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Calculus Review
This very brief summary is intended to
re-familiarize you with basic calculus. If your grasp of calculus
is shaky, I recommend you purchase the Schaum Outline Introduction to Mathematical Economics (3rd
ed.) by Edward Dowling (NY: Schaum Outline Series, McGraw-Hill) for a
more throrough review. Calculus is the most essential "power
tool" of economics. It provides the formal structure for
virtually all of the economics you have learned so far: utility
maximization, demand theory and welfare economics; profit maximization,
cost minimization and production theory.
The slope of a function y = f(x) is
calculated as the change in y
associated with a change in x, i.e. "the rise over the
run." The slope of the quadratic function diagrammed here
is constantly changing as x changes. Calculating a slope from two
discrete points on this function will only approximate the true slope
at any intermediate point. The derivative function df(x)/dx
expresses the true slope of f(x), i.e., its instantaneous rate of
change, at any point x.
If y = f(x) is a polynomial in x such as the cubic function
f(x) = 30
+ 25x - 4x2 + 0.15x3 then f(x) can be
differentiated term by term, premultiplying each term by the exponent
on x and subtracting one from each exponent.
Rewriting f(x) as 30x0 + 25x1 - 4x2 +
0.15x3, the derivative or slope function of f(x) is
calculated as:
df(x)/dx = f '(x) = 0×30x(0-1) + 1×25x(1-1)
- 2×4x(2-1) + 3×0.15x(3-1)
= 25 - 8x + 0.45x2.
If a function has local maximum or minimum points, its slope will equal
zero
at those points. To determine the values of x that maximize or
minimize f(x), take the derivative, set it equal to zero and solve for
x.
The range of the cubic (3rd-order polynomial) function f(x) in the
graph here (shown in black) is unbounded, but it has both a local
maximum and a local minimum. Its derivative is the quadratic
(2nd-order polynomial) function (shown in red) which we set equal to
zero: 25 - 8x + 0.45x2 = 0.
The roots of this quadratic (solved from the quadratic equation) are
4.0457 and 13.732.
These are the values of x that yield local maximum or minimum values
for f(x).
To distinguish a maximum from a minimum, we need to take the second
derivative of f(x) and evaluate it at these values of x. The
second derivative is simply the derivative of
the first derivative:
if df(x)/dx = f '(x) = 25x0 - 8x1 + 0.45x2,
then d2f(x)/dx2 = f ''(x) = -8 + 0.90x
(shown in blue).
If f(x) is at a maximum, its slope is decreasing from positive to
negative, so the slope of the derivative will be negative. If
f(x) is at a minimum, its slope is increasing from negative to
positive, so the slope of the derivative will be positive.
The graph shows that x = 4.0457 yields a local maximum for
f(x),
where f ' = 0 and f '' = -4.359.
The other solution x = 13.732 yields a local minimum for f(x), where f
'
= 0 and f '' = +4.359.
For higher-order functions, if the second derivative evaluates to zero
at the maximizing or minimizing value(s) of x, you have to evaluate
higher-order
derivatives to distinguish maxima, minima or inflection points.
For a polynomial such as f(x) = x4 the derivative f ' = 4x3
= 0 when x = 0. But f '' = 12x2 = 0 when x = 0
also. So
we keep evaluating successive derivatives at x = 0 until we find one
yielding
something other than zero: f ''' = 24x = 0, but f '''' = 24 >
0. Since this non-zero derivative is an even-order (fourth)
derivative, it implies that f(x) = x4
is minimized at x = 0. For a polynomial such as f(x) = x3
, f ' = 3x2 = 0 and f '' = 6x = 0 when x = 0, but f ''' = 6
> 0. Since this non-zero derivative is an odd-order (third)
derivative, it implies that f(x) = x3
has an inflection point at x
= 0.
To determine the maximum or minimum point of a function of two
variables, e.g., z = f(x,y) = -2x2 + 20x - xy + 5y - 3y2,
we take partial derivatives
with respect to each variable, treating the other variable as a
constant, set these equal to zero and solve the system of equations,
e.g., fx = -4x + 20 - y = 0 and fy =
-x + 5 - 6y = 0 is solved by x = 5 and y = 0. Since the four
second parial derivatives fxx = -4, fxy = -1, fyx
= -1 and fyy = -6 are all negative, this function is
maximized in both x and y at this point, implying that this function
has a hill shape.
The function z = f(x,y) = x2 - y2 has first
partials fx = 2x and fy = -2y. Setting
these equal to zero yields the solution x = 0 and y = 0. The four
second partials are fxx = +2, fxy = 0, fyx
= 0 and fyy = -2, implying that f(x,y) is minimized in the x-plane and maximized in the y-plane at this point,
which means that this function is shaped like the saddle on a horse.
Where
the derivative of a function f(x) expresses its slope, the integral of
f(x) expresses the exact area between f(x) and the x-axis.
Calculating the areas under discrete arcs defined by points on the
function will yield only approximate area measures.
Integrating a function is the opposite of taking its
derivative. If f '(x) = g(x), then the integral of
g(x) is
f(x) + C where C is an arbitrary constant term that might have dropped
out of f(x) during differentiation. So integration recovers
the original function from its slope function, except for its intercept
term.
If y = f(x) is a function such as 4x - x2, f(x)
is integrated by multiplying each term by x, dividing each term by the
resulting exponent of x, and adding an unknown constant C, e.g., F(x) =
2x2 - x3/3 + C. This indefinite
integral can evaluated for any value of x only up to this arbitrary
constant.
A definite integral is evaluated for a bounded interval in x, e.g.,
between x = 1 and x = 2. The definite integral for
this example would be F(x=2) - F(x=1) =
[8 - 8/3 + C] - [2 - 1/3 + C] = 3.667. The unknown C cancels
out.
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