1

Lecture Notes for Mathematical Methods for Economics I......................................................................................1

Chapter 5: Operation on Vectors & Matrices............................................................................................................1
5.1 Introduction...........................................................................................................................................................1
5.2 Matrix Addition.....................................................................................................................................................3
5.3 Matrix Multiplication............................................................................................................................................6
5.3.1 Scalar and Vector Multiplication...................................................................................................................7
5.3.2 Multiplication by a Scalar..............................................................................................................................9
5.3.3 Distributive Laws and Associative Laws of Multiplication of Matrices.....................................................11
5.4 Equality of Matrices............................................................................................................................................13
5.5 Transpose of a Matrix.........................................................................................................................................13
5.6 Symmetric Matrices............................................................................................................................................15
5.7 The Zero Matrix..................................................................................................................................................16
5.8 Identity and Diagonal Matrices...........................................................................................................................16
5.8.1 Upper Triangular (UTM), Lower Triangular (LTM) and Diagonal Matrices..............................................18
5.9 Orthogonal Matrices...........................................................................................................................................19
5.9.1 Some Properties of Orthogonal Matrices.....................................................................................................20
5.10 Invertible Matrices............................................................................................................................................21
5.11 Power of Matrices.............................................................................................................................................21
5.12 Differences between Scalars and Matrices.......................................................................................................22

Lecture Notes for Mathematical Methods for Economics I

Prepared by M. Franklin and R. Hosein1
Chapter 5: Operation on Vectors & Matrices
5.1 Introduction
This chapter introduces matrices as mathematical structures in which data can be stored. A
matrix therefore can be evaluated as a rectangular array of values which relay numerical
information.
The following important points concerning the mathematical structure of a matrix should be
noted:
1. A matrix consists of any number of complete rows and columns.
2. The value that coincides with the intersection of a row and a column is referred to as a cell,
an element or the data item.
3. To show that the values from a matrix are part of a closed set, the values are enclosed in
brackets.

We would like to acknowledge the research assistance of M. Maharaj.

Thus a matrix refers to a rectangular array of items, i.e. numbers or objects:

e.g.

1 2 3
a
X 4 5 6 or Y = d
g
7 8 9

b
e

c
f

h i

Both X and Y have 3 rows and 3 columns each.

In general, an m n matrix has m rows and n columns (note the ordering: rows then columns).
An m n matrix may be represented as:

A=

a 11 a12 a 1n
a a a
21 22 2n

or more compactly A = (aij)m n

a m1 a m2 a mn
The order of the matrix is m n, read as m by n.
A square matrix is one in which m = n.
Given the ordering of matrices, it is possible to identify a particular element by its row and
column position. Thus (a12) represents the element in the first row and second column of the
matrix.
In general matrices are derived from systems of linear simultaneous equations. Thus:
3x + 2y = 10
4x + 7y = 17
may be decomposed in matrix form as:

Az = b

where A =

3 2

4 7

is a matrix of coefficients and both b and z are column vectors of constants and

unknowns respectively, with

b=

10

17

and z =

x

y

Row Vector
A row vector is a set of quantities which is arranged in a row. If there are n data items in this row,
we say that the row vector is of size 1n. For A being an n element row vector, we have
[A] = [a1, a2, a3, an]
Column Vector
A column vector is a set of quantities which are arranged in a column. If there are m data items
in this column, then we say that the column vector is of size m1. For A, and m element column
vector, we have
a1

a2
[A] a 3

a
m

5.2 Matrix Addition

The sum of two matrices A and B are obtained by adding corresponding elements of A and B.
Note that for matrix addition to be possible, the order of A must be the same as B. Thus:

a11 a 12 a 1n

a m1 a m2 a mn

b11 b12 b1n

b m1 b m2 b mn

(a 11 b11 ) (a 1n b1n )
=

(a m1 b m1 ) (a mn b mn )

The resulting matrix A + B is of the same order as A and B. In general, for A and B of order mn,
their sum or difference may be defined as:
A B = [aij bij]m n
Note that the addition (and subtraction) of matrices is:
(i) Commutative
(A + B) = B + A
(ii) Associative
(A + B) + C = A + (B + C)
Note also that:

(i)

a b
c d

e f g
h i j

cannot be evaluated as both matrices dont have the same order.

(ii) A + 0 = [aij] + [0] = [aij] = A

(iii) If A = [aij]m n, then A = [aij]m n
(iv) If B = -[aij]m n, then A + B = [aij]m n + [-aij]m n = [0]m n = 0

Example 5.1
New chains of One stop stores have opened in T&T with 4 outlets, San Fernando, P.O.S.,
Arima and Pt. Fortin. Three of its main items and their stock levels at the start of week 1 in the
various districts are:

Coca Cola (case)

9
10
11
12

San Fernando
P.O.S.
Arima
Pt. Fortin

Potato Chips (00 pks.)

3
2
7
1

Bread (loaves)
6
8
12
19

The retail outlet recorded sales as shown below during week 1:

Coca Cola (case)
2
8
7
5

San Fernando
P.O.S.
Arima
Pt. Fortin

Potato Chips (00pks.)

2
1
4
0

Bread (loaves)
4
5
8
17

What is the new level of stocks?

(a) per district
(b) per commodity
Solution
9

10
11

12

3
2
7
1

8
12

19

2
1

4
0

-
7
5

17

1
1

San Fernando

P.O.S.

=
=
4 3 4

Arima
Pt. Fortin

Example 5.2
A popular hardware in Mayaro advertises the following price and delivery cost per unit of wood,
cement and galvanize.
Wood

Cement

Galvanize

Purchase
Delivery

12
2

8
2

4
1

Assume that government regulation raises the purchase price by 10% per unit and the delivery
cost by 40%. Write out expressions for:
a) The change in unit prices and delivery costs
b) The new price and delivery cost levels
Solution
The change in unit prices and delivery costs can be obtained as follows:
(i)

12

8
2

C=
2

C =

4
1

0.1(12) 0.1(8) 0.1(4)

0.4(2) 0.4(2) 0.4(1)

1.2

C =
0.8

0.8
0.8

0.4
0.4

The new price and delivery costs levels can be evaluated as follows:
C* = C + C = C + C
12

=
2

13.2

=
2.8

8
2

4
1.2
+

1
0.8
8.8
2.8

0.8
0.8

0.4
0.4

4.4
1.4

Example 5.3
The table below shows the trends in the life expectancy of vegetarians and non-vegetarians in a
Caribbean island. From the data in the table, form a matrix which illustrates the life expectancy
differential of vegetarians and non-vegetarians.

Year
1960
1970
1980
1990
2000

Vegetarians
60
70
75
71
80

Meat Eaters
45
50
52
55
56

Solution

60

70
75

71
80

45

50
52

55
56

15

25
23

16
24

The column vector on the R.H.S. of the expression above shows for the available snapshot time
periods the extra life expectancy of vegetarians to meat eaters.
5.3 Matrix Multiplication
Two matrices A and B are conformable for multiplication if the number of columns in A is equal
to the number of rows in B. If A and B are of order m n and n p respectively, then AB = C
where C is of order m p. More technically, matrix multiplication refers to a repeat process of
vector multiplication. Thus consider the first row of A and the first column of B, where A and B
are m n and n p matrices respectively.

[a11 a12 a1n]

b11

= a11 b11 + a12 b21 + + a1n bn1 = a1 b1

bn1
which indicates that corresponding elements are multiplied and the results are summed.
Alternatively, let a1 and b1 represent the first row and the first column (vectors) from A and B,
then a1b1 is a convenient way to express the product of these row and column vectors.
In general A(m n) B(n p) = C(m p)
or

a 11 a 12 a 1n b11 b12 b1p a 1

a a a b b b a | | |
21 22 2n 21 22 2p = 2 b b b
1 2 p

| | |
a m1 a m2 a mn b n1 b n2 b np a m
The element in the ijth position in the matrix AB is the product of the ith row of A and jth column
of B. To form the product AB, we pre-multiply B by A, and to form the product BA we post
multiply B by A.
Example 5.4

1 2 5 6

3 4 7 8

(1 5) (2 7) (1 6) (2 8)

(3 5) (4 7) (3 6) (4 8)

19 22

43 50

Example 5.5

A=

a11 a12
a a
21 22

AB=

and

B=

b11 b12 b13

b b b
21 22 23

a11 b11 a12 b21 a11 b12 a12 b22 a11 b13 a12 b23
a b a b a b a b a b a b
21 11 22 21 21 12 22 22 21 13 22 23

c11 c12 c13

c c c
21 22 23

5.3.1 Scalar and Vector Multiplication

Example 5.6
Let the value of the commodities in our 'One Stop' retail outlet stores (see example 5.1) be:
San Fernando
P.O.S.
Arima
Pt. Fortin

Coca Cola ($)

360
400
440
480

Potato Chips ($)

60
40
140
20

Bread ($)
30
40
60
45

10

If the firm is celebrating its 1st anniversary in T&T and cuts all prices by 10%, what is the value
of its stock
(a) per district?
(b) per commodity?

Solution
Value of stock per district can be read of as the row elements of the matrix in the middle whilst
the value of the stocks per commodity is the sum of the columns of the same matrix.
360

400

60
40

30

40

20

45

324

360

54
36

0.9
440 140 60
396 126

480

432

18

27
San Fernando

36
P.O.S.

54
Arima

Po int Fortin
40.5

Example 5.7
Wills ice-cream chain sell on average 200 strawberry, 120 chocolate and 240 orangepine icecreams per hour in the time period 6pm-11pm on a Friday evening. The price of a strawberry ice
cream is $0.45, a chocolate ice cream is $0.60 and an orangepine is $0.50. The cost to Wills of a
strawberry ice cream is $0.38, a chocolate is $0.42 and an orangepine is $0.32. Derive the firms
total profits using:
(i) total revenue less total costs
(ii) profit per unit times sales volume
Solution
(i)

It is well known that Total Revenues (TR) = Price (P) Quantity (Q)

TR = P Q

11

200

Q 5 120 =
240

1000
600

1200

0.45
P 0.60
0.50

0.45 10
PQ 0.6 60

0.5 120
but PQ as is has no mathematical significance. Transposing P and forming P'Q gives:
TR = P'Q = 0.45

0.60

1000
0.50 600
1200

= (0.451000) + (0.6600) + (0.51200)

= $1 410.00
Similarly, a matrix algebra perspective:
TC = ATC'Q

12

1000

= 0.38 0.42 0.32 600

1200
= $1 016.00
so that profits () can be represented as:
= TR - TC = $1 410.00 - $1 016.00 = $394.00
(ii)

From a per unit perspective:

Profit per unit = price per unit cost per unit

0.45
0.38
0.07
0.60 0.42 0.18

0.50
0.32
0.18

Total profit = profit per unit quantity

As before, transposing the column vector representing profit per unit into a row vector, we get:
0.07

0.18

1000
0.18 600
1200

= $394.00
5.3.2 Multiplication by a Scalar
If we multiply A(m n) by a vector, V(n 1), then

13

a1
a |
2 v

|
a m

a1 v
a v
2

=C

a m v

where C is of order m 1, i.e. it is a column vector.

Note that a row vector is simply a matrix with one row. Similarly, a column vector is really a
matrix with one column. If we have a matrix, A(m x n) and we multiply it by a scalar k and form a
matrix B, then
bij = k aij
It can also be shown that:
kA = Ak
kA + IA = (k + I)A
k(A + B) = kA + kB
This implies that linear equations with scalar coefficients follow the laws of scalar algebra.
Example 5.8
Assume that the purchase price and delivery cost of three important building materials are as
follows:
Wood Cement Gravel
Purchase Price 120
20
600
Delivery Cost 15
5
50
We may represent these average total cost per unit of output as:
120
ATC
15

20
5

600
50

14

With the introduction of a 20% VAT, the new average total cost per unit would increase to:
144
18

ATC* = 1.2ATC

24
6

720
60

5.3.3 Distributive Laws and Associative Laws of Multiplication of Matrices

5.3.3.1 Distributive Law
With scalar multiplication, the distribution law states that a (b + c) = ab + ac. This also holds for
matrix multiplication, i.e. A (B + C) = AB + AC. To prove that this is so, we can show that the ij th
element of A (B + C) = ijth element of (AB+BC).
Proof: Let A = [aij]m x n, B = [bij]n x p and C = [cij]n x p
The ith row of A is representable as
ai1, ai2, ain
Similarly, the elements in the jth column of the matrix B + C are
b1j + c1j, b2j + c2j, , bnj + cnj
This implies that the element in the ith row and jth column of A (B + C) is:
ai1 (b1j + c1j) + ai2 (b2j + c2j) + + ain (bnj + cnj) =
n

a ik (b kj c kj )
k 1

k 1

a ik b kj a ik c kj
k 1

which represents the sum of the elements in the ith row and jth column of AB and AC and which
demonstrates that matrix multiplication adheres to the distributive law.
5.3.3.2 Associative Law
With scalar multiplication, the associative law states that a(bc) = (ab)c. This also holds for matrix
multiplication i.e. A(BC) = (AB)C. We will illustrate this with the proof below.

15

Proof: If A = [aij] is of order mn, B = [bij] is of order np, and C = [cij] is of order pq, then the
element of the ith row of A are ai1, ai2, ain and the elements of the jth column of BC are
p

b1h chj,

h 1

h 1

b2h chj, , bnh chj

h 1

In this regard, the element standing in the ith row and jth column of A(BC) is
p

ai1

h 1

k 1

b1h chj + ai2 b2h chj + + ain

h 1

aik ( bkh chj) =

h 1

h 1

k 1

bnh chj

h 1

aik bkh) chj

k 1

k 1

k 1

= ( aik bk1) c1j + ( aik bk2) c2j + + ( aik bkp) cpj

and this shows that the element in the ith row and jth column of A(BC) = (AB)C.
Example
The associative law of matrix multiplication can be illustrated by way of the following example.
Let
7
A 1
8

7(4) 5(2)
AB 1( 4) 3(2)
8(4) 6(2)

5
3

4
2

7(9) 5(6)
1(9) 3(6)
8(9) 6(6)

38 93 95
(AB)C 10 27
25
44 108 110

9 10
6 5

2
C 6
7

7(10) 5(5)
95
38 93

1(10) 3(5) 10 27
25
44 108 110
8(10) 6(5)

2
38(2) 93(6) 95(7)
1299
6 10(2) 27(6) 25(7) 357

7
44(2) 108(6) 110 (7)
1506

4(2) 9(6) 10(7)

132

2(2) 6(6) 5(7)

75

BC
7
A ( BC) 1
8

5
7(132) 5(75)
1299
132

3
1(132) 3(75) 357

75
8(132) 6(75)
1506
6

16

However, note that in general AB BA.

Note that also AB = 0 does not necessarily mean that A=0 or B=0 as with scalar multiplication.
Consider the simple matrix multiplication below:

x y

0 0

y y

x x

0 0

0 0

5.4 Equality of Matrices

Two matrices A and B are equal if the corresponding elements in A and B are equal. Thus:

a 11 a 12 a 1n
a a a
21 22 2n

a m1 a m2 a mn

b11 b12 b1n

b b b
21 22
2n
=

b m1 b m2 b mn

if aij = bij for each combination ij

Note both matrices have the same order.
5.5 Transpose of a Matrix
The transpose of a matrix refers to a reordering of its rows and columns to give a matrix of
columns and rows. Thus Am x n becomes (AT)n x m under the transpose operation. Thus for:

17

a 11 a1n

A = a a
21 2n
a m1 a mn
a11 a 21 a m1

A' = A =

a1n a 2n a mn
T

The transpose of the sum of two matrices A and B, i.e. (A+B)', is A'+B' (see proof 1 below). The
transpose of the product of AB is B'A' (see proof 2 below). In general, the transpose of the
product of any number of matrices is equal to the product of their transpose in reverse order.
Note further that:
(A)T = AT
(AT)T = A
Proof 1: (A + B)' = A' + B'
Let A = [aij] and B = [bij]. To verify that (A + B) 1 = A1 + B1 we simply need to show that the
element in the ith row and jth column of A1 and B1 is the same as the elements in the same position
in the matrix (A+B)1 and these are respectively aji, bji and aji + bji.
Proof 2: (AB)' = B'A'
Let A = [aij], B = [bij] and C = [cij] be of order mn, np and mp respectively. We can form a
matrix C = [cij] = AB. The element in the ith row and jth column of Cij is the same as the element

18

th

th

in the j row and i column of (AB)'. Thus we can write Cij =

aik . bkj = cij The elements of

k 1

the jth row of B' are b1j, b2j bnj and the element of the ith column of A' are ai1, ai2 ain. In this
regard, the element in the jth row and ith column of the product B'A' is
n

bkj . aik =

k 1

aik . bkj = cij

k 1

so that (AB)' = B'A'

Proof 3: (AT)-1 = (A-1)T
In order to show this, post multiply the expression above by AT to get:
(AT)-1 AT = (A-1)T AT
L.H.S. = I
R.H.S. = (A-1)T AT = (A A-1)T = IT = I
LHS = RHS
Proof 4: (A)T = (A)T for Anm and a scalar
The ijth entry of A is aij and the corresponding entry of (A)T = aji
Because (aij)T = aji then [aij]T = [aji]
= aji
which illustrates that (A)T = (AT)
5.6 Symmetric Matrices
A symmetric matrix is a matrix such that AT =A. Thus a square matrix A = aij is symmetric if
AT = [aij]T = aji = aij for all i and j
Consider the matrix A below:

19

1 2 3

A= A = 2 4 7 = A

3 7 8
T

It can be shown that the sum of any square matrix A and its transpose is symmetric. To see this,
form:
B = A + AT
BT = (A + AT)T
= AT + (AT)T
= AT + A
= A + AT
which shows that B is symmetric, i.e. A + AT is symmetric.
5.7 The Zero Matrix
The zero matrix has all its elements equivalent to zero and can vary in size. It is also called the
null matrix and it is written as:
(0)m n, which indicates it can have any size.
Given the definition of 0, then A = B, means that A - B = 0. Also A + 0 = A and A - 0 = A. Note
also that 0A = A0 = 0. It is important to recognize that AB = 0 does not mean that A or B equals
zero i.e. the cancellation law of multiplication is inapplicable to matrices. To illustrate this
x

last point consider the case where A =

0

y
and B =
0
x

(assume x and y are each non zero), we see that

y
, both of which are non zero
x

20

AB =

x y y y

0 0 x x

0 0

0 0

5.8 Identity and Diagonal Matrices

An identity matrix of order n n is given by In.

1 0 0
0 1 0

I =

0 0 1
n

The identity and zero matrices play roles in matrix algebra parallel to scalar algebra. Thus:
(i) 0 + A = A + 0 = A
(ii) A - A = 0
(iii) 0 * B = 0
(iv)B * 0 = 0
(v) Im m Am n = Am n
(vi)Am n In n = Am n

Example 5.10

21

1 0 0
0 1 0

0 0 1

a 11
a
21
a 31

a 12
a 22
a 32

a 13
a 11

a 23 = a 21
a 31
a 33

a 12
a 22
a 32

a 13
a 23
a 33

A square matrix which has zeroes as the data items in every cell except in the leading diagonal is
called a diagonal matrix. More specifically, the matrix A, in which the typical element is aij, is a
diagonal matrix if aij = 0 for i j.
For example typical 4 4 diagonal matrix is

d 22

0
0

0
0

d 33
0

d 11

and in general (i.e. for the n x n case)

d11 0 0
0 d 0
22

D =

0 0 d nn
Example 5.11

written as D = diag. [d11 dnn]

d 44

22

d1 0 0

Let D be the diagonal matrix 0 d 0
2
0 0 d 3
i.e. D = diag (d1, d2, d3)
Prove by induction that
Dn = diag (d1n, d2n, d3n)

Solution
Step 1: Show the result is true when n = 1
D1 = (d11, d21, d31)
= (d1, d2, d3)
Step 2: Assume the statement is true for n = k
DK = (d1K, d2K, d3K)
Step 3: Show statement is true for n = k + 1
DK + 1 = DK. D

d 1 K 0 0 d1 0 0
K
=0 d

2 0 0 d 2 0
K
0 0 d 3 0 0 d3

23

d1K1 0 0

K 1

0 d 2 0

K 1

0 0 d 3
= diag (d1K+1, d2K+2, d3K+3)
Step 4: The expression holds for n = k, n = k+1 and by the principle of induction for all n.
5.8.1 Upper Triangular (UTM), Lower Triangular (LTM) and Diagonal Matrices
A matrix An n is said to be upper triangular if the aijth element is zero for all elements where i>j.
Correspondingly, a Bn n matrix is said to be lower triangular if the bijth element is zero for all
elements where i < j. A diagonal matrix is both upper and lower triangular.

1
0
E.g. of a UTM:
0

2 3 4
5 6 7
0 8 9

0 0 10

24

1 0 0 0
2 3 0 0

E.g. of a LTM:
4 5 6 0

7 8 9 10
5.9 Orthogonal Matrices
A matrix A is said to be orthogonal if its transpose is equivalent to its inverse. Alternatively
stated, a square matrix is said to be orthogonal if the product of the matrix with its transpose
yields the identity matrix.
AT = A-1
i.e. if AAT = ATA = I
Note that the product of two or more orthogonal matrices is also orthogonal and the determinant
of an orthogonal matrix is 1.
Example 5.12
Demonstrate that the following matrix is orthogonal:
1

1/9 4
8

Solution

8
4
1

4
7
4

25

AAT

1 64 16
0
81 81 81

81
=
0
81

0
0

= I3

81

81

Example 5.12
Show that for a symmetric matrix A such that AT = A-1 that A2 = I.
Solution
A2 = A . A = A . AT
= A . A-1

(since A = AT for symmetric matrices)

(A is orthogonal)

=I
5.9.1 Some Properties of Orthogonal Matrices
(1) If A and B are orthogonal matrices, then AB is an orthogonal matrix:
(AB)T = BT AT
(AB)T AB = BT AT AB
= BT IB since AT A = I
BT B = I
and hence AB is orthogonal.
(2) For An n an orthogonal matrix, the determinant is 1.
i.e. |A| = 1
Note that |A-1| = 1/|A|

(1)

since |AT| = |A|

(2)

26

and AT = A-1

(3)

Then |A| = |AT| = |A-1| = 1/|A|

|A|2 = |A| |A| = 1/|A| = 1
|A| = 1
(3) A-1 and AT are each orthogonal if A itself is orthogonal.
Since A-1 = AT
and (AT)T = A
then (AT)T AT = AAT
= AA-1
=I
which shows that AT is orthogonal
5.10 Invertible Matrices
A square matrix A is invertible if there exists a matrix B such that
AB = BA = I
The matrix B is a unique matrix. There is a link between an invertible matrix and the solution to
a system of linear equations. More specifically, a square matrix A is invertible if the system of
equations represented by
Ax = b
has a unique solution.
Example 5.13
Prove for any non singular matrices A and B that
(AB)-1 = B-1 A-1
Solution
We are told that A and B are non singular so that both A-1 and B-1 exists.
Form ABB-1 A-1 = A IA-1 = AA-1 = I
Also B-1 A-1 AB = B-1 IB = B-1 B = I

27

Thus the matrix B-1A-1 is such that when pre-multiplied and post-multiplied by AB it results in
the identity matrix.
Hence (AB)-1 = B-1 A-1
5.11 Power of Matrices
For a square matrix A of order n n, we can write the product of A A (p times) as A p. In the
mould of reasoning consistent with the associative law, we can note that
Ax Ay = Ay Ax = Ax+y
and (Ax)y = (Ay)x = Axy

Example 5.14
1

Let A =
0 1

Find A2, A3 and A4

Solution
1
0

1
, A3 =
1
0

A2 =

and A4 =
1
0 1

Example 5.15
Show using proof by induction that (An)-1 = (A-1)n, where A is a non-singular matrix and n is a
positive number.
Solution
Step 1: Show that the expression is true when n = 1
(A1)-1 = A-1 = (A-1)1
so that the result holds when n = 1
Step 2: Assume the result is true when n = k i.e. Assume that (Ak)-1 = (A-1)k.
Step 3: Show that the result is true for n = k + 1

28

(Ak+1)-1 = (A-1)k+1
(Ak+1)-1 = A-1(Ak)-1 = (A-1) (A-1)k = (A-1)k+1
Step 4: Since the result holds for n=k and n=k+1, by induction it is true for all positive integers.
5.12 Differences between Scalars and Matrices
For scalars a and b and matrices A and B, their main points of distinction are:
(i) Whilst with scalars ab = ba, this is not generally the case with matrices as AB = BA only in a
specific special case.
(ii) With scalars, ab = 0 means either a and/or b = 0. With matrices, AB = 0 does not necessarily
mean that A and/or B = 0.

Transition Matrices
The West Indies Cricket Board (WICB) is evaluating whether Guyana should be allowed to
continue as a test venue. The WICB sent a panel of experts into Guyana, and they recorded the
following sequences of wet/dry days.
WWDWW

DWWWD

WDDWD

WDWDW

DDWWW

W: wet day
D: dry day
The WICB is trying to ascertain how the weather on any one day will affect weather conditions
on the following day. Based on their collected data the WICB panel makes the following record,
WW 6
WD 6
DD 2
DW 8

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This type of sequenced data can be complied into a transition matrix of the form below:
W 6
D W 8

6
2

or generally,

a11 a12
a a
21 22
where;
a11: wet dry followed by a wet day
a12: wet day followed by a dry day
a21: dry day followed by a wet day
a22: dry day followed by a dry day
With transition matrices D and W are referred to as states. It is possible to convert the matrix A =
aij above into a matrix of proportions by dividing each of the a ij element by the sum of the row
elements. Thus we conform

a 12
a 11 a 12

a 11
a a
11
12

P=

a 22

a 21 a 22

a 21
a 21 a 22

Which in the case of our example is

6
12

P* =

8
10

6
12

2
10

The elements of P* (Pij) maybe interpreted as follows

30

P11 probability of a W followed by a W

P12 probability of a W followed by a D
and so on.
We may now define a transition matrix as a matrix (i = j) which illustrates the proportion of
times one state progressed into another state. With transitional matrices the sum of the
proportions for any row must sum to unity. In addition T = T x T represents another transition
matrix which shows changes in states over two time periods. With transition matrices it is
therefore important to clearly define periods.
Example (Formation of a transition matrix)
Question
A firm has 2 lorries and keeps records of the number that are serviceable for a whole day over
42 successive days for a particular period as follows (reading from left to right):
222

121

011

212

221

201

122

122

211

012

122

201

002

(a) Obtain the transition matrix, T, for the proportions of 0, 1 or 2 lorries being serviceable on
the following day, given the number (0, 1 or 2) serviceable on one particular day.
(b) Find T2 also, and use this to find, if there is one serviceable lorry today, the proportion of
times that there will be at least one serviceable lorry in two days time.
Answer
(a)

Reading the data from left to right gives: 22; 22; 21; 12; 21; etc leading to
the following numbers of serviceable lorries from one day to the next:
Number of lorries serviceable on the following day
0 1 2 Total

0 1 4 1 6
Number of lorries serviceable on a particular day 1 3 3 9 15
2 2 8 10 20

Writing each value as a proportion of the row total gives the following transition matrix:

122

31

T1
2

(b) T

1
6
3
15
2
20

4
6
3
15
8
20

1
6
9
15
10
20

0.167 0.667 0.167

0.200 0.200 0.600

0.100 0.400 0.500

0.167

T T 0.200
0.100

0.167

0.200

0.600

0.500

0.400

0 0.178

T 1 0.133
2 0.147

i.e.

0.667

0.311
0.413
0.346

0.167

0.200
0.100

0.667

0.167

0.200

0.600

0.400

0.500

2
0.511

0.454
0.507

(Note that the sum of the proportions in each row adds to 1, as required for a transition matrix.)
The proportion of times that there will be at least one serviceable lorry in 2 days time (if there is
one serviceable lorry today), is equivalent to:
Pr (11 or 12) after two transitions = 0.413 + 0.454 (from row 2) = 0.867

Complex and Hermitan Matrices

Consider the matrix
2 2i
6

A=

4
2 2i

2i
4 2i

Where i = -1
And so A is a matrix with complex numbers as some of its elements. We can form A*, such that
2 2i
6

A* =

4
2 2i

Note that (A*) = A

2i
4 2i

32

In general, if
a 11 i a 12 i a 13 i a 1n i
a i a i a i a i
21
22
23
2n

A=

a nn i
a n1 i a n 2 i

then
a 11 i a 12 i a 13 i
a i a i a i
21
22
23
A* =

a n1 i a n 2 i

a 1n i
a 2 n i

a nn i

A Hermitian matrix can be constructed as

(A*)1 = A
where A is a complex number, A* is its complex conjugate and thus the Hermitian Matrix is
obtained by talking the transpose of the complex conjugate.
For example, let

A =
1 i

1 i

From which we can form

1 i

A* =
1 i

And the Hermitian matrix which is

H = (A*1) =
1 i

1 i

Observe that all the elements along the leading diagonal of the Hermitian matrix are real. In the
event that (A*)1 = -A, then the A matrix is said to be skew-Hermitian.

33

Many practical situations can be expressed simply in matrix form. In particular, financial
economists nowadays employ a form of language which is easy to express in matrix terms, and
which we shall introduce here.
The basic idea is that an investor can choose between a number of different assets; these may be
thought of as shares in companies, holdings of foreign exchange, old-master paintings, or
whatever. After a fixed time period, say one year, the assets will have a new value, and this will
depend on what has happened in the meantime. We model this uncertainty by assuming that
there are a number of states which may occur.
Example
The citizens of the island of Apathia can invest in land, bonds (which yield a fixed return) and
stocks (which yield and uncertain return). A general election is due, after which one of the 2
political parties, the Liberal-Conservatives or the Conservative-Liberals, will be in power. There
are three assets: Asset 1 = land, Asset 2 = bonds, Asset 3 = stocks, and there are two states:
State 1 = LibCons in power, State 2 = ConLibs in power.
Clearly, the value of an investment will depend upon which of the states occurs. For example,
government by LibCons may result in an increase in the value of land and a decrease in the
value of stocks, while government by ConLibs may have the opposite effect. We can describe this
by writing down the value in a years time of the amount of each asset which costs one dollar
now, under the assumption that a given state occurs. In this example, we could get a table like
the following.
Land
Bonds
Stocks

LibCon ConLib
1.25
0.95
1.05
1.05
0.90
1.15

In other words, we have a 32 matrix R = (r ij) which determines the return of each asset in the
various states. In general, if there are m assets and n states, then the returns will be an mn
matrix

34

Suppose an Apathian investor decides, before the election, to invest $5000 in land, $1000 in
bonds and $4000 in stocks. Then the row vector [5000

1000

4000] is her portfolio. If the

LibCons win the value will be

5000 1.25 + 1000 1.05 + 4000 0.90 = 10900
But if the ConLibs win the value will be
5000 0.95 + 1000 1.05 + 4000 1.15 = 10400
This is just an example of matrix multiplication. The portfolio can be considered as a 13 matrix
Y, the table of returns R is a 32 matrix, and their product
YR 5000

1000

1.25

4000 1.05
0.90

0.95

1.05 10900
1.15

10400

is a 12 matrix. When R is given, YR tells us the possible values of the portfolio Y in the various
states.
The terminology introduced above is very useful when we try to model investment decisions. For
example, a cautious investor might ask if there is a riskless portfolio, that is, one which has the
same value whichever party wins the election.
On the other hand, an investor might look for a portfolio which costs nothing. In the Apathian
context, this could be a portfolio such as [5000 -10000 5000], which means that the investor
borrows $10000 from the bank and uses it to buy the land and stocks. At the end of the year she
owes the bank more, 100001.05 dollars, but the changes in value of land and stocks may offset
this. In fact, we calculate that
YR 5000

10000

1.25

5000 1.05
0.90

0.95

1.05 250
1.15

Thus if the LibCons win she has gained $250 without having to invest anything, in real terms,
while if the ConLibs win she is no worse off.
A portfolio like the one just described, which costs nothing, cannot lose and in at least one state
yields a profit, is called an arbitrage portfolio. The question of the existence of riskless and

35

arbitrage portfolios leads us inevitably to the study of linear equations, which we begin in the
next chapter.
Partitioning
Any matrix can be separated arbitrarily into a number of sub-matrices. For example, we could
partition A as follows:
B C
A

D E

and if
1
A 4
0

2
0

3
6

1
1
1

we could take
1
4

D 0

2
0
2

3
,
6
2 ,

1
C
1
E 1

Conformable matrices which are suitably partitioned have the property that their product can be
expressed in terms of the products of the sub-matrices as follows:
If
B C
A

D E

and

W X
V

Y Z

then
BW CY BX CZ

AV

DW EY DX EZ

This operation is useful for several reasons. For one thing, it may be very much easier to
calculate the sub-matrix products than to calculate the whole product at once; if D is a null
matrix, for example. Partitioning can also be a great help in interpretation, in such models as
the input-output model or the Markov chain. Suppose that, after a suitable rearrangement of the
rows and columns of the input-output matrix, it can be partitioned in the way given for A above,
with D a matrix of zeros. Then we see that the first few industries do not use the outputs of the
last few industries as their inputs, and we say that the system is decomposable (or segmentable).

36

This has implications for the properties of the solutions to the system. Partitioning is also
important in econometrics, for example, in interpreting structural forms and in handling
identification problems.