Introduction to Mathematical Economics I
Professor Ariell Reshef University of VirginiaLecture notes based on Chiang and Wainwright,
Fundamental Methods of Mathematical Economics
1 Mathematical economics
Why describe the world with mathematical models, rather than use verbal theory and logic? After all, thiswas the state of economics until not too long ago (say, 1950s).1. Math is a
language, so we can describe a lot using fewer words.2. Math contains many
tools and theorems
that help making
.3. Math forces us to
explicitly state all assumptions
, and help preventing us from failing to acknowl-edge implicit assumptions.4.
is easily described.Math has become a
for most economists. It facilitates communication between econo-mists.
despite its usefulness, if math is the only language for economists, then we are restrictingnot only communication among us, but more importantly we are restricting our understanding of the world.Mathematical models make strong assumptions and use theorems to deliver insightful conclusions. But,remember the
A-A’ C-C’ Theorem:
Let C be the set of conclusions that follow from the set of assumptions A. Let A’ be a small perturbation of A. There exists such A’ that delivers a set of conclusions C’ that is disjoint from C.
Thus, theinsightfullness of C depends critically on the plausibility of A.The plausibility of A depends on empirical validity, which needs to be established, usually using econo-metrics. On the other hand, sometimes theory informs us on how to look at existing data, how to collectnew data, and which tools to use in its analysis. Thus, there is a
between theory andempirics. Neither can be without the other (see the inductivism v deductivism debate).Theory is an abstraction of the world. You focus on the most important relationships that you considerimportant a priori to understanding some phenomenon. This may yield an economic model.
2 Economic models
Some useful notation:
exists and is unique. If we cross any of these, or pre…x by
, then it means "not".1