Mathematical Economics

(ECON302)
Nature of Mathematical
Economics
Mathematical economics refers to
economic principles and analyses
formulated and developed through
mathematical symbols and methods.

Mathematical economics is reserved to
describe cases employing mathematical
techniques beyond simple geometry, such
as matrix algebra, differential and integral
calculus, etc.

Purpose of the course: to introduce the
student to the most fundamental aspects of
these mathematical methodsthose
encountered daily in the current economic
literature


Mathematical Economics versus
Econometrics
The term mathematical economics is
sometimes confused with a related term,
econometrics.
Econometrics is concerned mainly with the
measurement of economic data. Hence it
deals with the study of empirical
observations using statistical methods of
estimation and hypothesis testing.
Mathematical economics, refers to the
application of mathematics to the purely
theoretical aspects of economic analysis
REVIEW
EXPONENTS
Given n a positive integer, x
n
signifies
that x is multiplied by itself n times.
Here x is referred to as the base; n is
termed an exponent.
By convention an exponent of 1 is not
expressed: x
1
= x, 8
1
= 8,.
By definition any nonzero number or
variable raised to zero power is equal
to 1: x
0
= 1, 3
0
= 1.
And 0
0
is undefined.


Assuming a and b are positive
integers and x and y are real numbers
for which the following exist, the
RULES of EXPONENTS are as
follows:

1. x
a
(x)
b
= x
a+b


2. x
a
= x
a-b

x
b
3. (x
a
)
b
= x
ab


4. (xy)
a
= x
a
y
a


5. (x/y)
a
= x
a
/y
a



6. 1/x
a
= x
-a


7. x = x
1/2



8.
a
x= x
1/a


9.
b
x
a
= x
a/b
= (x
1/b
)
a


5. x
-(a/b)
= 1/x
a/b



Examples
=
4 3
7 2 a a ( ) =
+4 3
7 2 a
7
14a
=
2 3 2
2 8 5 r r r ( ) =
+ + 2 3 2
2 8 5 r
7
80r
( ) =
3
3xy
=
3 3 3
3 y x
3 3
27 y x
=
|
.
|

\
|
2
3
2
b
a
=
2 2
2 2
3
2
b
a
2
2
9
4
b
a
( ) =
3
5 2
2 n m
=
3 5 3 2 3 1
2 n m =
15 6 3
2 n m
15 6
8 n m
=
x
x
2
8
4
=

1 2
8
1 4
x
3
4x
=
5
3
3
9
z
z
=
3 5
1
3
9
z
=
2
1
3
x
2
3
x
More Examples
=
2 2 3
7 3 xyz z y x ( ) =
+ + + 2 1 1 2 1 3
7 3 z y x
( ) =
3 2
2 3 8 xy xy xy ( ) =
+ + + + 3 1 2 1 1 1
2 3 8 y x
( ) ( ) =
2
2
2
3 2
2 3 xy y x
( )( ) =
2 2 2 1 2 1 2 3 2 2 2 1
2 3 y x y x
=
4 2 6 4
4 9 y x y x ( ) =
+ + 4 6 2 4
4 9 y x
=
|
|
.
|

\
|
3
2
3
3
5
ab
b a
=


3 2 3 1 3 1
3 1 3 3 3 1
3
5
b a
b a
=
6 3 3
3 9 3
3
5
b a
b a
=
6 3
3 9
27
125
b a
b a
=

3 6
3 9
27
125
b
a
More Examples
=
2 2 3
7 3 xyz z y x ( ) =
+ + + 2 1 1 2 1 3
7 3 z y x
3 3 4
21 z y x
( ) =
3 2
2 3 8 xy xy xy ( ) =
+ + + + 3 1 2 1 1 1
2 3 8 y x
6 3
48 y x
( ) ( ) =
2
2
2
3 2
2 3 xy y x
( )( ) =
2 2 2 1 2 1 2 3 2 2 2 1
2 3 y x y x
=
4 2 6 4
4 9 y x y x ( ) =
+ + 4 6 2 4
4 9 y x
10 6
36 y x
=
|
|
.
|

\
|
3
2
3
3
5
ab
b a
=


3 2 3 1 3 1
3 1 3 3 3 1
3
5
b a
b a
=
6 3 3
3 9 3
3
5
b a
b a
=
6 3
3 9
27
125
b a
b a
=

3 6
3 9
27
125
b
a
3
6
27
125
b
a
Polynomials
Given an expression such as 5x
3
, x is
called a variable because it can
assume any number of different
values, and 5 is referred to as the
coefficient of x.

Expressions consisting simply of a
real number or of a coefficient times
one or more variables raised to the
power of a positive integer are called
monomials.
Monomials can be added or
subtracted to form polynomials.

Each of the monomials comprising a
polynomial is called a term.

Terms that have the same variables
and exponents are called like terms.
Example
Perform the indicated operations.
1. 4x
2
+ 9x
2
= 13x
2

2. (7x
3
+ 5x
2
8x)+ (11x
3
9x
2
2x) =
3. (6x +7y)(4x + 9y) =
4. (2x + 3y)(8x 5y 7z)
Equations: Linear and
Quadratic
A mathematical statement setting two
algebraic expressions equal to each
other is called an equation.
An equation in which all variables are
raised to the first power is known as a
linear equation.
A quadratic equation of the form ax
2
+ bx +
c, where a, b, and c are constants and a
is not equal to 0, can be solved by
factoring, completing the square, or
using the quadratic formula.
Quadratic Equation
2
1 2
Solution:
4
,
2
b b ac
x x
a

=
Solve each of the following
equations:


1. x/4 3 = x/5 + 1

2. x
2
+ 13x + 30 = 0

Completing the Square
An expression in the form x
2
+ bx,
where the coefficient of the squared
term is +1, can be converted to a
perfect square by taking the
coefficient of x, here b/2, squaring it
[(b/2)
2
], and adding the latter to the
original expression to obtain:

x
2
+ bx + b
2
/4 = (x + b/2)
2


Example
x
2
18x + 45
Solution
x
2
18x + 45
move the constant to the right
x
2
18x = - 45
b= - 18,
b/2 = -9
(b/2)
2
= 81
Add (b/2)
2
,here 81, to both sides of the equation
and simplify by factoring.
x
2
18x + 81 = -45 + 81
(x 9)
2
= 36
Then take the square root of both sides and solve
for x.
x = 15, 3
Simultaneous Equations
A system of simultaneous linear
equations can be solved by either
substitution or elimination method.

Example
The equilibrium conditions for two
markets, butter and margarine, where
Pb and Pm are the prices of butter
and margarine, respectively, are given
as follows:
8Pb 3Pm = 7 Eq. 1
- Pb +7Pm =19 Eq.2
The prices that will bring equilibrium to
the model are found by using the
substitution and elimination method.
Substitution Method
Solve one of the equations for one
variable in terms of the other. Solving
(Eq.2) for Pb gives Pb = 7Pm 19.
Substitute the value of that term in the
other equation, here Eq.1, and solve for
Pm. 8Pb 3Pm =7
8(7Pm 19) 3Pm = 7
56Pm 152 3Pm = 7
53Pm = 159
Pm = 3
Then substitute Pm = 3 in either Eq. 1
or Eq.2 to find Pb.

Eq.1 8Pb 3(3) = 7
8Pb = 16
Pb = 2
Elimination Method
1. Multiply Eq.1 by the coefficient of Pb (or
Pm) in Eq. 2 and Eq. 2 by the coefficient of
Pb (or Pm) in Eq. 1. Picking Pm, we get
7(8Pb 3Pm = 7) 56Pb 21Pm = 49 Eq.3
-3(-Pb + 7Pm = 19) 3Pb 21Pm = -57 Eq. 4

2. Subtract Eq. 4 from Eq. 3 to eliminate the
selected variable.
53Pb = 106
Pb = 2
3. Substitute Pb = 2 in Eq. 3 or Eq. 4 to find
Pm.
GRAPHING TWO VARIABLES ON A CARTESIAN
COORDINATE SYSTEM
FIGURE 1A.2 A Cartesian
Coordinate System
GRAPHS, SLOPES, AND INTERCEPTS
A Cartesian coordinate
system is constructed
by drawing two
perpendicular lines: a
vertical axis (the Y-
axis) and a horizontal
axis (the X-axis).
27 of 33
The point at which
the line intersects
the Y-axis (point a)
is called the Y-
intercept.
The Y-intercept, is
the value of Y
when X = 0.
28 of 33
The slope of the line indicates
whether the relationship
between the variables is
positive or negative.
The slope of the line is
computed as follows:
b =
A
A
Y
X
Y Y
X X
=

1 0
1 0
Example
Graph a linear equation such as y = -
1/4x + 3.
Identify the slope and y intercept.
Graph each of the following sets of
numbers. Draw a line through the points
and calculate the slope.
1
X Y
0 0
10 10
20 20
30 30
40 40
2
X Y
1 100
2 75
3 50
4 25
5 0
For each of the following equations, graph
the line and calculate its slope.
1. P = 100 4Qd (Put Qd on the x axis)

2. P = 50 + 6Qs (Put Qs on the x axis)

3. I = 1000 50r (Put I on the x axis)

Summation Notation

Summation Notation

Summation Notation
The subscript may be any letter,
although i, j, and k seem to be
preferred by statisticians.

When we are assuming over all the
values of xi that are available, the
limits of summation are often omitted
and we simply write x represent the
sum of all available data.
Graphs of Nonlinear
Functions
The graph of a quadratic function of
the form f(x) = ax
2
+ bx + c, where a is
not equal to zero, is a parabola.
The graph of a parabola is symmetric
about a line called the axis of
symmetry.
The point of intersection of the
parabola and its axis is called a
vertex.
For a quadratic function expressed in
the form
y = a(x h)
2
+ k = 0
the axis x h = 0, x = h; the vertex is (h,
k).
If a>0, the parabola opens up; if a<0, it
opens down.