3.

4

Marginal Functions in
Economics
Marginal Analysis
Marginal analysis is the study of the rate of
change of economic quantities.
An economist is not merely concerned with the value
of an economy's gross domestic product (GDP) at a
given time but is equally concerned with the rate at
which it is growing or declining.
A manufacturer is not only interested in the total cost
of corresponding to a certain level of production of a
commodity, but also is interested in the rate of
change of the total cost with respect to the level of
production.
Supply
In a competitive market, a relationship
exists between the unit price of a
commodity and the commoditys
availability in the market.
In general, an increase in the commoditys
unit price induces the producer to increase
the supply of the commodity.
The higher unit price, the more the
producer is willing to produce.
Supply Equation
The equation that expresses the relation
between the unit price and the quantity
supplied is called a supply equation defined
by .
In general, increases as x increases.
( ) x f p =
( ) x f p =
Demand
In a free-market economy, consumer demand
for a particular commodity depends on the
commoditys unit price.
A demand equation expresses the
relationship between the unit price p and the
quantity demanded x.
In general, decreases as x increases.
The more you want to buy, the unit price should
be less.
( ) x f p =
( ) x f p =
Cost Functions
The total cost is the cost of operating a
business. Usually includes fixed costs
and variable costs.
The cost function C(x) is a function of the
total cost of operating a business.
The actual cost incurred in producing an
additional unit of a certain commodity
given that a plant is already at a level of
operation is called the marginal cost.
Rate of Change of Cost Function
Suppose the total cost in dollars incurred each
week by Polaraire for manufacturing
refrigerators is given by the total cost function


a. What is the actual cost incurred for
manufacturing the 251st refrigerator?
b. Find the rate of change of the total cost
function with respect to when .
( ) ) 400 0 ( 2 . 0 200 8000
2
s s + = x x x x C
x
250 = x
x
a. the actual cost incurred for
manufacturing the 251st refrigerator is
( ) ( )
( ) ( ) | |
( ) ( ) | |
80 . 99
500 , 45 8 . 599 , 45
250 2 . 0 250 200 8000
251 2 . 0 251 200 8000
250 251
2
2
=
=
+
+ =
C C
b. The rate of change is given by the derivative


Thus, when the level of production is 250
refrigerators, the rate of change of the total
cost is
( ) x x C 4 . 0 200 ' =
( ) ( ) 100 250 4 . 0 200 250 ' = = C
Observe that we can rewrite




The definition of derivative tells us that



Thus, the derivative is a good
approximation of the average rate of change of
the function .
( ) ( )
( ) ( )
( ) ( ) ( ) ( )
h
C h C C C
C C
C C
250 250
1
250 1 250
1
250 251
250 251
+
=
+
=

=
( )
( ) ( )
h
C h C
C
h
250 250
lim 250 '
0
+
=

( ) x C'
( ) x C
Marginal Cost Function
The marginal cost function is defined to be
the derivative of the corresponding total cost
function.
If is the cost function, then is its
marginal cost function.
The adjective marginal is synonymous with
derivative of.
( ) x C ( ) x C'
Revenue Functions
A revenue function R(x) gives the revenue
realized by a company from the sale of x
units of a certain commodity.
If the company charges p dollars per unit,
then .
The demand function tells the
relationship between p and x. Thus,
( ) px x R =
( ) x f p =
( ) ( ) x xf x R =
Marginal Revenue Functions
The marginal revenue function gives the
actual revenue realized from the sale of an
additional unit of the commodity given that
sales are already at a certain level.
We define the marginal revenue function to
be . ( ) x R'
Profit Functions
The profit function is given by
where R and C are the revenue and cost
functions and x is the number of units of a
commodity produced and sold.
The marginal profit function measures
the rate of change of the profit function and
provides us with a good approximation of the
actual profit or loss realized from the sale of the
additional unit of the commodity.

( ) ( ) ( ) x C x R x P =
( ) x P'
Average Cost Function
The average cost of producing units of the
commodity is obtained by dividing the total
production cost by the number of units
produced.
The average cost function is denoted by
and defined by


The marginal average cost function
measures the rate of change of the average
cost.
( )
x
x C
( ) x C
( ) x C'
The weekly demand for the Pulser 25 color LED
television is


where p denotes the wholesale unit price in
dollars and x denotes the quantity demanded.
The weekly total cost function associated with
manufacturing the Pulser 25 is given by


where C(x) denotes the total cost incurred in
producing x sets.
) 000 , 12 0 ( 05 . 0 600 s s = x x p
( ) 000 , 80 400 03 . 0 000002 . 0
2 3
+ + = x x x x C
a. Find the revenue function R and the profit
function P.


( ) ( )
2
05 . 0 600
05 . 0 600
x x
x x px x R
=
= =
( ) ( ) ( ) ( )
( )
000 , 80 200 02 . 0 000002 . 0
000 , 80 400 03 . 0 000002 . 0
05 . 0 600
2 3
2 3
2
+ =
+ +
= =
x x x
x x x
x x x C x R x P
b. Find the marginal cost function, the marginal
revenue function, and the marginal profit
function.
( ) x x R 1 . 0 600 ' =
( ) 200 04 . 0 000006 . 0 '
2
+ = x x x P
( ) 400 06 . 0 000006 . 0 '
2
+ = x x x C
c. Compute , , and
and interpret your results.

Since , the cost to manufacture
the 2001st LED TV is approximately 304.
Since , the revenue increased
by manufacturing the 2001st LED TV is
approximately 400.
Since , the profit for
manufacturing and selling the 2001st LED TV
is approximately 96.
( ) 2000 ' C ( ) 2000 ' P ( ) 2000 ' R
( ) 400 2000 ' = R
( ) 304 2000 ' = C
( ) 96 2000 ' = P
Elasticity of Demand
Question: when you produce more
commodities, do you actually get the more
revenue?
It is convenient to write the demand function f in
the form ; that is, we will think of the
quantity demanded of a certain commodity as a
function of its unit price.
Usually, when the unit price of a commodity
increases, the quantity demanded decreases
( ) p f x =
Suppose the unit price of a commodity is
increased by h dollars from p dollars to p+ h
dollars. Then the quantity demanded drops
from f (p) units to f(p + h) units. The
percentage change in the unit price is


and the corresponding percentage change in
the quantity demanded is
( ) 100
p
h
( ) ( )
( )
( ) 100
(

+
p f
p f h p f
( ) ( )
( )
( )
( )
( )
( ) ( )
h
p f h p f
p f
p
p
h
p f
p f h p f
+
=
(

+
=
100
100
price unit the in change Percentage
demanded quantity the in change Percentage
Elasticity of Demand
Since , we can write the
previous ratio as


called the elasticity of demand at price p.
We will see in section 4.1 that
since f is decreasing. Because economists
would rather work with a positive value, we put
a negative sign.
( ) ( )
( ) p f
h
p f h p f
' ~
+
( )
( )
( ) p f
p pf
p E
'
=
( ) 0 ' < p f
Consider the demand equation

which describes the relationship between the
unit price in dollars and the quantity demanded
x of the Acrosonic model F loudspeaker
systems. Find the elasticity of demand E(p).
) 000 , 20 0 ( 400 02 . 0 s s + = x x p
( )
( )
( )
( )
p
p
p
p
p f
p pf
p E

=
+

= =
400
000 , 20 50
50 '
When , we have . This result

tells us that when the unit price is set at $100
per speaker, an increase of 1% in the unit price
will cause a decrease of approximately 0.33% in
the quantity demanded.
When , we have . This result
tells us that when the unit price is set at $100
per speaker, an increase of 1% in the unit price
will cause a decrease of approximately 0.33% in
the quantity demanded.
( )
3
1
100 = E
100 = p
( ) 3 300 = E
300 = p
Since the revenue is ,
the marginal revenue function is




Since , we have . If we

increase the unit price, the revenue increases.
Since , we have . If we
decrease the unit price, the revenue decreases.
( ) ( ) p pf px p R = =
( ) ( ) ( )
( )
( )
( )
( ) ( ) | | p E p f
p f
p pf
p f
p pf p f p R
=
(

+ =
+ =
1
'
1
' '
( ) 1
3
1
100 < = E ( ) 0 100 ' > R
( ) 1 3 300 > = E ( ) 0 300 ' < R
If the demand is elastic at p [E(p)>1], then an
increase in the unit price will cause the revenue
to decrease, whereas a decrease in the unit
price will cause the revenue to increase.
If the demand is inelastic at p [E(p)>1], then an
increase in the unit price will cause the revenue
to increase, whereas a decrease in the unit price
will cause the revenue to decrease.
If the demand is unitary at p [E(p)>1], then an
increase in the unit price will cause the revenue
to stay about the same.
Consider the demand equation

and the quantity demanded each week is 15. If
we increase the unit price a little bit, what will
happen to our revenue?


When x=15, p=2.75, f(p)=x=15, and
) 000 , 20 0 ( 8 2 . 0 01 . 0
2
s s + = x x x p
( )
( )
( )
( )( )
15
11
15
4 75 . 2 '
=

= =
p f
p pf
p E
x dp
dx
dp
dx
x
02 . 0
2 . 1
2 . 0 02 . 0 1

= =
( ) 4 ' = =
dp
dx
p f