Running head: APPLICATIONS OF MATHEMATICS IN ECONOMICS 1

Applications of Mathematics in Economics

Akshat Agarwal (1933304)

CHRIST (Deemed to be University)

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I would like to thank my Mathematical Economics teacher Manasi Ma’am for

providing the golden opportunity, to find the applications of mathematics in Economics

which motivated me to do further research on this topic. Before beginning, I would like to

explore the subject of Economics and find out the what actually enabled Mathematics to be

put to uses in the vast subject of Economics. Looking at the big picture of economics, what

we can find is that economics talks about money, profits, costs, revenue, investment, interest

etc. mainly involving numbers, but is it really so? The famous economist of 20th century John

Maynard Keynes said that economics is nothing but the study of people in their everyday

business of life. The above statement leads us to the conclusion that economics talks about

everything that happens in our day-to-day life. Economics basically talks about relationships

between various individuals of an economy and that relationship leads us to the fact that

individuals are the most important part of economics. As of now I can figure out the

following applications of mathematics in economics:

1) To arrive at conclusions: Mathematics is a very good deductive tool and it acts

like a detective when we want to search for a hidden answer specially in economic problems.

Suppose a buyer and a seller are making a deal then if mathematics is applied and that

economic scenario is converted in the form of a mathematical statement then mathematics

itself invokes its internal logic rules to arrive at the conclusion that helps both buyer and

seller in maximizing their profits. Input- Output analysis helps producers to know how much

they need to produce, in incline with the public demand.

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2) To make precise statements: Mathematics not only helps in making deductive

statements but also helps in making precise statements by putting forth the assumptions, and

thus helping in understanding arguments.

For e.g.: Other factors remain unchanged ↔ demand is inversely related to the price

of the commodity. ↔ symbol stands for if and only if. This symbol tells us that both the

statements leads to the other being true i.e. first and second statements lead to each other.

3) To group elements together: When we want to group similar kind of quantities

together then we can make use of sets. A plethora of different quantities being part of still

larger set called superset can be grouped together as subset to manage these quantities in an

easy way. Sets allows us to perform different operations upon them to arrive at a particular

result. Venn diagrams visualise the sets to make study better.

E.g.: Let in an economy:

A= People who purchased Rolex watch.

B= People who purchased iPhone.

From the below Venn diagram, area A∩B represents the group of people who have purchased

both Rolex watch and iPhone, making it easier for economists to study the target audience.

4) To deal with unknown quantities: The beauty of mathematics is that it allows us

to deal with quantities with unknown values called variables and represent them in equations

called functions. Let’s say that output depends on use of labour and capital now we can
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depict our output by Q, labour by L and capital by K, now all we write is an equation Q = f

(L, K). This looks like an arithmetic equation but actually it does not involve numbers. This

allows us to arrive at an ideal L/K ratio for minimum producing cost and maximum output.

For example: If we are given the relation between quantity supplied and the own price of

good in the form of a function, we can find out supply at different prices.

5) Optimisation of resources: Calculus allows us to study situations of optimisation,

where we have to maximize our gains with given input. There are situations when we have to

attain the highest point or lowest point and that point can be attained by the use of differential

calculus. Now as we differentiate the equation and put it equal to zero then we get the

marginal solution at which the profit is maximized, now this solution could not have been

arrived by grammatical statements.

For example:

6) To develop relation between various elements of economics: Linear algebra

helps us establish relationships between various sectors of our economy, thus providing a

coordination among them using the tools of matrices and determinants. Let’s consider an

economy has three sectors coal, electric and steel. This table indicates how much of each’s

sector distribution is purchased by the other sectors.

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Coal Electric Steel Sold / Purchased

0% 40% 60% Coal
60% 10% 20% Electric
40% 50% 20% Steel

7) To study data in a systemic way: Mathematics provides us with tools which

easily beat the descriptive tools of grammar. Statistics helps us to do inductive study in which

we study different individual units of numeric data, manipulate them using various

mathematical formulae and then arrive at a common conclusion and then arrive at a law.

Statistics is put to special use in econometrics and policy framing.

For example, the below graph shows the average employment over the firm lifecycle:

8) To understand the psychology of consumers: Now one of the features of

economics is to investigate the motivation of the people as they go about their activities.

Observing various results of statistics and logic, helps us in understanding the thinking and

decision making of our target consumers so that we as a producer can incline our goods as

per the demands and desires of our consumers.

9) To find the rate of change of any quantity over time: The concept of plotting

our data on graph in the form of a curve can be used to find the rate of increase or decrease of
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the data by observing the slope of the curve. If the curve is downward sloping or with

negative slope then we can arrive to the conclusion that the value on Y- axis decreases with

increase in the value of entity on X- axis.

10) To do economic research: While doing any research, our prime concern is to

study previous trends, collect older data, apply economic theories, manipulate data

mathematically, predict future possibilities and finally arrive at some conclusion.

Mathematics is put to use to do complicated research involving a number of variables.

Mathematics can be of various types with many different branches to cater to the needs of

different schools of economics. Even Marxian economists, who have the value judgement

that people, although can do the best still should not do the best morally, make use of linear

algebra to arrive at conclusions. As we progress further we see that different branches of

mathematics are being used. Mathematics provides us a huge array of methods to solve any

problem.

References:

Katzner, D. (2003). Why Mathematics in Economics? Journal of Post Keynesian Economics,

25(4), 561-574. Retrieved from http://www.jstor.org/stable/4538849

Wilson, E., & Stigler, G. (1955). Mathematics in Economics: Further Comment. The Review

of Economics and Statistics, 37(3), 297-300. doi:10.2307/1925433

Sydsaeter, K & Hammond, P.J. (2002). Mathematics for Economic Analysis (1st ed.). Pearson

Education India.
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