ECMT 660 Mathematical Economics (Lecture Notes) GUOQIANG TIANI. THE NATURE OF MATHEMATICL ECONOMICS “Mathematical economics is an approach to economic analysis, in which the economists make use of mathematical symbols in the statement of the problem and also draw upon known ‘mathematical theorems to aid in reasoning. ‘The purpose of this course is to introduce the most fundamental aspects of the mathematical methods such as those matrix algebra, mathematical analysis, and optimization theory. 1.1 Mathematical Versus Nonmathematical Economics ‘Since mathematical economics is merely an approach to economic analysis, it should not iffer from the nonmathematical approach to economic analysis in any fundamental way. The difference between these two approaches is that in the former, the assumptions and conclusions are stated in mathematical symbols rather than words and in equations rather than sentences, Advantages matical Approa (1) the analysis is more rigorous; (2) _ itallows us to treat the general n-variable case; and (3) the "language" used is more concise and precise.III, EQUILIBRIUM ANALYSIS IN ECONOMICS 3.1 The Meaning of Equilibrium Like any economic term, equilibrium can be defined in various ways. One definition here is that an equilibrium is a constellation of selected interrelated variables so adjusted to one another that inherent tendency to change prevails in the model which they constitute. In essence, an equilibrium for a specific model is a situation that is characterized by a lack of tendency to change. It is for this reason that the analysis of equilibrium is referred to as statics. The fact that an equilibrium implies no tendency to change may tempt one to conclude that an equilibrium necessarily constitutes a desirable or ideal state of affairs. ‘This chapter provides two examples of equilibrium. One is the equilibrium attained by a market under given demand and supply conditions. ‘The other is the equilibrium of national income under given conditions of consumption and investment patterns. Market Equilibrium - A Linear Model rium model, the standard problem is that of finding the set of values of the endogenous variables which will satisfy the equilibrium conditions of the model. determination in an isolated market. artial-Eguilibrium Market Model-a model of p Three variables Qu = the quantity demanded of the commodity; Q, = the quantity supplied of the commodi P = the price of the commodity. ‘The Equilibrium Condition: Q, ‘The model is W=Q® Q =a-bp (a,b > 0) Qa-c + dp (,d > 0)