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You are on page 1of 36

Hasin Yousaf

Week 1

Organizational Issues

Course Staff:

Email: h.yousaf@unsw.edu.au

• Tutor:

Organizational Issues

References:

http://moodle.telt.unsw.edu.au

• Alpha C. Chiang, Kevin Wainwright, Fundamental Methods of

Mathematical Economics, McGraw-Hill Education, 4th ed. 2005

• Simon, Carl P., Lawrence Blume, Mathematics for Economists, W.

W. Norton, 1994.

• Klein, W. Michael, Mathematical Methods for Economics, Addison

Wesley, 2002.

Organizational Issues

Assessments:

Mathematical Economics?

edge of the mathematical tools used in economic analysis.

Partial Market Equilibrium - A Linear Model

determination in an isolated market. To construct the model, the

following elements are required:

• Variables

– Quantity demanded of the commodity (Qd )

– Quantity supplied of the commodity (Qs )

– Price of the commodity (P )

• Equilibrium Condition

– Quantity demanded equals quantity supplied (Qd = Qs )

• Behavioural Equations

– Qd is a decreasing function of P Qd = a − bP (a, b > 0)

– Qs is an increasing function of P Qs = −c + dP (c, d > 0)

Partial Market Equilibrium - A Linear Model

Graphical Solution

Qs = −c + dP (Supply)

a Qd = a − bP (Demand)

Q∗ = Q∗d = Q∗s (P ∗ , Q∗ )

0 P

P∗

-c

Partial Market Equilibrium - A Linear Model

Analytical Solution

Q = Qd = Qs . Rewrite the model equivalently as:

(

Q = a − bP

Q = −c + dP

a+c

P∗ =

b+d

∗ ad − bc

Q =

b+d

additional restriction that ad > bc.

Click for Detailed Solution

Partial Market Equilibrium - A Nonlinear Model

Now let the linear demand in the isolated market model be replaced by

a quadratic demand function. To construct the model, the following

elements are required:

• Variables

– Quantity demanded of the commodity (Qd )

– Quantity supplied of the commodity (Qs )

– Price of the commodity (P )

• Equilibrium Condition

– Quantity demanded equals quantity supplied (Qd = Qs )

• Behavioural Equations

– Qd is a decreasing function of P 2 Qd = 4 − P 2

– Qs is an increasing function of P Qs = 4P − 1

Partial Market Equilibrium - A Nonlinear Model

Graphical Solution

Q

Qs = 4P − 1 (Supply)

Qd = 4 − P 2 (Demand)

P

-2 0 P∗ 2

-1

Partial Market Equilibrium - A Nonlinear Model

Analytical Solution

Q = Qd = Qs . Rewrite the model equivalently as:

(

Q = 4 − P2

Q = 4P − 1

equation:

P 2 + 4P − 5 = 0

The two solutions are: P1∗ = 1 and P2∗ = −5. But, only the first is

economically admissible, as negative prices are ruled out.

Given the equilibrium price P ∗ = 1, the equilibrium quantity is given

by

Q∗ = 3

Click for Detailed Solution

General Market Equilibrium

of a commodity should take into account the effect not only of

the price of the commodity itself, but also of the prices of related

commodities.

sidered, equilibrium would require that quantity demanded equals

to quantity supplied for each and every commodity included in the

model.

Qdi = Qsi for i = 1, 2, ..., n

• The solution will then consist of a set of prices Pi∗ and correspond-

ing quantities Q∗i such that all commodities’ markets will be in

equilibrium.

Two-Commodity Market Model

each other. To construct the model, the following elements are

required:

• Variables

– Quantity demanded of each commodity (Qd1 and Qd2 )

– Quantities supplied of each commodity (Qs1 and Qs2 )

– Price of each commodity (P1 and P2 )

• Equilibrium Condition

– Quantity demanded equals quantity supplied of each commodity

(Qd1 = Qs1 and Qd2 = Qs2 )

• Behavioural Equations

– Qd1 = a0 + a1 P1 + a2 P2 and Qd2 = α0 + α1 P1 + α2 P2

– Qs1 = b0 + b1 P1 + b2 P2 and Qs2 = β0 + β1 P1 + β2 P2

Two-Commodity Market Model

Analytical Solution

Q1 = Qd1 = Qs1 and Q2 = Qd2 = Qs2 . Rewrite the model equivalently

as:

(

(a0 − b0 ) + (a1 − b1 )P1 + (a2 − b2 )P2 = 0

(α0 − β0 ) + (α1 − β1 )P1 + (α2 − β2 )P2 = 0

prices:

c2 γ0 − c0 γ2

P1∗ =

c1 γ2 − c2 γ1

c0 γ 1 − c1 γ 0

P2∗ =

c1 γ2 − c2 γ1

where ci = ai − bi and γi = αi − βi (i = 0, 1, 2)

Click for Detailed Solution

Equilibrium in National-Income Analysis

Y = C + I0 + G0

C = a + bY (a > 0, 0 < b < 1)

where Y and C stand for endogenous variables national income and con-

sumption expenditure, respectively. I0 and G0 represent the exogenously

determined investment and government expenditures.

national income and consumption expenditure:

a + I0 + G0

Y∗ =

1−b

a + b(I0 + G0 )

C∗ =

1−b

The restriction b 6= 1 is necessary to ensure the denominator is non-zero.

Since b, the marginal propensity to consume is assumed to be a positive

fraction, this restriction is automatically satisfied.

Click for Detailed Solution

Linear Models and Matrix Algebra

though a number of parameters are involved.

into the model, the solution methods we have considered quickly

become cumbersome and unwieldy.

taneous equations is matrix algebra.

• Matrix algebra

– provides a compact way of writing an equation system;

– leads to a way of testing the existence of a solution;

– gives a method of finding the solution (if it exists).

Matrices as Arrays

Definition: Matrix

columns:

a11 a12 · · · a1n

a21 a22 · · · a2n

A = [aij ]m×n = .

.. .. ..

..

. . .

am1 am2 ··· amn

define the dimension of the matrix. Since the matrix A in the definition

contains m rows and n columns, it is said to be of dimension m × n.

Matrices as Arrays

a21 x1 + a22 x2 + · · · + a2n xn = d2

.. .. .. ..

. . . .

an1 x1 + an2 x2 + · · · + ann xn = dn

a11 a12 · · · a1n x1 d1

a21 a22 · · · a2n x2 d2

A= . .. , x = .. , d =

.. .. ..

..

. . . . .

an1 an2 · · · ann xn dn

Matrices as Arrays

x1 + 2x2 − x3 =4

3x1 + 5x2 =5

−x1 − 3x2 + 6x3 =7

1 2 −1 x1 4

A= 3 5 0 , x = x2 , d = 5

−1 −3 6 x3 7

Vectors as Special Matrices

column:

x1

x2

xm×1 = .

..

xm

x1×n = x1 x2 . . . xm

5

For example, x2×1 = is a column vector.

12

For example, x1×4 = 2 6 8 1 is a row vector.

Matrix Operations

is the component-wise sum:

a11 + b11 ··· a1n + b1n

a21 + b21 ··· a2n + b2n

A+B = (aij )m×n +(bij )m×n =

.. .. ..

. . .

am1 + bm1 ··· amn + bmn

dimension, i.e. the matrices should be conformable for addition.

For example,

3 4 −1 0 3−1 4+0 2 4

6 7 + 6 5 = 6 + 6 7 + 5 = 12 12

−1 3 −1 3 −1 − 1 3 + 3 −2 6

Matrix Operations

[bij ]m×n is the component-wise difference:

a11 − b11 · · · a1n − b1n

a21 − b21 · · · a2n − b2n

A−B = (aij )m×n −(bij )m×n =

.. .. ..

. . .

am1 − bm1 · · · amn − bmn

dimension, i.e. the matrices should be conformable for subtraction.

For example,

19 3 6 8 19 − 6 3−8 13 −5

− = =

2 0 1 3 2−1 0−3 1 −3

Matrix Operations

r ∈ R is the component-wise multiplication:

ra11 · · · ra1n

ra21 · · · ra2n

rA = (raij )m×n = .

.. ..

.. . .

ram1 ··· ramn

For example,

3 2 2×3 2×2 6 4

1 6 2×1 2×6 2 12

2 = =

7 3 2×7 2 × 3 14 6

8 −2 2×8 2 × −2 16 −4

Matrix Operations

matrix B = [bij ]n×p is the m × p matrix C = [cij ]m×p whose

element in the ith row and the j th column is the product on the

ith row of A and the j th column of B. That is,

n

X

cij = air brj = ai1 b1j + ai2 b2j + · · · + ain bnj

r=1

A is equal to the number of rows of the matrix B.

For example,

1 3 1(5) + 3(9) 32

2 8 × 5 = 2(5) + 8(9) = 82

9

4 0 4(5) + 0(9) 20

Matrix Operations

Exercise

Let

3 5 1 2 1

1

A= 2 1 ,B = 4 7 ,C = ,D = 0

3

6 0 0 3 0

(i) (A + D)C

(ii) (A − B)C

(iii) (A + B)D

Commutative, Associative and Distributive Laws

given operations are defined, then the basic properties of matrix

addition are:

• Commutative Law A+B =B+A

• Associative Law (A + B) + C = A + (B + C)

Commutative, Associative and Distributive Laws

given operations are defined, then the basic properties of matrix

multiplication are:

• AB 6= BA except in special cases.

Linear Dependence

only if one of the vectors can be written as a linear combination

of the others.

be written as a linear combination of the others.

2 1 4

For example, the three vectors v1 = , v2 = , and v3 =

7 8 5

are linearly dependent because v3 is a linear combination of v1 and v2 .

6 2 4

3v1 − 2v2 = − = v1 = = v3

21 16 5

Linear Dependence

vectors are linearly independent if and only if

k1 v1 + k2 v2 + ... + kn vn = 0

The vectors are linearly dependent if and only if there exists

k1 , ..., kn with at least one ki 6= 0 for i = 1, ..., n.

Exercise

1 1 1

Show that v1 = −1 , v2 = 0 , v3 = −2 are linearly

0 1 −1

dependent.

Detailed Solutions

Substitute the first equation into the second equation

a − bP = −c + dP

(b + d)P = a + c

a+c

P∗ =

b+d

or supply equation.

(a + c) a(b + d) − b(a + c) ad − bc

Q∗ = a − b = =

b+d b+d b+d

Go Back

Theorem: Quadratic Equation

ax2 + bx + c = 0

there are two roots, which can be obtained from the quadratic

formula √

∗ ∗ −b ± b2 − 4ac

x1 , x2 =

2a

√

∗ ∗ −4 ± 16 + 20

P1 , P2 = = 1, −5

2

either demand or supply equation.

Q∗ = 4 × 1 − 1 = 3

Go Back

Let ci = ai − bi and γi = αi − βi (i = 0, 1, 2), then the system of

two equations can be rewritten as

(

c1 P1 + c2 P2 = −c0

γ1 P1 + γ2 P2 = −γ0

Substituting this into the second equation and solving gives

c2 γ0 − c0 γ2

P1∗ =

c1 γ2 − c2 γ1

From the second equation, it can be found that P1 = −(γ0 + γ1 P1 )/γ2 .

Substituting this into the first equation and solving gives

c0 γ1 − c1 γ0

P2∗ =

c1 γ2 − c2 γ1

Note that we must require the common denominator to be nonzero, i.e.

c1 γ2 6= c2 γ1 .

Go Back

Substitute the second equation into the first equation to reduce the

system into a single equation in one variable, Y.

Y = a + bY + I0 + G0

(1 − b)Y = a + I0 + G0

a + I0 + G0

Y∗ =

1−b

To find equilibrium consumption expenditure C ∗ , substitute Y ∗ into

the consumption equation

b(a + I0 + G0 ) a + b(I0 + G0 )

C ∗ = a + bY ∗ = a + =

1−b 1−b

Go Back

(i) Since A is a 3 × 2 matrix and D is a 3 × 1 matrix, (A + D)C is not

defined.

(ii)

3 5 1 2

1

(A − B)C = 2 1 − 4 7

3

6 0 0 3

2 3

1

= −2 −6

3

6 −3

(2)(1) + (3)(3)

= (−2)(1) + (−6)(3)

(6)(1) + (−3)(3)

11

= −20

−3

(iii) (A + B) is a 3 × 2 matrix and D is a 3 × 1 matrix. Since the number

of columns of (A + B) is not equal to the number of rows of D ,

(A + B)D is not defined.

Go Back

Consider the equation

k1 v1 + k2 v2 + k3 v3 = 0

1 1 1 0

k1 −1 + k2 0 + k3 −2 = 0

0 1 −1 0

k1 + k2 + k3 =0

−k1 − 2k3 =0

k2 − k3 =0

the first and second equations to k1 + 2k2 = 0 which can be solved

by k2 = −1/2 and k1 = 1. Therefore, the system can be solved by

k = (1, −1/2, −1/2). Therefore, the vectors are linearly dependent.

Go Back

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