Rate of Change Applications Cont.
Changes in Cost and Revenue
In addition to analyzing motion along a line and population growth, derivatives are useful in analyzing changes in cost, revenue, and profit. The concept of a marginal function is common in the fields of business and economics and implies the use of derivatives.
- The marginal cost is the derivative of the cost function.
- The marginal revenue is the derivative of the revenue function.
- The marginal profit is the derivative of the profit function, which is based on the cost function and the revenue function.
Marginal Cost, Marginal Revenue and Marginal Profit
- If C(x) is the cost of producing x items, then the marginal cost MC(x) is
MC(x)=C′(x).
- If R(x) is the revenue obtained from selling x items, then the marginal revenue MR(x) is
MR(x)=R′(x).
- If P(x)=R(x)−C(x) is the profit obtained from selling x items, then the marginal profit MP(x) is defined to be
MP(x)=P′(x)=MR(x)−MC(x)=R′(x)−C′(x).
We can roughly approximate
by choosing an appropriate value for h.
Since x represents objects, a reasonable and small value for h is 1. Thus, by substituting h=1, we get the approximation MC(x)=C′(x)≈C(x+1)−C(x).
Consequently, C′(x) for a given value of x can be thought of as the change in cost associated with producing one additional item. In a similar way, MR(x)=R′(x) approximates the revenue obtained by selling one additional item, and MP(x)=P′(x) approximates the profit obtained by producing and selling one additional item.
Assume that the number of barbeque dinners that can be sold, x, can be related to the price charged, p, by the equation
p(x)=9−0.03x,0≤x≤300.
In this case, the revenue in dollars obtained by selling x barbeque dinners is given by
Use the marginal revenue function to estimate the revenue obtained from selling the 101st barbeque dinner.
Compare this to the actual revenue obtained from the sale of this dinner.