Partial Differentation

EC115 - Methods of Economic Analysis
Lecture 3
Partial Dierentiation
Renshaw - Chapter 14
University of Essex - Department of Economics
Week 18
Domenico Tabasso (University of Essex - Department of Economics) Lecture 3 Week 18 1 / 35
Topics for this week
Graphical and economic interpretation: the slope of the
level curve
Second order partial derivatives
Economic Application: Utility Functions
Cross partials and Youngs Theorem
Introduction
Recall that a function of several variables is a relation
between some independent variables x
1
, x
2
, x
3
, ..., x
n
and some dependent variable z such that:
z = f (x
1
, x
2
, x
3
, ...x
n
)
species the value of z given the values of
x
1
, x
2
, x
3
, ...x
n
.
A typical function we encounter in economics is the
Cobb-Douglas function:
u = U(x, y) = Ax
y
1
where A and are positive constants and [0, 1].
Today we will analyze these type of functions further by
asking the following questions:
How does z change when x
1
changes assuming
x
2
, x
3
, ..., x
n
are constant?
How does x
1
changes when x
2
change assuming
z, x
3
, ..., x
n
are constant?
The answers to these questions:
will help us graph functions of the form z = f (x, y);
and
have interesting economic interpretations.
What is a Partial Derivative?
Let us start with a Macro example:
One of the most important questions in
macroeconomics is what determines the growth rate of
a countrys real income.
Suppose that the growth rate, GR, is determined by the following linear
relation:
GR
t
=
0
+
1
I
t
+
2
HC
t
+
3
INST
t
+
4
Tech
t
+... +
We would like to know the impact of each of these variables.

That is, by how much could we improve the growth
performance of an economy if we only
increasing the capital stock (investment), I
t
?
improved the quality of education, HC?
improved our institutions (provide property rights,
stable governments. etc.), INST?
improved our technology through innovations, Tech?
To do this, rst we have to analyze the eects of each
component independently of the others, and then, second
we have to analyze the eects of the components taken as
a whole.
Partial derivatives allow us to perform this task.
Slope of a surface
Consider the utility function:
z = U(x, y) = x
1/2
y
1/3
.
and x the consumption of y = 27.
Recall that this implies we are analyzing the set of
coordinates that have the property (x, 27, z). That is,
we are looking at the graph of the function:
z = U(x, 27) = 3x
1/2
.
The partial derivative of z with respect to x when
y = 27 is the slope of a straight line tangent to this
function at any point (x, z) on its graph.
14
12
10
8
4
6
2
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Original function: z = U(x, y) = x
1/2
y
1/3
Now x the consumption of x = 16.
That is, we are looking at the graph of the function:
z = U(16, y) = 4y
1/3
.
The partial derivative of z with respect to y when
x = 16, is the slope of a straight line tangent to this
function at any point (y, z) on its graph.
What does it mean?
Why do we say that it is a measure of the slope?
A derivative is a measure of change.
For example, how much does z changes when y changes?

As the change in y gets smaller and smaller we nd
that the change in z can be approximated better and
better by the change in y multiplied by the slope of the
tangent.
Suppose that we wanted to know how much does z
changes when we increase y, from y
0
to y
1
, when holding x
constant at 25:
z
0
= U(16, y
0
) = 4y
1/3
0
z
1
= U(16, y
1
) = 4y
1/3
1
Dene the change in y to be y = y
1
y
0
, so that:
z
1
z
0
= U(16, y
0
+ y) U(16, y
0
)
z
y
=
U(16, y
0
+ y) U(16, y
0
)
y
lim
y0
z
y
=
U(16, y)
y
.
A graphical representation
So in order to be able to nd the derivative of z with
respect to x we have to assume that y is just a constant
(i.e. any number) and then apply the standard derivation
rules. Vice versa in case we take the derivative with respect
to y. So for example:
Find the partial derivatives
z
x
and
z
y
of:
z = 3x
3
+ 2x
2
y + y
2
+ y
z
x
= 9x
2
+ 4xy
Why? Because y is a constant! So when x is multiplied by y, its
derivative will be multiplied by y; when y is just added, then it
disappears from the derivative.
z
y
= 2x
2
+ 2y + 1
As before: Now x is a constant!
Another Example
z = (x
3
+ y
2
)
1/2
This is a more complicated case: We have to apply the
Chain Rule. So the derivative will be the product of two
functions: the derivative of theoutside function (i.e.
the power of 1/2) times the derivative of the inside
one. So:
z
x
=
1
2
(x
3
+ y
2
)
1/2
(3x
2
) =
3x
2
2
x
3
+y
2
z
y
=
2y
2
x
3
+y
2
Second order partial derivatives
Now it is easy to see that the rst order partial
derivatives tells us if a function is increasing or
decreasing given that we hold constant the rest of
independent variables.
For example, if f (x
0
, y)/y > 0 for all y [0, 10], this
implies that given x = x
0
, the function f is increasing
in y for values of y that range from 0 to 10 inclusive.
Using the previous exercises we obtained that if
f (x, y) = (x
3
+ y
2
)
1/2
then the partial with respect to
y is:
f (x
0
, y)
y
= y(x
3
0
+y
2
)
1/2
> 0 for all values of y > 0 given that x
0
0.
Summary
If we have a have a function of two variables, we can
calculate two partial derivatives
U(x, y) = x
(1)
=
U
x
= x
1
y
(2)
U
y
= x
y
1
(3)
But each of these derivatives can itself be a function of x
and y. So for each of them we can calculate the derivatives
with respect to x and y!
The second derivatives
So the rst derivative with respect to x can be rederived
with respect to x and y
U(x, y) = x
(4)
=
U
x
= x
1
y
(5)
=
2
U
x
2
= ( 1)x
2
y
(6)
2
U
xy
= x
1
y
1
(7)
The second derivatives
The same is true with respect to y
U(x, y) = x
(8)
=
U
y
= x
y
1
(9)
=
2
U
y
2
= ( 1)x
y
2
(10)
2
U
yx
= x
1
y
1
(11)
So from a function of two variables we can calculate up to
four second order derivatives.
First derivative function
Going back to a previous example:
z = (x
3
+ y
2
)
1/2
(12)
Fixing x = x
0
and performing the partial derivative we
obtain a new function in y:
z
y
= h(x
0
, y) = y(x
3
0
+ y
2
)
1/2
.
By dierentiating again with respect to y we can get
information about how this rst partial changes when y
changes holding constant x = x
0
.
That is, how does h change when y changes (i.e., what
is the slope of h(x
0
, y))?
The function h
Note that h denes the rate of change of z when y changes
and x = x
0
. In this case, we obtain:
h(x
0
, y)
y
=

2
z
y
2
= (x
3
0
+ y
2
)
1/2
y
2
(x
3
0
+ y
2
)
3/2
.
Consider the case of x = 0; then:
h(0, y)
y
= (y
2
)
1/2
y
2
(y
2
)
3/2
= y
1
y
2
y
3
= y
1
y
1
= 0.
The interpretation is as follows when x = x
0
= 0 then:
rst partial: an increase in y increases z.
z is an increasing function in y;
second partial: this increase is constant for all y.
Note that we could have obtained the same results by
putting x = x
0
= 0 into f (x, y) and then dierentiating
(f (0, y) = (0
3
+ y
2
)
1/2
= y).
A graphical representation
Example: Cobb-Douglas function
For the Cobb-Douglas function U(x, y) = x
1/2
y
1/3
we have
that:
U(x, y)
x
=
1
2
x
1/2
y
1/3
> 0,
2
U(x, y)
x
2
=
1
4
x
3/2
y
1/3
< 0.
Economic Application: Utility Functions
Consumer Theory = Marginal Utility and
Diminishing Marginal Utility
U(x,y)
x
is called the MU
x
when we hold constant the
consumption of y.
U(x,y)
y
is called the MU
y
when we hold constant the
consumption of x.
If x or y are commodities that we like, we will assume
that both marginal utilities are positive. Consuming
more of x or y increases our utility. So
U
x
,
U
y
> 0
However, it might be that as we increase the
consumption of x or y we get satiated and our utility
increases but at a decreasing rate as our consumption
increases.
In this case we would expect the second partial
derivatives to be negative.
So

2
U
x
2
,

2
U
y
2
< 0
Cross Partial Derivatives
Recall that second order partial derivatives measure
how the slope of z = f (x, y
0
) changes when x changes.
Cross partials are a natural extension as they measure
how the slope of z = f (x, y
0
) changes when y changes
keeping x constant.
Formally cross partials are denoted by:
2
f (x, y)
xy
or

2
f (x, y)
yx
.
Youngs Theorem
Denition (Youngs Theorem)
For a function y = f (x
1
, x
2
, . . . , x
n
), with continuous rst
and second-order partial derivatives, the order of
dierentiation in computing cross-partials is irrelevant.
2
f (x, y)
xy
=

2
f (x, y)
yx
.
Graphical Representation
The other cross partial derivative
Example: Cobb-Douglas Function
For the Cobb-Douglas utility function we have
U(x, y) = x
0.5
y
0.5
U(x, y)
x
=
1
2
y
x
0.5
and
U(x, y)
y
=
1
2
x
y
0.5
2
U(x, y)
x
2
=
1
4
y
0.5
x
1.5
and

2
U(x, y)
y
2
=
1
4
x
0.5
y
1.5
2
U(x, y)
xy
=
1
4
x
0.5
y
0.5
=

2
U(x, y)
yx
More exercises
Find the second and cross partial derivatives of
1
z = 3x
3
+ 2x
2
y + y
2
+ y
z
x
= 9x
2
+ 4xy
z
y
= 2x
2
+ 2y + 1
2
z = (x
3
+ y
2
)
0.5
z
x
=
3
2
x
2
(x
3
+ y
2
)
0.5
z
y
= y(x
3
+ y
2
)
0.5
3
z = 100e
2x+3y
z
x
= 200e
2x+3y
z
y
= 300e
2x+3y

Partial Differentation

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EC115 - Methods of Economic Analysis

We would like to know the impact of each of these variables.

A derivative is a measure of change.

For example, how much does z changes when y changes?

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