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EC2104
Lecturer: Chua Yeow Hwee
Lecture 1
11th August 2015
Outline
relationships.
Working with equations, the aim is to derive a set of logical
conclusions.
Simple Logic
if Q)
Example: If x is a square, then it is a rectangle. However, if x
is a function of x, or
y = f (x)
Here, f is the function. The actual symbol for the function is
x
-4
-3
-2
-1
0
-1
of f (x).
or xyz coordinates.
In most graphs, the independent variable goes on the x-axis
Price
4
2
2
1
1
Price
0
0
Quantity
0
0
Common Functions
Here are some types of functions frequently encountered in
economics:
Polynomial function: f (x) = an x n + an1 x n1 + ... + a1 x + a0
where n is a non-negative integer, and the coefficients ai are
constants
Linear function: f (x) = ax + b where a and b are constants
Quadratic function: f (x) = ax 2 + bx + c where a, b and c are
constants
(x)
Rational function: f (x) = gh(x)
where g (x) and h(x) are
x >0
Exponential function: f (x) = Cax , where C and a are positive
constants.
Logarithmic function: f (x) = loga x, where a is a positive
constant.
Polynomial Functions
General form for a polynomial function:
f (x) = a0 + a1 x + a2 x 2 + ... + an x n
where n is a non-negative integer and a0 , a1 , a2 , ..., an are
constants.
Terminology:
The superscript indicators of the powers of x are called
Linear Function
We often deal with linear relationships in economics.
y = f (x) = ax + b
Slope defined as 4y
4x .
Take 2 points that lie on the line: (x1 , y1 ) and (x2 , y2 ).
Since they lie on the line, these are the same as (x1 , ax1 + b)
(ax2 + b) (ax1 + b)
a(x2 x1 )
=
=a
x2 x1
x2 x1
If x = 0, then y = f (0) = a 0 + b = b, so b is the y -intercept.
Graph is a straight line with slope a and y -intercept b.
Linear Functions
qD = qS
10 2p = 5 + 3p p = 3
qD
When p = 3,
= 4, q S = 4.
Alternatively, we can write the equilibrium condition as:
qD = q = qS
Substituting this into the behavioral equations, we get the
following system of two equations:
q = 10 2p
q = 5 + 3p
We can solve these simultaneously to obtain p = 3, q = 4.
Graphical Solution
Demand: q D = 10 2p, Supply: q S = 5 + 3p
Price
5
qS = -5 + 3p
4
qD = 10 - 2p
Quantity
0
0
10
Quadratic Functions
Quadratic functions are polynomial functions of degree 2:
f (x) = a + bx + cx 2
Example: Solve 2x 2 + x 6 = 0 (find the roots). Draw the graph
of the function y = f (x) = 2x 2 + x 6.
Solution 1: By factoring:
2x 2 + x 6 = 0
3
(2x 3)(x + 2) = 0 x = , x = 2
2
Solution 2: Using the quadratic formula. The quadratic
b 2 4ac
formula states that for ax 2 + bx + c = 0, x = b 2a
as
2
long as b 4ac 0 and a 6= 0. Plugging in a = 2, b = 1 and
c = 6 into the equation, we get:
p
1 12 4(2)(6)
1 49
x=
x =
22
4
which simplifies to x = 32 , x = 2.
1
y = 2x + x 6 = 2
4
2
2
1
+
4
6 = 6
1
8
Graph of 2x 2 + x 6
y
1
(3/2, 0)
(-2, 0)
0
-3
-2
-1
0
-1
-2
-3
-4
-5
-6
(-1/4, -6 1/8)
-7
Rational Functions
P(x)
that can be
A rational function is a function R(x) = Q(x)
expressed as the ratio of two polynomials P(x) and Q(x).
ax + b
cx + d
(c 6= 0)
Power Functions
x2
0
0
0
0
1
x-1/2
x-1
x-2
0
0
Exponential Functions
A quantity y that increases (or decreases) by a fixed factor when x
increases by 1 is said to increase (or decrease) exponentially. If the
fixed factor is a > 0, then y is an exponential function f of x where
y = f (x) = Cax for all x 0
f (x + 1)
=a
f (x)
decreasing.
Exponential functions with x = t, or time, are used in
Graph of y = e x and y = 5e x
y
5ex
10
ex
0
-5
-4
-3
-2
-1
Logarithmic Functions
In some cases, we are interested in questions that involve
equation:
loga ax = loga b
By definition, loga ax x, so x = loga b.
The order of the two operations can be changed as well, so
aloga x = x
We also have a special name for loge : the natural logarithm,
Graph of y = ln x
y
2
0
0
-1
-2
axy = aay
axy = (ax )y
ax b x = (ab)x
x=
1
n
loga x
For the natural logarithmic function ln, just replace loga with ln
and a with e in the above equations.
Shifting Graphs
If you know the graph of f (x), you also know the graphs of
f (x) + c, f (x + c), cf (x), and f (x).
If y = f (x) is replaced with y = f (x) + c, the graph is moved
Shifting y = f (x) =
f(x)
6
0
-1
0
-1
-2
Shifting Graphs
If you know the graph of f (x), you also know the graphs of
f (x) + c, f (x + c), cf (x), and f (x).
If y = f (x) is replaced with y = f (x) + c, the graph is moved
Shifting y = f (x) =
f(x)
3
0
-4
-3
-2
-1
0
-1
Shifting Graphs
If you know the graph of f (x), you also know the graphs of
f (x) + c, f (x + c), cf (x), and f (x).
If y = f (x) is replaced with y = f (x) + c, the graph is moved
Shifting y = f (x) =
f(x)
2
6
5
4
3
2
0.5
1
0
-1
-1
0.5
-2
-3
-4
-5
-6
Shifting Graphs
If you know the graph of f (x), you also know the graphs of
f (x) + c, f (x + c), cf (x), and f (x).
If y = f (x) is replaced with y = f (x) + c, the graph is moved
Shifting y = f (x) =
f(x)
3
0
-5
-4
-3
-2
-1
0
-1
Composite Functions
Suppose that f and g are two functions such that the range
Inverse Functions
this: P = D 1 (Q).
In the original demand function, simply solve for P in terms of
Q.
By definition, D(D 1 (Q)) = Q and D 1 (D(P)) = P.
1
Note: f 1 (x) 6= f (x)
2x1
x+3
y
y=x
10
9
8
7
6
5
4
3
2
y = f(x)
1
-10 -9
-8
-7
-6
-5
-4
-3
-2
0
-1-1 0
x
1
10
-2
-3
-4
-5
-6
-7
-8
-9
-10
y = f-1(x)
f (x) = 3 x + 2
y = g-1(x)
y=x
y = g(x)
0
-5
-4
-3
-2
-1
0
-1
-2
-3
-4
-5