derivative
If y is any
dx function of x:
d2y
is the second derivative
2
dx

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dy
0
equation,
dx

Solving the
will identify the turning points of a
function.
The second derivative can then be
used to indicate whether the
turning point is a maximum or
minimum.
when the second derivative is positive,
it signifies a minima.
when the second derivative is
negative, it signifies a maxima.

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Use of differentiation in a
In any commercial environment,
the profit can be considered as a
simple function of the difference
between the revenue obtained
from the sale of a number of
products and the costs involved in
their production.
Profit = Revenue - Cost

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Cost function
The cost involved in standard
processes can be normally
categorised as follows:
fixed cost
variable cost
special/optional cost

## Total cost = fixed cost + variable

cost + special cost

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Total cost
Average cost =
total quantity
dC
cost, dx

Marginal
is defined as the
extra cost incurred of producing
another item at activity level x.

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dC
occur when
= 0.
dx

## The second differential coefficient

is used to determine whether
there is a maximum or minimum.

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Revenue function
R(x) = x . Pr (x)
where x is the quantity of items
demanded (supplied or produced).
Pr (x) is the fixed cost associated with
the product.

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## Price /demand function

In business environment, item price is
usually dependent on the number of
items in demand.The more items that
are in demand, the less the price per
unit is.

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## Procedure for obtaining the demand

function
put the demand function in the form Pr = a
+ bx
substitute the first price/ demand pair into
Pr to obtain one equation in a and b
substitute the second price/demand pair
into Pr to obtain another equation in a and
b.
Solve the two equations obtained, for a
and b.

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dR
Marginal revenue,dx

is the extra
revenue obtained from producing another
item at activity level x.

dR
occur when
= 0.
dx

## The second differential coefficient is used

to determine whether there is a maximum
or minimum.

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Profit function
difference between revenue
function and cost function, P =
Revenue cost
dP
Profit maximisation
or
dx
minimisation occur when
=
0.
The maximum
dR profit
dC point for
be found by
some process can
dx dx
solving the equation:

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Break-even point
It is the level of production where profit
is zero or when the total revenue for a
period will equal the total costs for the
same period. i.e. R = C
Hence, Pq = F + Vq

F
fixed cost
q

P V contributi on/unit

## where q is the quantity of units

p is the selling price
F is the fixed cost
V is the variable cost

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Break-even chart
It is a graphical representation of
the cost and revenue associated
with different levels of output.
It is useful in business decisionmaking as it enables companies to
identify the level of output which,
given the prevailing cost and
revenue function, maximises profit.

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## We will review some

rules of differential
calculus that are
especially useful for
management decision
making

25

## The profit function

Suppose that a business firm has estimated its
profit () function (based on marketing and
production studies) as follows:

2Q 0.1Q 3.6
2

## Where is profit (in thousands of dollars) and Q

is quantity (in thousands of units).
Thus the problem for management is to
set its quantity(Q) at the level that
maximizes profits ().

26

## The profit function shows

the relationship between the
managers decision variable
(Q) and her objective ().
That is why we call it the
objective function.

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8.0
6.0

Profit

4.0
2.0
0.0
-2.0
-4.0

0.0

2.0

4.0

6.0

## Marginal profit at a particular output

is given by the slope of a line
tangent to the profit function

-6.0
Quantity

again
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## Computing profit at various

output levels using a

## Recall our profit function is given by:

= 2Q - .1Q2 3.6
Fill in the quantity column with 0, 2, 4, . . .
Assume that you typed zero in column cell a3 of
Place your cursor in the the cell b3 (it now
contains the bolded number 3.6)just to the
right of cell a3.
Type the following in the formula bar:

=(2*a3)-(.1*a3^2)-3.6

## and click on the check mark to the left of the

formula bar.
Now move your cursor to the southeast corner of
cell b3 until you see a small cross (+).Now move
your cursor down through cells b4, b5, b6 . . . to
Mathematics
compute profit at various
levels
of output.

Quantity
(000s)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0

Profit
(000s)
-3.6
0.0
2.8
4.8
6.0
6.4
6.0
4.8
2.8
0.0
-3.6

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