Chapter Five: Integral Calculus

Introduction:
In the previous chapters, you have discussed derivate and related concepts. If you are given a primitive
function , you can find its derivative function using techniques of derivative. For example, if
is given, the first derivative applying the techniques of derivative.
However, if the derivative function is given and F(x) were not known, how can you get
It is not possible using the techniques of derivative, since the process is opposite of derivative.
Obtaining a primitive function given the derivative function is known as Integral calculus. The
process is known as integration or anti derivative. In this chapter, you will understand the concept of
integration, techniques of integration as well as its application in economics.

Objective:
After completing this chapter, students will be able to be:

Understand the concept of integration

Use the rules of integration to solve integration problems
Apply the rules and techniques of integration to solve economic problems
The Concept of Integration
If is the derivative of , it possible to integrate f(x) to find the primitive function F(x), provided
that appropriate information is given. Integration is the opposite of derivative. Derivative and
integration may thus be likened two ways of studying the family tree: differentiation seeks out the
progeny the function ; integration is tracing back the parentage of the function . Since
integration is different from differentiation we should use a different notation of integration as given
below.

In the integral notation on the left, is the sign of integration while is known as the integrand
(the function to be integrated. The part of the notation refers to which variable the integration is
performed; in this case, it reminds that the integration is performed with respect to the variable .

Suppose you are required to find the F(X) given its derivative

By straightforward inspection the answer could be

, Since . However, the derivative of is also .

This is because the derivative of a constant is zero. if you also introduce any constant number other than
5, the derivative is . Therefore we can rewrite as

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Where C refers the arbitrary constant

In general, if is any function that differentiates to then, so does . Hence

The arbitrary constant is called the constant of integration. The presence of an arbitrary constant of
integration serves to indicate the multiple parentage of the integrand. That is

The integral is known as indefinite integral of , because it has not define numerical value.

The basic Rules of Integration

To begin the rules of integration, let’s begin developing the basic rules from differentiation.

If , then

Since

Example:

Find the indefinite integral of the following functions applying the basic rule of integration

a)
b)
Solution:

a)
b)
Rule I. Constant rule

Given a constant function

Where k and C are constants

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Example:

Find the integral of the following constant functions with respect the variable x.

a)
b)
c)
Solution:

a)
b)
c)
Rule II. Constant multiple rule

Where k is a constant

Example:

Find the integral of the following functions.

a)
b)
Solution:

a)

b)
Rule III. Sum or difference rule:

Given two functions and

Example:

Find the integral of the following functions.

a)
b)
c)

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Solution:

a)

b)

c)

Rule IV. The power rule:

Given a function , then its integral is obtained as

This is the simple power rule that we have considered as the basic rule of integration. It is based on this
rule all other rules are developed. Using this rule, we can solve the following examples.

Example:

Find the integral of the following functions

a)
b)
c)
d)
e) ,
Solution:

a) . Here, you have , and therefore

b) . Here, you have , and therefore

c) . Here, you have , and therefore

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 d) . Here, you have , and therefore

e) . Here, you have , and therefore

Rule V. The exponential rule:

We have discussed that to differentiate an exponential function, all we need to do is to multiply by

the coefficient of x. To integrate we do exactly the opposite and divide by the coefficient of x, s o

Example:

Find the integral of the following functions

a)
b)
c)
Solution:

a)
b)
c)
Rule VI. The logarithmic rule:

The integrand , which is a special form of the power function where the power is negative one.
The particular integrand is inadmissible under the power rule, but now is duly taken care of by the
logarithmic rule. As stated, the logarithmic rule is placed under the restriction , because logarithms
do not exist for non- positive values of . A more general formulation of the rule, which can take of
negative value of , is

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Example:

Find the integral of the following function

a)
Solution:

a)
Rule VII. The Substitution Rule:

The integral of with respect to the variable is the integral of with respect to the
variable is

Example:

Find the integral of

a)
b)
c)
Solution:

a)
Let , then which means . Then by substitution

, where

b)

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 Let , then

c)
Let , then

Rule VIII. Integration by parts:

The rationale behind this result is relatively simple. First, the product rule of differentials gives us

And then, if we integrate both sides of the equation

Example:

Find the integral of

a)
b)

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Solution:

a)
Let and , thus . Then

b)
Let . Then and .

Exercise:

1. Find the indefinite integral of the following functions

a) d)
b) e)
c) f)
2. Apply the substitution rule or integration by parts rule to find the indefinite integral of the
following functions.
a) c)
b) d)

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 e)
Definite integrals
All integrals sited previously are of the indefinite variety, each in a function of a variable and hence
possess no definite numerical, i.e.

If we choose two values of x in the domain (say a and b, b>a), substitute them successively in to the right
of equation and f form the difference, we will have the following.

We get a specific numerical value free of the variable x, as well as the arbitrary constant c. This value is
called the “the definite integral” of from a to b. we refer to ‘a’ the lower limit of the integration
and to ‘b’ as the upper limit of the integration. In order to indicate the limit of the integration, we have
to modify the integral sign to the form of . Then the integration can be written as;

Example:

Find the definite integral of the following function.

a) ; For the lower limit 1 and upper limit 5.

b) ; For the lower limit ‘a’ and upper limit ‘b’.
c) ; For the lower limit 0 and upper limit 4.
Solution:

a)
b)
c)
4.1.1. Some Properties of Indefinite Integral
Property I. The interchange of the limits of the integration changes the sign of the definite integral:

Proof:

Property II. A definite integral has a value of zero when the two limits of integration are identical:

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 Property III. A definite integral can be expressed as a sum of a finite number of a definite
sub-integrals as follows

Property IV.

Property V.

Property VI.

Property VII.

Definite Integral and Area under a Curve

Every definite integral has a definite value. The value may be interpreted geometrically to a
particular are under a given curve. The graph of a continuous function is drawn in the
following figure.

a b

If we seek to measure the shaded area, , enclosed by the curve and the x-axis between the two
points a and b in the domain we may proceed in the following manner. First we divide the in
to ‘n’ sub-intervals. Since each interval represents change in x, we may refer to them as
respectively.

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 Let’s assume . On the sub-intervals, let’s construct four rectangular blocks. The highest of
each block is equal to the highest value of the function attained in that block. The first block has the
highest and the width , and in general the block has the highest of and the
width . The sum of the areas of the four blocks gives as the area of the shaded portion of
rectangular blocks which is plus the unshaped portion of the rectangular blocks. If we assume the
area of the blocks is represented by , then it can be given as;

The area of is not the exact are of , and the only difference is that, inlcudes the unsahded
portion. Therfore, we should minimize the unshaded portion so that area of best approximates
the shaded area which is area of . In order to shrunk the size of the unshaded portion of the
rectangular blocks, we may subdivide a-b in to many more small blocks. For example, if we subdivide
in to eight blocks, as it can be seen in the follwing figure, the usnshded portion is shrunk compared
to when we ther were only four blocks. Further, we observe that the width of each block has
beocme short.

a b

Thefore, if we subdivide the interval in to large number of blocks, the size of the unshaded
protion will become zero. As a result, as number of blocks increases to a larger numebr, the area of
sum of blocks equals the area of the shaded area under the curve . That is;

, provided that the limit does exist.

As n increases to a very large number, becomes very small which can be represented by the
differential . Accordingly, is rewritten as . In the other hand, as n approaches to

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 infinity, the summation notation which represents the sum of finite number of terms is
substituted by the definite integral symbol . Then,

In general, given a fucntion , the area under the curve for the interval a-b equals the definte
integral of the function for the interval.

Example:

Given the following graph, find the area of

a) BFDA
b) BFC
44
𝑦=𝑓(𝑥)=20+4𝑥
40
𝑦
36
𝐸 𝐹
32
28
24
20 𝐵 𝐶
16
12
8
4
𝐴 𝐷
0
0 1 2 3 4 5 6
𝑥

Solution:

a) The area of BFDA is given as the area under the curve betaween 1 and 3. That is

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 b) The area of BFC is given as the area BFDA minus the area of the rectangle BCDA. That is;

Activity:

Given the above graph, find the area of BEF

Exercise:

1. Find the following

a)
b)
c)
d)
e)
f)

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 2. Find the area under the curve for the following function
a) between and
b) – for the interval
Improper Integrals
I. Infinite limits of integration
When we have a definite integral of the form

With one limit of integration being infinite, we refer to them as improper integral. In these cas it is not
possible to evaluate the integral as, respectively.

This all is because is not a number, and therefore it cannot be substituted for in the function .
Instead, we must resort once more to the concept of limits. That is;

If the limit exists, the improper integral is said to be convergent (or to converge) and the limiting process
will yield the value of the integral. If the limit does not exist, the improper integral is said to be divergent
and is in fact meaningless.

Example:

Consider the following integration

We first denote as of

Applying the limit of the integral;

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Therefore, the improper integral does converge and it has a value of 1.

Example:

Consider also the following case;

First we denotes as of;

As , . Thus the given improper integral is divergent.

II. Infinite integrand

Even with finite limits of integration, an integral can still be improper, if the integrand becomes infinite
somewhere in the interval of integration [a, b]. To evaluate such an integral, we rely up on the concept
of a limit.

Example:

Consider the following

This integral is improper because, the integrand is infinite at the lower limit of integration ( as
). Therefore we should find first find the integral as

And then evaluate its limit as :

Since this limit does not exist (as ), the given integral is divergent.

Example:

On the other hand consider the following example;

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When , the integrand becomes infinite; the integrand is therefore improper. Accordingly, let’s
apply the limit as;

The limit of this expression as is . Thus the given integral is convergent (to 6).

Economic Applications of Integrals

Economic Application of indefinite Integral
Integration is the opposite of differentiation, and marginal functions are the derivatives of total
functions. Therefore, the integration of marginal function should result the total functions. For example,
the integration of marginal revenue function results in the total revenue function; the integration of
marginal cost function results in the total cost function; the integration of marginal propensity to
consume results the consumption function; the integration of marginal propensity to save results in the
saving function; etc.

I. Finding Total Cost Function from Marginal Cost Function:

Example:

If the marginal cost (MC) of a firm is given as , and if the totac fixed cost is , then
find the total cost fucntion .

Solution:

Margina cost is the slope of total cost fucntion, and thus the integration of marginal cost fucntion resluts
in the total cost function. Accordingly integrating with respect to , gives us the
folloing integral fucniotn.

Since total fixed cost equals total cost when Q is zero, we can rewrite the total cost fucntion at as

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Therefore, the total cost fucntion is

II. Finding Total Revenue Function from Marginal Revenue Function:

Example:

If the marginal revenue fucntion (MR) of a particular firm is given as , then find the
total revenue fucntion .

Solution:

The total revenue function is the integral of marginal revenue function. That is

Since total revenue is zero when output is zero, we have

Therefore, the total revenue function is

III. Finding Saving Function from Marginal Propensity to Save Function:

Example:

If the marginal propensity to save (MPS) is given as and if aggregate saving is

zero when income (Y) is 81, find the saving fucntion .

Solution:

Marginal propensity measures the change in aggregate saving resulting from a unit income change. That
implies MPS is the derivative of saving function. Accordingly, the integration of marginal propensity to
save with respect to income results in the aggregate saving function. That is

The value of C is obtained based on the information that saving is zero when income is 81. That is

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Therefore, the saving function is given as

IV. Finding Consumption Function from Marginal Propensity to Consume Function:

Example:

Find the consumption function , if the marginal propensity to Consume (MPC) is given as
and aggregate consumption is 85 when income (Y) is 100.

Solution:

As we have done in the previuos examples, the integration of marginal propensity consume with respect
to income gives us the consumtion fucntion. This is because, marginal propensity to consume is the
change in consumption as a result of a unit inomce, which is the derivative of consumtoion. Therofre,

Since aggregate consumption is 85 when income (Y) is 100, the value of C can be obtained as

Therefore, the consumtion fucntion is

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 V. Investment and Capital Formation

Capital stock of a country is the productive capicity of a country. Therofere, a country should increase its
capital accumulated every period or time. The process of adding new capital to the existing capital stock
is called capital formtion. As a result, we may express capital scock as a fucntion of time and the
rate of capital formation over time as the derivative of capital stock with respect to time . By
defintion, the rate of capital formation at time t is equal to the rate of net investment flwo at time t
denoted by . Thus capital stock K and net investment I can be related as

- The derivative of capital stock with respect ot time equals the net investment at periond t. That
is

- This again imples, the integration of net investment fucntion at time t equals the capital stock at
period t. That is

Example:

Suppose that the net investment flow is described by the and that the intial capital stock (K
at time ) is . What is the time path of capital K?.

Solution:

Capital (K)as a fucntion of time equals the integration of net investment function. Thus , when net
investment fucntion is , the capital function is given as

Since K at period is , the constant C can be obtained as

Therefore, time path of capital K which is the capital stock fucntion over time is

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 Economic Application of Definite Integral

I. Consumers’ Surplus and Producers’ Surplus

Consumer s’ Surplus:
Example:

If the market demand fucntion is give by , find the conumes’ surplus at .

Solution:

When price equals

Then, the consumers’ surplus can be shown graphically as follows.

35

30
P Consumer's Surplus
25

20

15

10
B C
5
DD
A D
0
0 1 2 3 4 5 6 7 8
Q

In order to find the consumers’ surplus (CS), we apply the definite integral which was stated as
means of finding area under the curve between two points. Therefore, the above consumers’ suplus
(CS) can be interpreted as the area under the curve between 0 and 5 minus area of rectangle ABCD.
That is

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Producer’s Surplus:
Example:

If the market Supply fucntion is give by , find the Producers’ surplus at .

Solution:

When quantity supplied , the price equals . Given all this information,
the consumers’ surplus is shown graphically as follows.

44
40
P 36 Producers' Surplus SS
32
28 F G
24
20
16
12
8
4
0 E H
0 1 2 3 4 5 6 7
Q

In order to find the proucers’ surplus (PS), we apply the definite integral which was stated as means
of finding area under the curve between two points. Therefore, the above producers’ suplus (PS) can
be interpreted as the area of rectangle EFGH minus area under the curve between 0 and 5. That is

II. Cost of Production

Example:

Find the total varible cost at , if marginal cost funtion of the firm is

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Solution:

The total variable cost when is equal to the area under the marginal cost curve between
and . That is

III. Revenue of a Firm

Example:

If the linear demand dunction for a firm is given as , find the maximum total revenue using
definte integral.

Solution:

Total revenue of a firm equals price times quntity. . Thus, total revenue is
maximized when marginal revenue zero. That is

Therefore, total revenue is maximized when output is 15. The maxmized total revenue will then be
computed using definte integral as the area under marginal revenue curve between 0 and 15. That is,

IV. Investment Flow

Example:

If the net investment fucntion is given as , find

a) The capital formation from the end of the first year to the end of the fourth year
b) The number of years required before the capital stock exceeds
Solution:

a) The capital formation from the end of the first year to the end of the fourth year is given as

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 b) In this case, we supposed to find the numberof years required (T) for the capital stock to reach
100,000. This can be expressed as

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Chapter Six: Linear Difference and Differential Equations

Introduction:
In the previous discussions, we assumed equilibrium are achieved instantaneous or immediately.
However, economic variable take time vary. This means, equilibriums are not achieved as they are
calculated or known, they need some time to make adjustment. The incorporation of time in economic
models is known as dynamics. Dynamic analysis enables us to decide whether equilibriums values are
actually achieved and, if so, exactly how individual variables approach these values. On the other hand,
economic models which do not incorporate time variables are known as static and the corresponding
equilibriums are static equilibriums. Thus, all the previous discussions are static equilibriums analyses.

This chapter introduces you with the dynamic economic analyses through explaining the basics of
difference and differential equations.

Objective:
After completing this chapter, students will be able to be:

Solve the general solution of a linear difference and differential equation

Solve the specific solution of a linear difference and differential equation
Analyze the linear economic difference and differential equations
Definitions and Concepts
A difference equation (sometimes called a recurrence relation) is an equation that relates consecutive
terms of a sequence of numbers. We express the dependence using an obvious subscript notation. For
example, the price during the first period is denoted by , the price during the second period is , and
so on.
Sometimes a mathematical formulation of a problem involves an equation in which a quantity and rate
of change of that quantity are related by an equation. Rate of changes can be expressed in terms of
derivatives or differential and thus an equation is appropriately called differential equation. Therefore,
a differential equation is an equation that involves the derivative of an unknown function. Here, the
expression of the dependency is using the usual function notation. For example, the price of a product
at period t and the rate of change of price over time is expressed as and respectively.

First-Order Linear Difference Equations

For example, consider the following.

This descries that one number is twice its predecessor.

There are many sequences that satisfy this requirement including the following.

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Therefore, in order to determine the sequence uniquely, we need to be given with some additional
information. This additional information might be the first term denoted as . Once the first term is
known, all the remaining terms are known.

If for the sequence equation

Since ,
In general, given , the general equation can be rewritten as

However, the difference equation may be given in different form such as . In this case,
the general solution is the sum of a complementary function (CF) and particular function.
Complementary function is when the constant C is assumed to zero. On the other hand, particular
solution is when a particular value (constant value ) is considered. This implies, the general solution
(PS) is

If the difference equation is given as ,

The complimentary function (CF) is computed assuming . That is,

, where
The Particular Solution (PS) is computed assuming , where D is a constant. That
is,

Example:

Find the general solution and specific solution of the unknown function, if the differnce
equation is given as
Solution:

General solution is that

CF is when

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 PS is when , D is a constant value. This implies all have the constant value D,i.e.

The general solution is

The specific solution is computed when additional information is provided. Since is given
as the first term of the sequence, the particular solution is

The specific solution when is

First- Order Linear Differential Equations

For example, net investment is expressed as the derivative of capital stock

This equation represents the differential equation of the unknown function . This means, we are
given the derivative function equation while the function is yet to be found.
Therefore, the direct method is to integrate both sides of the equation to find the unknown function.
Say for example

To find , we should integrate as follows

Where

C is the constant of integration

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This solution is known as general solution. In order to find a specific solution of the unknown
function , we should get some additional information like the value of at period , which
is . If the initial capital sock for the above example is given as , the specific solution
can be computes as follows

Therefore, the specific solution when is given as

Differential equations usually have general and specific solution. When the differential equation more
complicated (if the right hand side of the equation are given terms the unknown rather than t), a general
solution itself is composed of a complementary function and particular solution. Further, differential
equations may have different order (determined by the degree of the leading term) and may involve
nonlinear case. In this course, we are going to discuss only those of first order linear differential
equations.

Example:

Find the general solution and specific solution of the unknown function, if the differnce
equation is given as

Solution:

The general solution

CF is when the constant is assumed to be zero

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 , where

PS is when particular value is considered, say

The general solution is

The specific solution is when additional information is given. Since

The specific solution when is

Exercise:

1. Find the general and definite solution of the following difference equations
a)
b)
c)
d)
e)
2. Find the general and the definite solution of the following differential equations
a) e)
b) f)
c)
d)

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 Economic applications of Difference and Differential Equation
Uses of Difference Equation in Economics

Supply and Demand Analysis

If assume the demand and supply functions are both linear, then we have the following relations for
some positive a, b, c, and d.

Where represents demand function and represents supply function.

In thus equations, it is implicitly assumed that only one time period is involved, that supply and demand
are independently only on the price in the period under consideration, and thus the equilibrium values
are attained instantaneously. However, for some goods, there is a time lag between supply and price.
For example, a farmer needs to decide precisely how much of any crop to sow well in advance of the
time to sale. This decision is made on the basis of the price at the time of planning and not on the price
prevailing at harvest time, which is unknown. In other word, the supply, , in period t depends on the
price, , in the preceding period . Therefore, the time dependent supply and demand functions
can be written as

Assume that, with in each time period, demand and supply are equal, so that all goods are sold, then we
have equilibrium as

As you can observe, that last equation is a difference equation. So that, you can find the general and
specific (given additional information) solution using the usual method you applied in the previous.

Example:

The demand and supply functions are givenas

Then, the expression for and when assuming that market is in equalibrium.

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Solution

At equilibrium

General Solution is

CF is when the constant is assumed to be zero

, where
PS is when , where is a constant value

The general solution is

The specific solution when is

The specific solution is

In order to find the expression for , you can substitute the expression of in the demand equation as

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 National Income Model
Lets assume a simplified two sector national income model which comprises only consumption (C) which
is a fucntion of income and investment (I) which is given as autonomous. That is

Where b and denote autonoums consumption and investment, a is the marginal propensity to
consume, which lies in the range of . In dealing with this, we are assuming implicitly that only
one time period is involved, that consumption depends on nationa income within this period and that
equalibrium values are attained instananouesly. However in practice, there is a time lag between
consumption and national income. Consumption, , in period t depends on national income, , in
the previous period . Accordinlgy, consumption fucntion function is given by

Therfore, assuming that investment is autonous, the national income equlibrium can be given as

As we can observe, the last equation is in the form of differnce equation and thus can be solved using
the usual method.

Example:

Consider a two sector national income model given as

Find an expression for when .

Solution:

At national equilibrium, you have

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 The general solution is the sum of comolementary fucntion and particluar fucntion

CF is when the constant is assumed to be zero

, where
PS is when , where is some constant value

The general solution is

The specific solution when

The specific solution is

Uses of Differential Equations in Economics

Supply and Demand Analysis:

If assume the demand and supply functions are both linear, then we have the following relations for
some positive a, b, c, and d.

Where represents demand function and represents supply function.

In thus equations, it is implicitly assumed that only one time period is involved, that supply and demand
are independently only on the price in the period under consideration, and thus the equilibrium values
are attained instantaneously. However, we fail to consider how this is achieved. To be reasonable, the
rate of change of price is proportional to the excess of demand and supply ( . With some
adjustment coefficient, say , the rate of change of price with respect to time is expressed as

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The assumption seems reasonable because

- If , it gives and so P increase in order to achieve a balance between supply

and demand
- If , it gives and so P remains constant at the equilibrium
- If , it gives and so P decrease in order to achieve a balance between supply
and demand
Substituting and in the results in

As we can observe, the last equation is in the form of differential equation and thus can be solved using
the usual method to find the expression of

Example:

Consider a market model

Find the expression for and when

Solution:

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 The general solution is

CF is when the constant is assumed to be zero

The PS is when P(t) take some constant value D

The general solution is

The specific solution when the additional information

The specific solution given is

Accordingly, the corresponding values of and can be computed by substituting P(t) as

follows.

- For

- For

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National Income Determination:
Consider the usual two-sector model

The first of these is simply a statement that the economy is already in balance. The left-hand side of
equation the first equation is the flow of money from firms to households given as payment for the
factors of production. The right-hand side is the total flow of money received by firms, either in the form
of investment, or as payment for goods bought by households. In practice, the equilibrium values are
not immediately attained and we need to make an alternative assumption about how national income
varies with time. It seems reasonable to suppose that the rate of change of Y is proportional to the
excess expenditure, : that is, with some adjustment coefficient

- If , it gives and so rises in order to achieve a balance between

expenditure and income
- If it gives and so is held constant at the equilibrium level
- If , it gives and so falls in order to achieve a balance between
expenditure and income.
The usual relations and can be substituted into the new equation to obtain

As we can observe, the last equation is in the form of differential equation and thus can be solved using
the usual method.

Example:

Consider the two-sector model

Find an expression for when .

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Solution:

The general solution is

CF is when the constant is assumed to be zero

The PS is when , where D is some constant value

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 The general solution is

The specific solution when is

The specific solution when is

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