This document discusses applications of derivatives in business and economics. It introduces cost, revenue, and profit functions, and how their derivatives - marginal cost, marginal revenue, and marginal profit - can be used to analyze production levels. Specifically, it states that a firm will set production at the level where marginal revenue equals marginal cost in order to maximize profit. Applications include finding the production level that maximizes total revenue or profit given cost and demand equations. Key concepts introduced are marginal analysis, profit maximization, and setting production where marginal revenue equals marginal cost.
This document discusses applications of derivatives in business and economics. It introduces cost, revenue, and profit functions, and how their derivatives - marginal cost, marginal revenue, and marginal profit - can be used to analyze production levels. Specifically, it states that a firm will set production at the level where marginal revenue equals marginal cost in order to maximize profit. Applications include finding the production level that maximizes total revenue or profit given cost and demand equations. Key concepts introduced are marginal analysis, profit maximization, and setting production where marginal revenue equals marginal cost.
This document discusses applications of derivatives in business and economics. It introduces cost, revenue, and profit functions, and how their derivatives - marginal cost, marginal revenue, and marginal profit - can be used to analyze production levels. Specifically, it states that a firm will set production at the level where marginal revenue equals marginal cost in order to maximize profit. Applications include finding the production level that maximizes total revenue or profit given cost and demand equations. Key concepts introduced are marginal analysis, profit maximization, and setting production where marginal revenue equals marginal cost.
This document discusses applications of derivatives in business and economics. It introduces cost, revenue, and profit functions, and how their derivatives - marginal cost, marginal revenue, and marginal profit - can be used to analyze production levels. Specifically, it states that a firm will set production at the level where marginal revenue equals marginal cost in order to maximize profit. Applications include finding the production level that maximizes total revenue or profit given cost and demand equations. Key concepts introduced are marginal analysis, profit maximization, and setting production where marginal revenue equals marginal cost.
economists have increasingly turned to mathematical models to help them describe what is happening, predict the effects of various policy alternatives, and choose reasonable courses of action. The derivative is one of the mathematical tools employed by economists and business analysts. Section 2.7 is devoted to illustrating a few of the many applications of the derivative to the problems of business and economics.
There are three main functions we will work with in
this section Applications in our textbook are centered around the theory of the firm. We will study the activity of a business or industry and restrict our analysis to a time period during which background conditions (supplies, wage rates, etc.) are fairly constant.
C(x) = cost of producing x units of a product
R(x) = revenue generated by selling x units of a product P(x) = R(x) C(x) = the profit (or loss) generated by producing and selling x units of the product. NOTE: These functions are often only defined for nonnegative integers. Why?
Often, these functions give rise to a set of discrete
points on a graph.
In studying these functions, economists usually
assume that C(x) is defined for all values of x and draw a smooth curve through the points.
If we assume that C(x) has a smooth graph, then we can use the tools of calculus (derivatives) to study it.
Suppose that the cost function for a manufacturer is
given by C(x) = (10-6)x3 - .003x2 +5x +1000 dollars
In sketching the graph of the marginal cost
y = C(x), we can use y = C(x) to provide us with information about the graph.
(a)Describe the behavior of the marginal cost.
(b)Sketch the graph of C(x) For (a), recall that marginal is the word for derivative in business and economics. For (b), we can get information about the graph from calculating first and second derivatives.
The relative minimum point of the marginal cost
graph can be discovered by examining y = C(x) = 0.
We can tell that the marginal cost graph will be a
parabola that opens upward. How?
The graph of the marginal cost function.
Solving C(x)=.000006(x-1000) = 0 for x
uncovers a horizontal tangent at x = 1000. The associated value of y in the marginal cost graph is calculated by (3)(10-6)(1000)2 - .006(1000) + 5 =36+5=2
Since the graph of the marginal cost function never
reaches 0, then there are no relative extreme points in the graph of the cost function.
The graph of the cost function.
We also note that the graph of C(x) is never
negative. What does this tell us about the graph of C(x)? What else can we tell about the graph of C(x) from looking at the graph of C(x)?
R(x) is the revenue received from the sale of x units
of some commodity. We call R(x) the marginal revenue.
Revenue Functions
Economists use marginal revenue to measure the
rate of increase in revenue per unit increase in sales. If x units are sold at a price p per unit, the total revenue R(x) is given by R(x) = xp
Some economic concepts for revenue
If a firm is small and has many competitors, then its sales have little effect on the market price of its commodity. The price is then constant as far as the one firm is concerned, and the marginal revenue R(x) equals the price p.
However, if the firms production of a commodity
has a significant impact on the availability of the commodity (for example, when the firm has a monopoly), then an interesting problem arises. Consumers will purchase more of the commodity when the price is low, and fewer units when the price is high. Let f(x) be the highest price per unit at which all x units can be sold to customers. Since consumers will buy less when the price increases, the graph of f(x) will be decreasing.
The demand equation p = f(x) determines the total
revenue function. If a firm wants to sell x units, the highest price it can set is f(x) dollars per unit. The revenue function becomes R(x) = xp = xf(x)
The concept of the demand curve applies to an
entire industry, as well as a single monopolistic firm. In this case, many producers offer the same commodity for sale. If x denotes the total output of the industry, then f(x) is the market price per unit of output and xf(x) is the total revenue earned by the industry from the sale of x units.
The demand equation for a certain product is
We want to begin by developing our revenue
function R(x). R(x) = xp so
p = 6 x dollars The marginal revenue is given by R(x) Find the level of production that maximizes revenue. Note that R(x) is the graph of a parabola that opens downward. How do we know?
We use R(x) = 0 to identify the relative maximum
point.
The graph of R(x) appears as
6 x = 0 x=6 The corresponding value of y is
Once we know the cost function C(x) and the
revenue function R(x), we can compute the profit function P(x).
Profit Functions
P(x) = R(x) C(x)
Suppose that the demand equation for a monopolist
is p = 100 - .01x and the cost function is C(x) = 50x + 10,000. Find the value of x that maximizes the profit and determine the corresponding price and total profit for this level of production.
We need to construct the profit function
P(x) = R(x) C(x). C(x) has been given, so we compute R(x) using the demand equation
The relative extreme point of P(x) will be the point
at which profit is the highest. We need to compute the marginal profit function P(x), and solve P(x) = 0 for x.
Then, our profit function is
Solving P(x) = 0, we have -.02(x-2500) = 0 The graph of P(x) is a parabola that opens downward. How do we know?
which yields x = 2500
If 2500 units are produced, the profit would be
P(2500) = -.01(2500)2 + 50 (2500) 10,000 = 52, 500 dollars The highest price at which the 2500 units can be sold is
Setting Production Levels
P = 100 - .01(2500) = 100 25 = 75 dollars Answer: Produce 2500 units and sell them at $75 per unit. The profit will be $52, 500.
Suppose that a firm has cost function C(x) and
revenue function R(x). In a free-enterprise economy, the firm will set production x in such a way as to maximize the profit function P(x) = R(x) C(x). If P(x) has its maximum at x = a, then P(a) = 0. It follows that since P(x) = R(x) C(x) that R(a) C(a) = 0 or R(a) = C(a) Thus profit is maximized at the production level for which marginal revenue equals marginal cost.
