4.

Mathematical notes

You will have realized by now that this course presents

economic analysis in terms of the underlying mathematics as
well as the diagrams!

Nothing we will do is very difficult, but it takes a bit of getting

used to, and these notes just take you through some of the basic
ideas.

You are all used to graphing functions of, say, x against y. The
function of x is often written

y  f x  .

A function is a rule that gives us one value for y for each value
of x. (If there is more than one y for each x it is not a function
but a correspondence.)

We should really specify the domain and range of the function –

the values that x and y can possibly take – but these are usually
just the set of positive real numbers.

We can graph the function by plotting the value of y given by

the function for each value of x.

An example of a function is the quadratic function

f x   ax 2  bx  c,

where a, b and c are given numbers.

If a = 0 then we are left with a linear relationship between x and

y.

If a > 0 then we have a U-shaped relationship between x and y

and if a < 0 then we have an inverted U-shaped relationship.

1
One example of a function considered earlier was the inverse
demand function, p  pQ  .

Here x is replaced by Q, y is replaced by p and the function f(.)

is replaced by p(.).

We often look at examples where inverse demand is linear:

p  a  bQ,

where a and b are positive numbers and the minus sign tells us
that the inverse demand curve slopes down.

To graph this function, we want to know the points at which it

cuts the horizontal (Q) axis and the vertical (p) axis.

For the vertical intercept we just set Q = 0, which leaves us with

p = a.

For the horizontal intercept we set p = 0, which leaves us with

0  a  bQ.

To get this in terms of Q, we have to manipulate the equation.

One key thing to keep in mind is that if you do something to one

side of the equation – such as multiplying or dividing by some
number, or adding or subtracting some other number – then you
must do the same thing to the other side of the equation too!

Another key thing is that if you divide by a number, make sure

that number is not zero, because dividing by zero is not possible.

So in this case, to isolate Q, we first subtract a from both sides

 a  bQ,

2
and then we divide by minus b

a
 Q.
b

The two minus signs cancel – think of -a as (-1) × a – and to

complete the procedure we just rewrite the equation with Q
(which is the variable we are interested in) on the left-hand side

a
Q .
b

When we have a quadratic function, we are interested in the

turning points of the function, i.e. the values of x and y at which
the function goes from sloping down to sloping up or vice versa.

In particular we often want to find the value of x for which y is

at a maximum: an example above was π = π(Q).

To find such points we use differentiation: more specifically we

take the derivative of y with respect to x.

Where the derivative is zero, we have identified the value of x

for which y is at a maximum or a minimum.

For the function

y  f x 

there are several different forms of notation for the derivative.

dy
The first is
dx . The advantage of this is that it indicates that
we are looking at a rate of change of the function or equivalently
the slope of the graph.

3
 df
The second notation is
dx , which is helpful if dealing with
functions of functions, as we will see in a moment.

The third notation is f x  . The corresponding advantage here

is that it makes clear that the derivative is itself a function of x.
It is also more compact.

Sometimes you will encounter a function which is itself the

product of two functions

y  f x g x  .

To differentiate this function, we use the product rule:

g x   f x  ,
dy df dg

dx dx dx

i.e. you differentiate each component in turn and multiply it by

the (undifferentiated) component.

A very simple example of this is the total revenue function for a

monopolist:

R  RQ  pQQ .

This tells us that revenue is the product of price and quantity,

but price is itself a function of quantity through the inverse
demand curve.

Applying the product rule gives us

dR dp dQ dp
MR   Q p  Q  p.
dQ dQ dQ dQ

4
So far we have talked about general rather than particular rules.

At this stage in the course, the only kinds of functions we will

differentiate are quadratic functions of the type given above:

y  f x   ax 2  bx  c.

The derivative of this function is

dy
 2ax  b.
dx

Many of you will be familiar with this as examples of the more

general power rule, which is that for a function

y  f x   ax n ,

where a and n are (non-zero) numbers, the derivative is

dy
 nax n1.
dx

That is, when you have a variable raised to some power n, the
derivative of the function is n times the variable raised to the
power n-1: you reduce the power time by one, and pre-multiply
by the original power term.

Any constant term a that was in the original function remains

there in the derivative function.