Application of derivatives to Business and economics

Presentation content:
Introduction to Application of derivatives and its importance in the Business field The demand function The cost function The revenue function The profit function Examples

The demand function

The demand function is the function that relates the price p(x) of a specific unit of a product to the number of units x produced. p(x) is also called the demand function.

p(x)= p * x

The cost Function

The cost function is the function that relates the total cost C(x) of producing an x number of units of a product to that number x

C(x) = p(x) * x

A general Example:
A football match takes place in a stadium that can take 60,000 people. At first the tickets cost QR30 , it was expected that around 30,000 people would come , then when the tickets value were lowered to QR20 the audience attendance was expected to rise to 5000. Find the demand function assuming that this is a linear Function?

Solution
First we find the equation of the straight line through the following points: (30000,30) ,(35000,20) Secondly we find the slope: m = (20-30)/(35,000 - 30,000) = -10/5000 = -1/500

So the equation of this line is: P(x) - 20 =(-1/500).(x - 35,000) P(x)=-1/500.(x - 35,000)+20 So the demand function is : P(x)= -1/500x+70+20 = -1/500x+90

 Total cost example:If BMW company wants to produce 10 cars and each car cost 200,000 QR, find total cost gain from selling this amount of cars: The solution:C(x) = P(x) * x C(x) = (10*200,000) * 200,000 C(x) = 40,000,000,000 QR

The revenue function

The revenue function which represented in R(x) is simply the product of the number of units produced x by the price p(x) of the unit. So the formula is: R(x)=x . p(x)

Example
The demand equation of a certain product is p=6-1/2x dollars. Find the revenue: R(x)= x.p =x(6-1/2x) =6x-1/2x2

The Profit Function

The profit function is nothing but the revenue function minus the cost function So the formula is : P(x)= R(x)-C(x) x.p(x)-C(x)

Notice that : A maximum profit is reached when: 1. the first derivative of P(x) when P(x) is zero or doesnt exist
And 2. The second derivative of P(x) is always negative P(x)<0 *when P(x)=0 this is the critical point, and since P(x)<0 the parabola will be concave downward Another important notice is: Since P(x)= R(x)- C(x) Then a maximum profit can be reached when: R'(x)-C'(x)=0 and R (x)-C(x)<0

Example
A factory that produces i-pods computed its demand, and costs and came to realize that the formulas are as follows: p=100-0.01x C(x)=50x+10000

Find:
The number of units that should be produced for the factory to obtain maximum profit. The price of the unit.

R(x)=x.p =x.(100-0.01) =100x -0.01x2 Now: P(x)=R(x)-C(x) =100x-0.01x2 (50x+10000) =-0.01x2 + 50x-10000

Now the maximum point in the parabola will occur When P'(x)=0 ; P"(x)<0 P(x) =-0.01x2 + 50x-10000 P'(x)=-0.02x+50 -0.02x+50=0 -0.02x=-50 x=2500 P'(2500)= -50+50=0 So the P'(X)=0 When x=2500 - Now we will find the second derivative: P(x)= -0.02 P(2500)= -0.02<0 So x=2500 is at a local maximum

Graph
y
80000 70000 60000 50000 40000 30000 20000 10000

x
-500 500 1000 1500 2000 2500 3000 3500 4000 4500

Finally to find the price that is needed to be charged per unit we return to the demand function: P=100-0.01(2500) = 100-25= $75

Thank you