FUNCTIONS IN ECONOMICS AND COMMERCE
Let q be the demand (quantity) of a commodity and p the price of that commodity. The demand function is defined as q = f(p) where p and q are positive. Generally, p and q are inversely related.
Observe the graph of the demand function q = f(p)
Following y can be made from the graph (Fig 3.1) (i) only the first quadrant portion of the graph of the demand function is shown since p and q are positive. (ii) slope of the demand curve is negative.
Let x denotes amount of a particular commodity that sellers offer in the market at various price p, then the supply function is given by x = f(p) where x and p are positive.
Generally x and p are directly related Observe the graph of the supply function, x = f (p)
Following observations can be made from the graph (Fig 3.2)
(i) only the first quadrant portion of the graph of the supply function is shown since the function has meaning only for nonnegative values of q and p.
(ii) slope of the supply function is positive.
Normally total cost consists of two parts.
(i) Variable cost and
(ii) fixed cost. Variable cost is a single - valued function of output, but fixed cost is independent of the level of output.
Let f (x ) be the variable cost and k be the fixed cost when the output is x units. The total cost function is defined as C(x) = f(x) + k, where x is positive.
Note that f(x) does not contain constant term.
We define Average Cost (AC), Average Variable Cost (AVC), Average Fixed Cost (AFC), Marginal Cost (MC), and Marginal Average Cost (MAC) as follows.
Note d (AC) dx If C(x) is the total cost of producing x units of some product then its derivative C'(x) isthemarginal cost which isthe approximate cost of producing 1 more unit when the production level is x units. The graphical representation is shown here (Fig 3.3).
Let x units be sold at Rs. p per unit. Then the total revenue R(x) is defined as R(x) = px , where p and x are positive.
Note If R(x) be the total revenue gained from selling x units of some product, then its derivative, R'(x) is the marginal revenue, which is approximate revenue gained from selling 1 more unit when the sales level is x units. The graphical representaion is shown here (Fig 3.4)
The profit function P(x) is defined as the difference between the total revenue and the total cost. i.e. P(x) = R(x) C (x).
The elasticity of a function y = f(x), with respect to x, is defined as
Thus the elasticity of y with respect to x is the limit of the ratio of the relative increment in y to the relative increment in x, as the increment in x tends to zero. The elasticity is a pure number, independent of the units in x and y.
Elasticity of Demand
Let q = f(p) be the demand function, where q is the demand and p is the price. Then the elasticity of demand is
Since the slope of the demand curve is negative and elasticity is a positive quantity the elasticity of demand is given by
Elasticity of Supply
Let x = f(p) be the supply function, where x is the supply and p is the price. The elasticity of supply is defined as
The price at which quantity demanded is equal to quantity supplied is called equilibrium price.
The quantity obtained by substituting the value of equilibrium price in any one of the given demand or supply functions is called equilibrium quantity.
Relation between Marginal Revenue and Elasticity of Demand Let q units be demanded at unit price p so that p = f(q) where f is differentiable.
The revenue is given by
R(q) = qp
R(q) = q f(q) [ p = f(q)]
Marginal revenue is obtained by differentiating R(q) with respect to q
A firm produces x tonnes of output at a total cost C(x) = 1/10 x3 - 4x 2 + 20x + 5 10
(i) Average cost
(ii) Average Variable Cost
(iii) Average Fixed Cost
(iv) Marginal Cost and
(v) Marginal Average Cost.
C(x) = 1/10 x3 - 4x 2 + 20x + 5
The total cost C of making x units of product is C = 0.00005x3 - 0.06x2 + 10x + 20,000. Find the marginal cost at 1000 units of output.
C = 0.00005x3 - 0.06x2 + 10x + 20,000
At x = 1000 units, Marginal Cost is Rs. 40
Example 3 Find the elasticity of demand for the function x = 100 - p - p 2 when p = 5.
Find the elasticity of supply for the supply function x = 2p2+8p+10
Solution : x = 2p2+8p+10
dx/dy = 4p+8
Example 5 For the function y = 4x-8 find the elasticity and also obtain the value when x = 6.
Solution : y = 4x- 8
dx/dy = 4
Example 6 If y = find Ey/Ex . Obtain the values of ψ when x = 0 and x = 2.
We have y =
Differntiating with respect to x, we get
when x = 0, η = 0
when x = 2, η = 7/12
A demand function is given by xpn = k, where n and k are constants. Calculate price elasticity of demand.
Solution : Given x pn = k
⇒x = k p-n
Show that the elasticity of demand at all points on the curve xy2 = c (c is constant), where y represents price will be numerically equal to 2.
Solution : We have
We have xy2 = c
x = c/y2
Differentiating with respect to y,
The demand curve for a monopolist is given by x = 100-4p (i) Find the total revenue, average revenue and marginal revenue. (ii) At what value of x,the marginal revenue is equalto zero?
Solution : We have
If AR and MR denote the average and marginal revenue at any output level, show that elasticity of demand is equal to . Verify this for the linear demand law p = a + bx. AR – MR where p is price and x is the quantity.
Given p = a + bx
Differentiating with respect to x
Example 11 Find the equilibrium price and equilibrium quantity for the following demand and supply functions, Qd = 4-0.06p and Qs = 0.6+0.11p
At the equilibrium price
Qd = Qs
⇒ 4-0.06p = 0.6 + 0.11p
⇒ 0.17p = 3.4
when p = 20, Qd = 4 -(0.06)(20)
= 4-1.2 = 2.8
∴ Equilibrium price = 20 and Equilibrium quantity = 2.8
Example 12 The demand for a given commodity is given byq = p/p - 5 (p>5), where p is the unit price. Find the elasticity of demand when p =7. Interpret the result.
This means that if the price increases by 1% when p = 7, the quantity demanded will decrease by approximately 2.5%. Also if the price decreases by 1% when p = 7, the quantity demanded will increase by approximately2.5%.
Example 13 The demand for a given commodity is q = - 60p + 480, (0 < p < 7) where p is the price. Find the elasticity of demand and marginal revenue when p = 6. Solution : Demand function q = -60p + 480 Differentiating with respect to p, we get