PARTIAL DIFFERENTIATION

DI RANGKUM
OLEH
ASOGIA AKBAR
201434025004

FAKULTAS EKONOMI UNIVERSITAS JAYABAYA

 BAB I

CHAPTER 5

A. Partial Differentiation

This chapter continues the topic of calculus by describing how to differentiate

funtions of more than one variable. In many ways chapter can be rearded as the

climax of the whole book. It is summit of the mathematical mountain that we have

been merrly climbing. Not only are the associated mathematical ideas and

techniques quite sophisticated, but also partial differentiation provides a rich

sousce of application. In one sense there is no new material presented here. If you

know how to differentiate a function of one variable then you also know how to

partally differentiate a function of several because the rules are the same.

Similary, if you can optimisme a function of one variable then you need have bo

fear of unconstained and constrained optimization. Of course, if cannot use the

elementary rules of differentiation or cannot find the maximum and minimum

values of a function as described in chapter 4 then you really are fighting a lost

couse. Under these circumstantance you are best advised to omit this chapter

entirely. There is no harm in doing this, because it does not form gant and useful

branches of mathematics.

There are six sections. It is importan thyat sections 5.1 and 5.2 are read first.

But the remaining sections can be studied in any order. Sections 5.1 and 5.2

follow the familiar pattern. We begin by looking at the mathematical techniques

and then use them to determine marginal functions and elasticities. Section 5.3
describes the multiplier concept and completes the topic of national income

determination which you studied in chapter 1.

The final three sec5tions are devoted to optimization. For function of several

variable, optimization problem are split into two groups, unconstrained and

constrained. Unconstrained problems, tackled in section 5.4, involve the

maxiimisation and minimization of function in which the variable are free to take

any values whatsoever. In a constrained problem only certain combinations of the

variable are examined. For example, affirm might wish to minise cost but is

constrained the need to statisfy productions quotas, or an vidual might want to

maximize utility but is subject to a budgetary constraint, and so on. There are two

ways of solving contraind problem : the method of substitution and the method of

legrange multipliers, described in sections 5.5 and 5.6 respectively.

 SECTION 5

FUNCTIONS OF SEVERAL VARIABLE

Objectives

At the end of this sections you sould be able to :

 Use the function notation,z=f(x,y)

 Determine the first-order partial derivatives, fx,and fy

 Determine the second –order partial derivatives,fxx,fxy,,fyxand fyy

 Appreciate that, for most function,fxy =fyx

 Use the small incrimenst formula.

 Perform implicit differentiation.

Most relationship in economics involve more two variables. The demand

for a good depends not only on its own price but also on the price of

substituatableand complementary goods, incomes of consumers, advertising

expenditure and so on. Likewise, the output from a production process depend on

a varety of inputs, including land, capital and labour. To analyse general ecomics

behaaviour we must extend the concept of function, and patticu, larly the

differential calculus, to funtions of several variable.

A function, f,of two variableis is a rule that assingns to each incoming pair

of number ,(x,y), a uniquely defined outgoing number,z. this is illustrated in

Figure 5.1. The black box fperform some arithmetic operation on x and y to

produce z. for example, the rule might be ‘multiply the two number together and

add twich the second number;. In symbols we write this either as.
 F(x,y)=2x+2y

Or as

Z=xy+2y

Inorder to be able to evaluate the function we have specity the numerical values of

both x and y.

For example , substituting x=3 and y=4

F(3,4)=3x4+2x4=20

And substituting x=4 and y=3 gives

F(4,3)=4x3+2x3=18

Notice that, for this function,f(3,4), so in general we must be careful to

write down the correct ordering of the variable.

We have used the labels x and y for the two incoming numbers (called the

independentvariable) and z for the outgoing number(called the independent

variable). We could equally well havewritten the above function as

Y=x1x2+2x2

Say, using x1 and x2 to denote the independent variable and using y this time to

denote the dependent variable. This use of subscripts may seem rather

cumbersome, but it does provide an abvious extension to function of more than

two variable. In general, afunction of n variable can be written

Y=f(x1,x2,……………….,xn)
SECTION 5.2

B. PARTIAL ELASTICITY AND MARGINAL FUNCTIONS

OBJECTIVES

At the end of this sections you should be able to :P

 Calculate partial elasticities

 Calculate marginal utilities.

 Calculate the marginal rate of commodity substitution along an

indifference curve.

 Calculate marginal products

 Calculate the marginal rate of technical substitution along isoquant.

 State Euler’s theorem for homogeneous production function.

The first section of this chapter described the technique of partial

differentiation. Hopefully, you have discovered that partial differentiation is no

more difficult than ordinary differentiatlon. The only difference is that for

functions of several variables you have to be clear at the outset which letter in a

mathematical expression is to be the variable, and to bear in mind that all

remaining letters are then iuSt constants in disguise! Once you have done this,

the aetual differentiation itself obeys the usual rules. In Sections 4.3 and 4.5 we

considered various microeconomic applications. Given the intimate

relationship between ordinary and partial differentiation, you should not be too

surprised to learn that we can extend these applications to functions of several

variables. We concentrate on three main areas:

 Elasticity of Demand
  Utility

 Production

5.2.1 ELASTICITY OF DEMAND

Suppose that demand, Q, for a certain good depends on its price,P, the

price of an alternative good,PA and the income of c0onsumers, Y, so that

Q=f(P,PA,Y)

For some demand function f.

Of particular interest is the responsiveness of demand to changes in any

one of these three variable. This can be measured quantitatively using elasticity.

The (own) price elasticity of demanad is defined to be.

Ep= Perecentage change in Q

Precentange change in P

Whith PA dan Y he;d constant. This definition is ident following the same

mathematical argument prsentede.

Again,EY can be positive or negative. If a good is inferior then demand falls as

income rises and By is negative. Canned vegetables, a supermarket’s own-brand

white bread and bus transportation are examples of inferior goods. if a good is

normal then demand rises as income rises and EY is positive. Sometimes the value

of EY of a normal good might am exceed 1. These goods are called superior. For

these goods the percentage rise in consumptron is greater than the percentage

increase in income. If income elasticity of demand is 1.25, a use of 40% in income

leads to a 50% increase in consumption. Examples of superior goods include

sports cars. caviar and quality wine. '

Example

Given the deman function

Q= 100 – 2P + PA + 0.1 Y

Where P = 10, PA =12 and Y = 1000

a) Price elasticity of demand

b) Cross-price elasticity of demand

c) Income elasticity of demand

Is the alternative good substitutable or complementary?

Solution

We begin by calculating the value of Q when P= 10,PA = 12 and Y =1000. The

demand function gives

Q =100 – 2P+0.1 (1000)=192

a) To find the price elasticity of demand we partially differentiate

Q=1000 -2P +PA+0.1 Y

Whith respect to P to get

∂Q = -2
∂P
b) To find the cross-price elasticity of demand we partially differentiate

Q=100 – 2P +PA+0.1Y
PRACTICE PROBLEM

1. Given the demand function '

Q=500-3P-2PA+0.0|Y

where P = 20, PA = 30 and Y: 5000, find

(a) the price elasticity of demand

(b) the cross-price elasticity of demand

(c) the income elasticity of demand.

If income rises by 5%, calculate the corresponding percentage change in

Would this good be classified as inferior. normal or suoerior?

So far in this book we have concentrated almost exclusively on the behaviour of

producers. In this case it is straightforward to identify the primary objective,

which is to maximise profit. We now turn our attention to consumers.

Unfortunately, it is not so easy to identify the motivation for their behaviour. One

tentative suggestion is that consumers try to maximise earned income. However, if

this were the case then individuals would try to work 24 hours a day for 7 days a

week, which is not so. In practice, people like to allocate a reasonable proportion

of time to leisure activities.

Consumers are faced with a choice of how many hours each week to spend

working and how many to devote to leisure. In the same way, a consumer needs to

decide how many items of various goods to buy and has a preference between the

options available. To analyse the behaviour of consumers quantitatively we

associate with each set of options a number, U, called utility, which indicates the

level of satisfacrion. Suppose that there are two goods, GI and 62, and that the
consumer buys xl items of GI and x2 items of G2. The variable U is then a

function of x, and x2, which We write as

U=U (x1,x2)

If

U(3,7)=20 and U(4,5)=25

for example, then the consumer. derives g-reater satistaction trom buymg tour

items of G1 and Live items of G2 than from buying three items of G1 and seven

items of G2. Utility is a functionof two variables, so we can work out two first-

order partial derivatives

PRACTICE PROBLEM

2. An individual’s utility function is given by

U = 1000 x1 + 450x1+ 5x1x2-x1-2x21 –x22

Where x1 is the amount of leisure measured in hours per week and x2 is carned

income measured in dollars per week .

for example, then the consumer. derives g-reater satistaction trom buymg tour

items of G1 and Live items of G2 than from buying three items of G1 and seven

items of G2. Utility is a functionof two variables, so we can work out two first-

order partial derivatives,

It was pointed out in Section 5.1 that functions of two variables could be

represented by surfaces in three dimensions. This is all very well in theory, but in

practice the task of sketching such a surface by hand is virtually impossible. This

difficulty has been faced by geographers for years and the way they circumvent
the problem is to produce a two-dimensional contour map. A contour is a curve

joining all points at the same height above sea level. Exactly the same device can

be used for utility functions. Rather than attempt to sketch the surface, we draw an

indifference map. This consists of indifference curves joining points (x,, x2)

which give the same value of utility. Mathematically, an indifference curve is

defined by an equation

U(x1,x2)=U0

for some fixed value of U0. A typical indifference map is sketched in Figure 5.4.

Points A and B both lie on the lower indifference curve, U0 = 20. Point A

corresponds to the case when the consumer buys aI units of G1 and a2 units of

G2. Likewise, point B corresponds .

SECTION 5.3

COMPARATIVE STATICS

Objectives

At the end of this section you should be able to:

 Use structural equations to derive the reduced form of macroeconomic

models 0 Calculate national income multipliers.

 Use multipliers to give a qualitative description of economic models.

 Use multipliers to give a quantitative description of economic models.

 Calculate multipliers for the linear one-commodity market model.

ADVICE

The content of this section is quite difficult since it depends on ideas covered

earlier in this book. You might find it helpful to read quickly through Section 1.7

now before tackling the new material.

The simplest macroeconomic model, dlscusscd 1n bection 17, assumes mat were

are two sectors, households and firms, and that household consumption, C, is

modelled by a linear relationshi1p of the form

C =aY+b

In this equation Y denotes national income and a and b are parameter. The

parameter a is the marginal propensinsity to consume and lies in the range 0<a<1.

The parameter b is the autonomous consumption and statisfies b>0. In

equilibirium

Y=c+1

Where I denotes investment, which is assumed to be gives by

I=I

For some constant I. Equations (1),(2), and (3) describe the structure of the model

and as such are called structural eqations. Substituating equations (1) and (3) into

equations (2) gives

Y =aY +b+ 1

Y-aY = b+1

(1-a)Y=b+1

This is known as the reduced form because it compresses the model into a Single,

in which the endogenous variable, Y, is expressed in terms of the exogenous

variable, I a arid parameters, a and b. The process of analysing the equilibrium

level of income in this way IS referred to as statics because it assumes that the

equilibrium state is attained Instantaneously. The branch of mathematical

economies which investigates time dependence is known as dynamics and is

considered in Chapter 9.
We should like to do rather more than just to calculate the equilibrium values
here. In particular, we are interested in the effect on the endogenous variables in a
model brought about by changes in the exogenous variables and parameters. This
is known as comparative statics, since we seek to compare the effects obtained by
varying each variable and parameter in turn. The actual mechanism for change
will be ignored and it will be assumed that the

system returns to equilibrium instantaneously. The equation

 BAB III

DAFTAR PUSTAKA