Jim Whitney | Economics 102 |
The product rule: Y = u·v => dY/dX = d(u·v)/dx
= u·dv + v·du
where u and v are two functions of X (u(X)
and v(X), with the arguments dropped for simpler notation), and
dv and du being the shorthand notation for du/dX
and dv/dX.
Example: Use the product rule to prove that MR =
P for a PC firm and MR < P for a monopoly.
Let u = P, where P (price) is a function of
Q (quantity)
v = Q
Y = TR = u·v
= P·Q.
Using the product rule and substituting the
example notation:
Y = u·v
=> dY/dX = d(u·v)/dx = u·dv + v·du
TR= P·Q
=> dTR/dQ = d(P·Q)/dQ = P·dQ/dQ + Q·dP/dQ
= P + Q·dP/dQ
Since dTR/dQ is MR, we have the final result:
(*) MR = P + Q·dP/dQ.
(1) For a PC firm, dP/dQ
= 0, so the second term in (*) drops out, leaving MR = P.
(2) For a monopoly, dP/dQ
< 0, so the second term in (*) is negative, making MR < P. QED
The quotient rule: Y = u/v => dY/dX = d(u/v)/dx = (v·du
- u·dv)/v2
Example: Use the quotient rule to prove that ATC
falls when MC < ATC and ATC rises when MC > ATC.
Let u = TC, where TC (total cost) is a function
of Q (quantity)
v = Q
Y = ATC = u/v = TC/Q.
Using the quotient rule and substituting the
example notation:
Y = u/v
=> dY/dX = d(u/v)/dx = (v·du - u·dv)/v2
ATC= TC/Q => dATC/dQ
= d(TC/Q)/dQ = (Q·dTC/dQ - TC·dQ/dQ)/Q2
= (Q·dTC/dQ - TC)/Q2
= [(Q·dTC/dQ)/Q - (TC/Q)]/Q
= [(dTC/dQ) - (TC/Q)]/Q
Since dTC/dQ is MC, and TC/Q is ATC, we have
the final result:
(*) dATC/dQ = [MC - ATC]/Q.
(1) ATC falling => dATC/dQ
< 0 => [MC-ATC] < 0 => MC < ATC.
(2) ATC rising => dATC/dQ
> 0 => [MC-ATC] > 0 => MC > ATC. QED