01 Introduction and Matrix Algebra PDF

introduction
The course is divided into four major topics
1. Static analysis
2. Comparative statics
3. Unconstrained optimization
4. Constrained optimization
1
Introductory mathematical economics focuses on static analysis
Static Dynamic
analysis analysis
Simplified analysis on the effect of an immediate Dynamic economic analysis is not only
change to a system. It tells about equilibrium concerned on equilibrium conditions, but also
conditions of a timeless economy, meaning, shows the path of change (i.e., how is it
variables do not change over time achieved). Time element is important, and all
economic variables are dated.
Introductory mathematical economics focuses on static analysis
Comparative
statics
It is the comparison of two different economic outcomes or equilibria, i.e., before
and after a change in some underlying parameter.
2
Illustration: Static analysis and comparative statics
p Suppose that supply and demand behavior
S are static (does not change through time).
At the original market conditions D0 and S,
the static market equilibrium is at E0. As
demand increases to D1, the market reaches
E1 a new static market equilibrium at E0. The
realm of comparative statics compares these
two points and analyzes the change in
E0 prices and quantities as market equilibrium
moves from E0 to E1.
D1
D0
q
Because resources are scarce, optimization is the process maximizing

or minimizing a function based on a given criterion
constrained unconstrained
Limitations exist on the values of the parameters No limitations exist on the values of the
that maximize (or minimize) the value of the parameters that maximize (or minimize) the
function value of the function
3
Illustration: Unconstrained and constrained optimization
π
Consider the profit function illustrated on
the left. Under unconstrained optimization,
A i.e. where the domain is the entire set of real
numbers, the maximum profit is at point A.
B However, imposing a constraint such as
limiting to the domain q ∈ [q1, q2] results
to a different maximum profit at point B,
and a minimum profit at point C.
q1 q2 q
Review:
LINEAR EQUATIONS
4
PRACTICE: Solve for the solution of the following equations
1
5x – 10 = 15
2
4x + 2(x – 4) – 3 = 2(3x – 5) – 1
3
(2x + 1)-1 = (x + 2)-1
4
(2x + 14)0.5 = 16
Source: Sydsaeter (2012), problems for section 2.1, page 37
Solution to numbers 2 and 3

4x + 2(x – 4) – 3 = 2(3x – 5) – 1
4x + 2x – 8 – 3 = 6x – 10 – 1
6x – 11 = 6x – 11
The statement is always true. Thus the solution to the equation above is x ∈ ℝ
(2x +1)-1 =(x+2 )-1

x +2 =2x +1
x=1
5
Relationship between variables can be described using forms of
equations. Consider the case of a linear equation:
y = ax + b
Eq.1 above represents the general form of the linear equation, where a and b are parameters
which can take any value in the domain of real numbers (ℝ). If values for a and b are given,
they are considered exogenous variables. The solution of the equation is determined by finding
the expression for the unknown variable, in this case, y, referred to as the endogenous variable.
Source: Sydsaeter (2012), page 38
Substituting parameters in the structural form derives the reduced form
y = ax + b, a = 3, b = 4
Structural form
y = 3x + 4
Reduced form
The reduced form that expresses endogenous variables as functions of exogenous variables.
[Note: there are two reduced forms for this equation, y in terms of x, and vice versa]
x = y/3 – 4/3
6
y = 3x + 4 x = y/3 – 4/3
PRACTICE: Consider the simplest model of the macroeconomy – a closed

economy without government:
Y=C+Ī
C = a + bY
Y is the gross domestic product (GDP); C is household consumption; and I is total investment, the
‘bar’ above I indicates that the amount of investment is treated as fixed or constant. Consumption
parameters a and b are given to be positive,with b < 1.
Derive the reduced form of the model in terms of Y.
Solve the model if parameter values are provided as: I = 100, a = 500, and b = 0.8
7
Solution
Y=C+Ī
C = a + bY
Y = (a + bY) + Ī
Y – bY = a + Ī
(1 – b)Y = a + Ī
Y = (a + Ī)/(1 – b)
The reduced form of the model in terms of Y is Y = (a + Ī)/(1 – b)
Given that I = 100, a = 500, and b = 0.8
Y = (500 + 100)/(1 – 0.8)
Y = 600/0.2
Y = 3000
Suppose the total demand for money in the economy is given by the following:
M = αY + β(r – γ) -δ
where M is the quantity of money in circulation, Y is national income, r is the interest rate, while
α, β, γ , and δ are positive exogenousparameters.
Derive the reduced form of the model in terms of r.
8
Solution
M – αY = β(r – γ) −δ
M – αY
= (r – γ) −δ
β
1/δ
M – αY
= (r – γ) −1
β
−1/δ
M – αY
= r–γ
β
−1/δ
M –αY
r= +γ
β
PRACTICE: Solve for the solution of the following equations
1
Y = 94 + 0.2[Y – (20 + 0.5Y)] for Y
2
(pq)1/2 – 3q = 5 for p
3
K 0.5 (0.5 rw -1) -0.25 = r for K
9
Review:
LINEAR EQUATIONS
IN TWO UNKNOWNS
Suppose we are to determine the values of x and y that satisfy both

equations:
18 = 2x + 3y
– 7 = 3x – 4y
Solving two linear equations with two unknowns can be done multiple ways. First,
one can solve one of the equations in terms of the other; then substitute the result
into the other equation. Second, one can eliminate one of the variables by adding
or subtracting a multiple of one equation from the other.
10
Derive the system of equations for the following, and determine what is asked
1 Find two numbers whose sum is 52 and whose difference is 26.
2 At the beginning of the year, a person had a total of PHP 10 000 in
two accounts. Annual interest rates were 5% and 7.2%, respectively.
If the person has made no transfers during the year, and has earned
a total of PHP 676 interest, what was the initial balance in each of the
two accounts?
3 A firm produces a good in two qualities, A and B. For the coming year,
the estimated output of A is 50% higher than that of B. The profit per
unit sold is PHP 300 for A and PHP 200 for B. If the targeted profit is
PHP 13 000 over the next year, how much of each of the two qualities
must be produced?
Solution for number 1

x + y = 52
x – y = 26
11
x + y = 10000
0.05x + 0.072y = 676

x = y + 0.5y
13000 = 300x + 200y
12
Consider the following general linear demand and supply schedules
QD = a – bP
QS = α + βP
Here a and b are positive parameters of the demand function QD, while α and β are positive
parameters of the supply function, QS.
Derive the reduced form of the model at equilibrium in terms of P. In terms of Q.
Solution
QD = a – bP
QS = α + βP
At equilibrium, QS = QD. Thus,
a – bP = α + βP
a – α = βP + bP
a – α = (β + b)P
a–α
P=
b+β
13
Solution
Using the demand equation, since QD = a – bP
a–α
QD = a – b
b+β
a α
QD = a – b −
b+β b+β
ab αb
QD = a – −
b+β b+β
ab αb
QD = a – +
b+β b+β
a(b + β) ab αb
QD = – +
b+β b+β b+β
ab + aβ ab αb
QD = – +
b+β b+β b+β
aβ + αb
QD =
b+β
Solution
Using the supply equation, since QS = α + βP
a–α
QS = α + β
b+β
a α
QS = α + β −
b+β b+β
aβ αβ
QS = α + −
b+β b+β
aβ αβ
QS = α + −
b+β b+β
α(b + β) aβ αβ
QS = + −
b+β b+β b+β
αb + αβ aβ αβ
QS = + −
b+β b+β b+β
aβ + αb
QS =
b+β
14
Solution
To summarize, at equilibrium:
a–α
P=
b+β
aβ + αb
QS = QD = Q =
b+β
Matrix
algebra
15
Analysis and comprehension of systems of linear equations can be
conducted using matrices, vectors, and determinants.
18 = 2x + 3y a = QD – bP
– 7 = 3x – 4y α = QS + βP
The study of these systems belong to an area of mathematics called linear algebra.
Consider the case of m equations in n unknowns, If the unknowns are

denoted by x1, . . . , xn, we usually write such a system in the form:
a11x1 + a12x2 + · · · + a1nxn = b1
a21x1 + a22x2 + · · · + a2nxn = b2
··························
am1x1 + am2x2 + · · · + amnxn = bm
Where m may be greater than, equal to, or less than n. Here a11, a12, . . . , amn are called the
coefficients of the system, and b1, . . . , bm are the right-hand sides. All are real numbers. A solution
of system is an ordered set or list of numbers s1, s2, . . . , sn that satisfies all the equations
simultaneously. If system has at least one solution, it is said to be consistent. When the system has
no solution,it is said to be inconsistent.
16
Matrix is a rectangular array of numbers considered as a single object.
When there are m rows and n columns, we have an m-by-n matrix
a11 a12 … a1𝑛

a21 a21 … a2𝑛
𝐀=
⋮ ⋮ ⋱ ⋮
am1 am2 … am𝑛
Matrix 𝐀 in above is said to have order m×n. The mn numbers that constitute A are called its
elements or entries. In particular, aij denotes the elementin the ith row and the jth column.
A matrix with either one row or one column only is called a vector.
a11
𝒂 = a21 𝒃 = a11 a12 a13
a31
Column vector Row vector
Matrix order (3x1) Matrix order (1x3)
17
If m = n, so, it is called a square matrix of order n. The matrix elements
a11, a22, . . . , ann constitute the main diagonal that runs from the top left
(a11) to the bottom right (ann).
a a12 Square matrix

𝑩 = 11 Matrix order 2, with diagonal
a21 a22 elements a11 and a22
The coefficients in a system of linear equations can be represented in a

coefficient matrix.
18 = 2x + 3y 2 3
𝐄=
– 7 = 3x – 4y 3 –4
5 = 3x – 4y + 6z 3 –4 6
– 2 = 5x + y + 2z 𝐆=
5 1 2
18
PRACTICE: Consider the following matrices:
5
2 3 3 –4 6
𝒅= 1 𝑬= 3 –4 𝑭=
3 5 1 2
d E F
𝒂𝟏𝟏 5 2 3
𝒂𝟐𝟏 1 3 5
𝒂𝟏𝟐 n/a 3 -4
𝒂𝟑𝟐 n/a n/a n/a
𝒂𝟐𝟑 n/a n/a 2
Matrix
operations
19
EQUALITY OF MATRICES. Two matrices 𝐀 and 𝐁 are equal if they
have the same order and if all their corresponding entries are equal.
𝐀mxn = 𝐁mxn ⇒ aij = bij

∀ i=1,2,...,m,j=1,2,...,n
PRACTICE: Identify the parameters where the following equation holds true
3 t–1 t 2v
=
2t u u+1 t+w
Solution
3 t–1 t 2v
=
2t u u+1 t+w
3 t–1 t 2v
Suppose A = and B =
2t u u+1 t+w
Firs, t = 3 since A11 = 3 = B11 = t. By definition of equal matrices, t -1 = 2v.

Since t = 3, then v = 1. Furthermore, 2t = u + 1 and thus, u = 5.
Finally, u = t + w, which translates to 5 = 3 + w. Thus, w = 2. To summarize:
t,u,v,w = (3,5, 1,2)
20
ADDITION OF MATRICES. Add two matrices of the same order by
adding their corresponding entries.
𝐀 + 𝐁 = (aij)mxn + (bij)mxn =(aij + bij)mxn
SCALAR MULTIPLICATION OF MATRICES. To multiply a matrix by a

scalar, multiply each entry in the matrix by that scalar.
α𝐀 = α(aij)mxn =(αaij)mxn
21
An mxn matrix consisting only of zeros is called a zero matrix
0 0 0 Zero matrix of order 2x3

𝒁=
0 0 0
RULES FOR MATRIX ADDITION AND MULTIPLICATION BY

SCALARS
[1] (𝐀 + 𝐁) + 𝐂 = 𝐀 + (𝐁 + 𝐂)
[2] 𝐀+𝐁 = 𝐁+𝐀
[3] 𝐀+𝟎 = 𝐀
[4] 𝐀 + (– 𝐀) = 𝟎
[5] (α + β)𝐀 = α𝐀 + β𝐀
[6] α(𝐀 + 𝐁) = α𝐀 + α𝐁
22
PRACTICE: Evaluate (𝐀 + 𝐁), (𝐀 – 𝐁), and (𝟓𝐀 –3𝐁) when
0 1 –1 1 –1 5
𝐀= 𝐁=
2 3 7 0 1 9
MULTIPLICATION OF MATRICES. Suppose that 𝐀 = (aij)m×n and that

𝐁 = (bij)n×p. The product 𝐂 = 𝐀𝐁 is the m×p matrix 𝐂 = (cij)m×p whose
element in the ith row and the jth column is the inner (dot) product:
n
cij = ෍ air brj
r=1
of the ith row of 𝐀 and the jth column of 𝐁. The matrix product 𝐀𝐁 is defined only
if the number of columns in 𝐀 is equal to the number of rows in 𝐁. The number of
columns of the 1st matrix must equal the number of rows of the 2nd matrix.
And the result will have the same number of rows as the 1st matrix, and the same
number of columns as the 2nd matrix.
23
GENERAL RULE FOR MULTIPLYING MATRICES. To multiply an m×n
matrix by an n×p matrix, the ns must be the same, and the result is an
m×p matrix.
Amxn(Bnxp)= Cmxp
Notation on convention. Since matrix multiplication is not commutative,

𝐀𝐁 is not necessarily the same as 𝐁𝐀.
premultiply 𝐁 by 𝐀 or
𝐂 = 𝐀𝐁 (postmultiply 𝐀 by 𝐁)
postmultiply 𝐁 by 𝐀 or
𝐃 = 𝐁𝐀 (premultiply 𝐀 by 𝐁)
24
PRACTICE: Solve for AB
7 8
1 2 3
𝐀= 𝐁= 9 10
4 5 6
11 12
Step 1. Check the dimensions of the matrix. A is a 2x3 matrix, and B is 3x2 matrix. Following
the rule for matrix multiplication, the matrix product AB (which we denote a C) is a 2x2 matrix.
Specifically:
c11 c12
C=
c21 c22

7 8
1 2 3
𝐀= 𝐁= 9 10
4 5 6
11 12
Step 2. Derive the inner product for each element. Since B is premultiplied with B, the
product AB will be computed as follows:
c11 c12
C=
c21 c22
C11 will be the inner product of first row of A and first column of B.
C12 will be the inner product of first row of A and second column of B.
C21 will be the inner product of second row of Aand first column of B.
C22 will be the inner product of second row of Aand second column of B.
25
7 8
1 2 3
𝐀= 𝐁= 9 10
4 5 6
11 12
Step 2. Derive the inner product for each element. Since B is premultiplied with B, the
product AB will be computed as follows:
c11 c12 58 64
C= =
c21 c22 139 154
C11 = 1x7 + 2x9 + 3x11 = 58
C12 = 1x8 + 2x10 + 3x12 = 64
C21 = 4x7 + 5x9 + 6x11 = 139
C22 = 4x8 + 5x10 + 6x12 = 154
PRACTICE: Compute the matrix product 𝐀𝐁. Is the product 𝐁𝐀defined?
0 1 2 3 2
𝐀= 2 3 1 𝐁= 1 0
4 –1 6 –1 1
Matrix of order 3x3 Matrix of order 3x2
26
Given the following matrices, calculate 𝐀𝐁, 𝐂(𝐀𝐁), 𝐁𝐀, and 𝐂(𝐁𝐀)
2 4 −2 4
𝐀= 𝐁=
1 2 1 −2
2 3 1 1
𝐂= 𝐃=
6 9 1 3
RULES FOR MATRIX MULTIPLICATION
[1] (𝐀𝐁)𝐂 = 𝐀(𝐁𝐂)

[2] 𝐀(𝐁 + 𝐂) = 𝐀𝐁 + 𝐀𝐂
[3] (𝐀 + 𝐁)𝐂 = 𝐀𝐂 + 𝐁𝐂
[4] α(𝐀)𝐁 = 𝐀(α𝐁) = α(𝐀𝐁)
27
Verify rules (1)–(4), where α is an arbitrary scalar, for the following matrices:
1 2 0 −1 1 1
𝐀= 𝐁= 𝐂=
0 1 3 2 2 1
Linear systems of equations can be expressed by means of matrix

multiplication. For instance, consider the system:
3x1 + 4x2 = 5
7x1 – 2x2 = 2
Is equivalent to the matrix equation:
3 4 x1 5
=
7 −2 x2 2
28
Consider the case of m equations in n unknowns, If the unknowns are
denoted by x1, . . . , xn, we usually write such a system in the form:
a11x1 + a12x2 + · · · + a1nxn = b1
a21x1 + a22x2 + · · · + a2nxn = b2
··························
am1x1 + am2x2 + · · · + amnxn = bm
Is equivalent to the matrix equation:
a11 a12 … a1𝑛 x1 b1
a21 a21 … a2𝑛 x2 b
= 2
⋮ ⋮ ⋱ ⋮ ⋮ ⋮
am1 am2 … am𝑛 xn bm
The matrix equation is of the form 𝐀𝐱 = 𝐛
𝐀𝐱 = 𝐛
a11 a12 … a1𝑛 x1 b1
a21 a21 … a2𝑛 x2 b
= 2
⋮ ⋮ ⋱ ⋮ ⋮ ⋮
am1 am2 … am𝑛 xn bm
(mxn) (nx1) = (mx1)
29
POWERS OF MATRICES. If 𝐀 is a square matrix, by associative law:
𝐀𝐧 = 𝐀𝐀 … 𝐀 repeated n times
Suppose 𝐏 and 𝐐 are n×n matrices where 𝐏𝐐= 𝐐𝟐𝐏. Prove that (𝐏𝐐)𝟐 = 𝐐𝟔𝐏𝟐.
Solution
Suppose 𝐏 and 𝐐 are n×n matrices where 𝐏𝐐= 𝐐𝟐𝐏. Prove that (𝐏𝐐)𝟐 = 𝐐𝟔𝐏𝟐
By definition of power of matrices, (PQ)2 = PQ (PQ) = Q2P(Q2P)
By property of matrix multiplication, (PQ)2 = Q2P(Q2P) = Q2(PQ)QP
Given that PQ = Q2P, (PQ) 2 = Q2(PQ)QP = Q2(Q2P)QP
By property of matrix multiplication, PQ = Q2(Q2P)QP = Q4(PQ)P
Given that PQ = Q2P, (PQ) 2 = Q4(PQ)P = Q4(Q2P)P
By property of matrix multiplication, (PQ) 2 = Q4(Q2P)P = Q4P2
Thus, (PQ)2 = Q4P2

▀
30
The identity matrix of order n, denoted by 𝐈𝐧, is the n×n matrix having
ones along the main diagonal and zeros elsewhere:
1 0 0 0
0 1 0 0
𝑰=
0 0 1 0
0 0 0 1
Identity matrix of order 4
𝐈𝐧 is the matrix equivalent of 1 in the real number system. Given a

matrix 𝐀 with order mxn
𝐀𝐈𝐧 = 𝐈𝐦𝐀 =𝐀
The properties exhibited by zero and identity matrices elaborate the following,
𝐀𝐁 = 𝟎 does not necessarily imply that either 𝐀 or 𝐁 is 𝟎. Furthermore, 𝐀𝐁 = 𝐀𝐁
with 𝐀 not equal to 𝟎 do not imply that 𝐁 = 𝐂.
31
Given that a and b are arbitrary constants, find 𝐀𝟐
a b 0
𝑨 = –b a b
0 –b a
Source: Sydsaeter (2012), problems for chapter 15, page 583
TRANSPOSE OF A MATRIX. Consider any m×n matrix 𝐀. The

transpose of 𝐀, denoted by 𝐀′ or 𝐀𝐓, is defined as the n×m matrix
whose first column is the first row of A, whose second column is the
second row of A, and so on
a11 a12 … a1𝑛 a11 a21 … am1

a21 a21 … a2𝑛 a a21 … am2
𝐀= ⇒ 𝐀𝐓= 12
⋮ ⋮ ⋱ ⋮ ⋮ ⋮ ⋱ ⋮
am1 am2 … am𝑛 a1𝑛 a2n … a𝑚𝑛
Matrix of order mxn Matrix of order nxm
32
RULES FOR MATRIX TRANSPOSITION
[1] (𝐀𝐓)𝐓 = 𝐀
[2] (𝐀 + 𝐁)𝐓 = 𝐀𝐓 + 𝐁𝐓
[3] (α𝐀)𝐓 = α𝐀𝐓
[4] (𝐀𝐁)𝐓 = 𝐁𝐓 𝐀𝐓
Given that a and b are arbitrary constants, find 𝐀𝐓, 𝐁𝐓, and (𝐀𝐁) 𝐓
a b 0 1
𝐀 = –b a b 𝐁= 0
0 –b a a
33
SYMMETRIC MATRICES. Square matrices with the property that they
are symmetric about the main diagonal are called symmetric
𝐀 = 𝐀𝐓 ⇒ aij =aji
∀ i,j
a b c 2 –1 5
–3 2
𝑩= b d e 𝑪 = –1 –3 2 𝑫=
5 2 8 2 0
c e f
If 𝐗 is an arbitrary m×n matrix, show that 𝐗𝐗𝐓 and 𝐗𝐓𝐗 are both symmetric.
For what values of a is the matrix below symmetric?
a a2 − 1 −3
a+1 2 a2 + 4
−3 4a −1
34
Solution
a a2 − 1 −3 a a + 1 −3
a+1 2 a2 + 4 = a2 − 1 2 4a
−3 4a −1 −3 2
a + 4 −1
By definition of symmetric matrices, the equation above should hold true. By definition of
equal matrices, the following should also hold true:
[1] a2 – 1 = a + 1
[2] a2 + 4 = 4a
Solving for [1]

a2 – 1 = a + 1
a2 – a – 2 = 0
(a – 2)(a + 1) = 0
a = 2, a = – 1
Solution
a a2 − 1 −3 a a + 1 −3
a+1 2 2
a +4 = a2 − 1 2 4a
−3 4a −1 −3 a2 + 4 −1
Solving for [2]

a2 + 4 = 4a
a2 – 4a + 4 = 0
(a – 2)(a – 2) = 0
a=2
Since both [1] and [2] should be satisfied, the intersection of the two solutions is derived and
thus the matrix is only symmetric if a = 2.
35
Determinants &
Inverse matrices
Consider solving the linear equation below

[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
Using the substitution method, from [1]

b1 – a12x2
x1 = a11
Substituting this to [2]:
b1 – a12x2
a21 + a22x2 = b2
a11
b1 a12x2
a21 – a21 + a22x2 = b2
a11 a11
a12x2 b1
– a21 + a22x2 = b2 – a21
a11 a11
36
[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
a12x2 b1
– a21 + a22x2 = b2 – a21
a11 a11
a21a12 b1
a22 – x2 = b2 – a21
a11 a11
a11a22 – a21a12 a11b2 – a21b1
x2 =
a11 a11
a11b2 – a21b1
x2 = a a – a a
11 22 21 12
Solving for x1 is left as seatwork

[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
To summarize,
a b –a b
x1 = a 22a 1 – a12a2
11 22 21 12
a b –a b
x2 = a 11a 2 – a21a1
11 22 21 12
Observe further that a solution to the linear equation will only exist if and only if the
denominator for x1 and x2 expressions are not zero. That is, if a11a22 ≠ a21a12.
37
DETERMINANT OF A MATRIX. For square systems of equations (i.e.
those with an equal number of equations and unknowns), a way to
determine the number of solutions the system has is the determinant. If
the determinant is non-zero, a unique solution to the system exists.
CASE 1 CASE 2 CASE 3

Equations intersect at one point Parallel lines Identical equations
Unique solution exists No solution Infinite solution
Determinant is non-zero Determinant is zero Determinant is zero
SOLVING THE DETERMINANT OF A SECOND ORDER MATRIX. To

get |𝐀| for matrices of order 2: (a) multiply the elements on the main
diagonal; (b) multiply the off-diagonal elements; (c) subtract the product
of the off-diagonal elements from the product of the diagonal elements.
a11 a12
𝑨=
a21 a22
a11 a12
𝒅𝒆𝒕 𝑨 = |𝑨| = =a11a22 − a21a12
a21 a22
38
Consider the linear equation below
[1] 2x + 3y = – 8
[2] 5y – x = 1
The system above can be writen in matrix equation as:
2 3 x −8
−1 5 y = 1
2 3
Finding the determinant of the coefficient matrix solves for the number of solutions.
−1 5
The determinant is 2(5) – 3(– 1) = 13. The determinant is non-zero and therefore the
equations must intersect in exactly one point. By way of checking, one can verify graphically
that the slope of [1] and [2] are 3/2 and -1/5, respectively. The different signs of the slopes
infers that the lines will intersect at one point.
Consider the linear equation below

[1] 4x – 5y = 12
[2] 4x – 5y = 10
4 −5 x 12
4 −5 y = 10
4 −5
Finding the determinant of the coefficient matrix solves for the number of solutions.
4 −5
The determinant is 4(– 5) – 4(– 5) = 0. The determinant is zero and therefore the equations
have no unique solution. By way of checking, one can verify graphically that the slope of [1]
and [2] are both 4/5. These are parallel lines and by definition will never intersect. Thus, no
solution exists.
39
Use determinants to re-solve the conditions where a solution exists for
this system
[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
a11 a12 x1 b
= 1
a21 a22 x2 b2
a11 a12
Finding the determinant of the coefficient matrix solves for the number of
a21 a22
solutions. The determinant is a11a22 – a21a12. Observe that this matches the denominator of
the solution we derived previously. Thus, a solution will only exist if a11a22 – a21a12 ≠ 0, or as
previously stated, if a11a22 ≠ a21a12.
Second order determinants &

Cramer's rule
40
Cramer’s Rule. Determinants not only test the existence of a unique
solution, it can also be used to solve the system without using
substitution or elimination methods
[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
Step 1. Convert the linear system in matrix form.
a11 a12 x1 b
= 1
a21 a22 x2 b2
Take note that the first column of the coefficient matrix corresponds to the coefficients of x1,
and the second column corresponds to the coefficients of x2.

[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
Step 2. Solve for the determinant of the coefficient matrix and check if a unique solution
exists. If a unique solution does exist, then proceed.
For a solution to exist in this example, let’s assume that a11a22 – a21a12 ≠ 0.
41
[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
Step 3. To get x1, solve for the following:
b1 a12 The numerator is the determinant of the coefficient matrix but

b2 a22 the column for x1 coefficients is replaced by the vector of
x1 = b
a11 a12 constants 1 . The denominator is the determinant of the
a21 a22 b2
original coefficient matrix. x1 will be the quotient of these two
determinants.

[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
Step 3. To get x2, solve for the following:
a11 b1 The numerator is the determinant of the coefficient matrix but

a21 b2 the column for x2 coefficients is replaced by the vector of
x2 = b
a11 a12 constants 1 . The denominator is the determinant of the
a21 a22 b2
original coefficient matrix. x2 will be the quotient of these two
determinants.
42
[1] a11x1 + a12x2 = b1
[2] a21x1 + a22x2 = b2
To summarize: b1 a12 a11 b1
b2 a22 a21 b2
x1 = x2 =
a11 a12 a11 a12
a21 a22 a21 a22
a b –a b a b –a b
x1 = a 22a 1 – a12a2 x2 = a 11a 2 – a21a1
11 22 21 12 11 22 21 12
Observe that the answers are similar with what those acquired using substitution method.
Use Cramer’s rule to find the solutions of:
1 2x1 + 4x2 = 7
2x1 −2x2 = −2
2 QD = a – bP
QS = α + βP
3
2(b + β1)QD1 + bQD2 = a – α1
bQD1 + 2(b + β2)QD2 = a – α2
43
Solution to number 1
[1] 2x1 + 4x2 = 7
[2] 2x1 − 2x2 = −2
In matrix form, the system becomes:
2 4 x1 7
=
2 −2 x2 −2
The determinant of the coefficient matrix is −12 ≠ 0. Thus, a unique solution exists. Using
Cramer’s rule:
7 4 2 7
−2 −2 2 −2
x1 = x2 =
2 4 2 4
2 −2 2 −2
X1 = 1/2, and x2 = 3/2
Third order determinants:

Expansion by cofactors
44
SOLVING FOR DETERMINANT OF A 3X3 MATRIX. Solving three
equations with three unknowns has the following coefficient matrix and
determinant
a11 a12 a13 a11 a12 a13
𝑨 = a21 a22 a23 |𝑨| = a21 a22 a23
a31 a32 a33 a31 a32 a33
𝑨 = a11a22 a33 −a11a23a32 + a12a23a31 − a12a21a33 + a13a21a32 − a13a22a31
SOLVING THIRD ORDER DETERMINANTS USING COFACTORS

Step 1. Select a “convenient” row or a column. In this example, the
elements of the first column is selected. Any row or column is okay.
a11 a12 a13

𝑨 = a21 a22 a23
a31 a32 a33
45
Step 2. Determine the minors, Mij, for each element in selected row or
column. The minor is value of determinant of the smaller square matrix
after removing the row and column of the element considered.
a11 a12 a13 a11 a12 a13 a11 a12 a13
𝑨 = a21 a22 a23 𝑨 = a21 a22 a23 𝑨 = a21 a22 a23
a31 a32 a33 a31 a32 a33 a31 a32 a33
Remove first row and first column Remove second row and first Remove third row and first
elements column elements column elements
a a a a a a
𝑀11 = a22 a23 𝑀21 = a12 a13 𝑀31 = a12 a13
32 33 32 33 22 23

Step 3. Determine the place sign by solving for (−1)(i+j), for each selected
element’s ith row and jth column position
a11 a12 a13 a11 a12 a13 a11 a12 a13

𝑨 = a21 a22 a23 𝑨 = a21 a22 a23 𝑨 = a21 a22 a23
a31 a32 a33 a31 a32 a33 a31 a32 a33
First row and first column Second row and first column Third row and first column
i =1; j = 1 i =2; j = 1 i =3; j = 1
(−1)(1+1) = 1 (−1)(2+1) = − 1 (−1)(3+1) = 1
46
[3] Multiply the minor and the corresponding place sign to get the
cofactor. The determinant is thus computed by summing the product of
the element and its cofactor.
i+j
𝑨 = ෍ −1 𝑎ij 𝑀ij
a a a a a a
𝑨 = −1 2𝑎11 a22 a23 + −1 3𝑎21 a12 a13 + −1 4𝑎31 a12 a13
32 33 32 33 22 23
𝑨 = 𝑎11 𝑎22𝑎33 − 𝑎23𝑎32 − 𝑎21 𝑎12𝑎33 − 𝑎13𝑎32 + 𝑎31 𝑎12𝑎23 − 𝑎13𝑎22

𝑨 = a11a22 a33 −a11a23a32 + a12a23a31 − a12a21a33 + a13a21a32 − a13a22a31
Given matrix 𝐀, Derive the following: matrix of its minors, MA; matrix of
its cofactors, CA; and the determinant of the matrix det(A).
0 2 0
𝑨 = 0 3 −1
−3 4 −2
Hint: Again, you may select any row or column here (step 1), but the most “convenient”
choice is to select the first row or first column. Since both of these have two zero elements,
you will only have to solve for one term.
47
Solution. 0 2 0
𝐀= 0 3 −1
−3 4 −2
1. The matrix of minors solves for the minors for all elements in the matrix.
3 −1 0 −1 0 3
4 −2 −3 −2 −3 4
2 0 0 0 0 2
MA=
4 −2 −3 −2 −3 4
2 0 0 0 0 2
−3 −1 0 −1 0 3
−2 −3 9
MA= −4 0 6
−2 0 0
Solution. 0 2 0
𝐀= 0 3 −1
−3 4 −2
2. The matrix of cofactors multiplies the elements of the matrix of minors with its
corresponding place sign.
−2 (1) −3 ( − 1) 9 (1)
CA= −4 ( − 1) 0 (1) 6 ( − 1)
−2(1) 0 ( − 1) 0 (1)
−2 3 9
CA= 4 0 −6
−2 0 0
48
Solution. 0 2 0
𝐀= 0 3 −1
−3 4 −2
3. Solving the determinant using the first column
det(A) = 0 + 0 + (−3)(+1)(−2)
element place minor
sign
det(A) = 6
Solution. 0 2 0
𝐀= 0 3 −1
−3 4 −2
3. We should get the same answer if we use the first row
det(A) = 0 + (2)(−1)(−3) + 0
element place minor
sign
det(A) = 6
49
Solution. 0 2 0
0 3 −1
𝐀=
−3 4 −2
3. We should get the same answer if we use a less convenient option, say second row
det(A) = 0 + (3)(−1)(0) + (−1)(−1)(6)

element place minor
sign
det(A) = 6
Derive the following:

3 0 2
𝑨 = −1 1 0
5 2 3
50
Third order determinants &
Cramer's rule
Solving three equations with three unknowns can also be conveniently

done by expressing the solutions as fractions of determinants
a11x1 + a12x2 + a13x3 = b1
a21x1 + a22x2 + a23x3 = b2
a31x1 + a32x2 + a33x3 = b3
b1 a12 a13 a11 b1 a13 a11 a12 b1
b2 a22 a23 a12 b2 a23 a12 a22 b2
b3 a32 a33 a13 b3 a33 a13 a32 b3
x1 = x2 = x3 =
𝑨 𝑨 𝑨
Where A is the coefficient matrix of the system of equations above
51
Solving three equations with three unknowns can also be conveniently
done by expressing the solutions as fractions of determinants
b1 a12 a13 a11 b1 a13 a11 a12 b1

b2 a22 a23 a12 b2 a23 a12 a22 b2
b3 a32 a33 a13 b3 a33 a13 a32 b3
x1 = a11 a12 a13 x2 = a11 a12 a13 x3 = a11 a12 a13
a21 a22 a23 a21 a22 a23 a21 a22 a23
a31 a32 a33 a31 a32 a33 a31 a32 a33
Use Cramer’s rule to find the solutions of:
1 x1 − x2 + x3 = 2
x1 + x2− x3 = 0
− x1 − x2−x3 = − 6
2
x + 3y − 2z = 1
3x − 2y+ 5z = 14
2x − 5y+ 3z = 1
3
2x + 2y − z = − 3
4x + 2z = 8
6y −3z = − 12
52
Consider a simple macroeconomic model described by the three equations:
Y = C + A0
C = a + b(Y − T )
T = d + tY
where Y is income, C is consumption, T is tax revenue, A0 is the constant (exogenous)autonomous
expenditure,and a, b, d, and t are all positive parameters.
Find the equilibrium values of the endogenous variables Y , C, and T, using

matrices. For what values does the solution exist?
Solution
Y = C + A0
C = a + b(Y − T )
T = d + tY
Converting the system of equations above in matrix form, where Y, C, and T are the
independent variables.
Y − C + 0T = A0
− bY + C + bT = a
− tY + 0C + T = d
1 –1 0 Y A0
–b 1 b C = a
–t 0 1 T d
53
Solution
Y = C + A0
C = a + b(Y − T )
T = d + tY
Solve for Y, C, and T using Cramer’s rule
1 –1 0 Y A0
–b 1 b C = a
–t 0 1 T d
A0 –1 0 1 A0 0 1 –1 A0
a 1 b –b a b –b 1 a
Y= d 0 1 C = –t d 1 T = –t 0 d
1 –1 0 1 –1 0 1 –1 0
–b 1 b –b 1 b –b 1 b
–t 0 1 –t 0 1 –t 0 1
Solution
Y = C + A0
C = a + b(Y − T )
T = d + tY
Solving for the determinants we have:
a − bd + A0
Y=
1 − b(1 −t)
a − bd + A0b (1 −t)
C=
1 − b(1 −t)
t (a+ A0) + (1 −b) d

T=
1 − b(1 −t)
54
Solution.
Y = C + A0
C = a + b(Y − T )
T = d + tY
Furthermore, the system above will only have a unique solution if the determinant
1 –1 0
–b 1 b is non-zero. In which case, 1 − b(1 −t)≠ 0.
–t 0 1
Compute for the following:
1 0 0 0 1 0 0 1
0 2 0 0 0 1 0 0
𝑨= 0 0 3 0 𝑩=
0 0 1 0
0 0 0 4 a b c d
55
RULES FOR DETERMINANTS. Let 𝐀 be an n×n matrix. Then:
[1] If all the elements in a row (or column) of 𝐀 are 𝟎, then |𝐀| = 𝟎.
[2] |𝐀𝐓| = |𝐀|
[3] If all the elements in a single row (or column) of 𝐀 are multiplied by a
number α, the determinant is also multiplied by α.
[4] If two rows (or two columns) of A are interchanged, |𝐀| changes sign, but
the absolute value remains unchanged.
[5] If two of the rows (or columns) of A are proportional, then |𝐀| = 𝟎.
[6] The value of the determinant of A is unchanged if a multiple of one row
(or one column) is added to a different row (or column) of A.
[7] |𝐀𝐁| = |𝐀|∙|𝐁|
[8] If αis a real number, |α𝐀| = αn|𝐀|
Derive the following: det(𝐀), det(𝐁), det(𝐀𝐁)
1 5 −1 3 0 2
𝑨 = −1 1 3 𝑩 = −1 1 0
3 2 1 5 2 3
56
INVERSE OF A
MATRIX
INVERSE OF A MATRIX. Given a matrix 𝐀, we say that 𝐗 is an inverse

of 𝐀 if there exists a matrix 𝐗 such that
𝐀𝐗 = 𝐗𝐀=𝐈
If the inverse of the matrix exists, then the matrix is said to be invertible. Note that
the two matrix products 𝐀𝐗 and 𝐗𝐀 are defined and equal only if A and X are
square matrices of the same order. Thus, only square matrices can have inverses.
But not all square matrices have inverses.
57
If the inverse of A exists, it is usually written 𝐀−1. This resembles the
concept of the reciprocal where for unique number α−1 with property
that αα−1 = α −1 α = 1. However a matrix inverse is not the same as how
reciprocal works since there are no rules for dividing matrices.
Source: Sydsaeter (2012), page 605.
DETERMINING WHETHER A MATRIX HAS AN INVERSE.

𝐀𝐗 = 𝐗𝐀=𝐈 definition of matrix inverse
|𝐀𝐗| = |𝐗𝐀|=|𝐈| property of determinants
𝐀𝐗 = 𝐗𝐀 = 𝐈 =𝟏 property of identity matrix
𝐀 𝐗 =𝟏 property of determinants
Thus, if 𝐗 is an inverse of 𝐀, then |𝐀||𝐗| = 𝟏.Thus, it is both a necessary and

sufficient condition that |𝐀| ≠ 𝟎 for 𝐀 to have an inverse. Otherwise, |𝐀| = 𝟎 would
lead to a contradiction.
58
Only square non-singular matrices have an inverse. A square matrix 𝐀
is said to be singular if |𝐀| = 𝟎 and nonsingular if |𝐀| ≠ 𝟎. A matrix has
an inverse if and only if it is nonsingular. Furthermore, if the inverse of
A exists, then that inverse (𝐀−1) is unique.
For what values does the inverse of 𝐀 exist?
𝑨= a b
c d
Show that the matrix below has no inverse

1 0
𝑨=
0 0
59
Finding the
inverse of a matrix
a b 1. Begin with the matrix under consideration, say A.

A=
c d Check if its inverse exists by finding its determinant.
d c
MA = 2. Derive the matrix of minors, MA.
b a
d −c
CA = 3. Derive the cofactor matrix, CA.
−b a
d −b 4. Derive the adjoint matrix, (CA)T, which is the
(CA)T =
−c a transpose of the cofactor matrix
1 d −b 5. The inverse of the matrix, A-1, is acquired by
A-1 = 𝐀 −c a multiplying all the element of the adjoint matrix with
the reciprocal of the determinant of A.
60
Find the inverse, if it exist
3 0
𝑨=
2 1
1 1 −3
𝑩 = 2 1 −3
2 2 1
1 0 −3
𝑪 = 2 −2 1
0 −1 3
Source: Sydsaeter (2012), problems for section 16.6 , page 609
Solution for the first item

3 0
A=
2 1
Matrix A is a square matrix with a non-zero determinant equal 3. It is a square non-singular
matrix and therefore its inverse exists. Solve for the minor, cofactor, adjoint and inverse.
1 2
MA =
0 3
1 −2
CA =
0 3
1 0
(CA)T=
−2 3
1/3 0/3
A−1 =
−2/3 3/3
61
Solution for the first item
3 0
A=
2 1
Verify if the definition of inverse matrix holds true. By definition, AA-1 = I
3 0 1/3 0
A A−1 =
2 1 −2/3 1
1+0 0+0
A A−1 =
2/3−2/3 0+1
1 0
A A−1 = =I
0 1
AA-1 = I
▀
Determine what is asked
1 Find the inverse of the n×n matrix 𝐀 if 𝐀 − 𝐀𝟐 = 𝐈.
2
Let 𝐁 be a n×n matrix such that 𝐁𝟐 = 𝟑𝐁. Prove that there
exists a number 𝐬 such that 𝐈 + 𝐬𝐁 is the inverse of 𝐈 + 𝐁
62
Find the inverse of the n×n matrix 𝐀if 𝐀− 𝐀𝟐 = 𝐈.
A – A2 = I
Factoring our A, we have: A (I–A) = I
Premultiplying both sides by A-1, we have: A-1A (I–A) = A-1(I)
By definition of matrix inverse, I (I–A) = A-1
(I–A) = A-1
▀

Let 𝐁be a n×n matrix such that 𝐁𝟐 = 𝟑𝐁. Prove that there exists a number 𝐬such that 𝐈+ 𝐬𝐁is
the inverse of 𝐈+ 𝐁
By definition of matrix inverse, (I + sB)(I + B) = I
Solving for the left hand side, we have: I2 + sB(I) + I(B) + sB2 = I
I + sB + B + s(3B) = I
The equation above holds true if:
4sB + B = 0
(4s + 1)B = 0
s = -1/4
If s = -1/4, then 4s + 1 = 0 and I + sB + B + s(3B) = I
▀
63
RULES FOR INVERSE OF A MATRIX. Let 𝐀 and 𝐁 be invertible
square matrices, then:
[1] 𝐀−1 is invertible and (𝐀−1) −1 = 𝐀
[2] 𝐀𝐁 is invertible and (𝐀𝐁) −1 = 𝐁 −1𝐀 −1
[3] 𝐀T is invertible and (𝐀T) −1 = (𝐀−1)T
[4] (c𝐀) −1 = c −1𝐀−1 , whenever c is a number ≠ 𝟎
SOLVING EQUATIONS BY
MATRIX INVERSION
64
Apart from Cramer’s rule, another way to solve for the solution of matrix
equations is through matrix inverses
Ax = b 1. Consider the general form of the matrix equation
A-1Ax = A-1b 2. Premultiply both sides by the inverse
(A-1A) x = A-1b
x = A-1b 3. The solution of the matrix equation using inverses
Using this method, the solution to the matrix equation is simply multiplying the inverse of the
coefficient matrix with the vector of constants.
Example: Consider the following system of equations

3x1 + 4x2 = 5
7x1 – 2x2 = 2
Expressing the system above in matrix form:
3 4 x1 5
=
7 −2 x2 2
Using inverses, the solution to the matrix equation is:
−1
x1 3 4 5
=
x2 7 −2 2
−1
3 4
Solve for
7 −2
65
−1
3 4
Solve for
7 −2
Matrix A is a square matrix with a non-zero determinant equal to −34. It is a square non-
singular matrix and therefore its inverse exists. Solve for the minor, cofactor, adjoint and
inverse. −2 7
MA =
4 3
−2 −7
CA =
−4 3
−2 −4
(CA)T=
−7 3
2ൗ 4
A−1 = 34 ൗ34
7ൗ −3ൗ
34 34

3x1 + 4x2 = 5
7x1 – 2x2 = 2
3 4 x1 5
=
7 −2 x2 2
Using inverses, the solution to the matrix equation is:
−1
x1 3 4 5
=
x2 7 −2 2
2ൗ 4
34 ൗ34
−1
3 4
Solve for =
7 −2 7ൗ −3ൗ
34 34
66
3x1 + 4x2 = 5
7x1 – 2x2 = 2
Using matrix inverses, the solution to the system is:
2ൗ 4
x1
= 34 ൗ34 5
x2 7ൗ −3ൗ 2
34 34
By matrix multiplication:
5 2ൗ +2 4ൗ 18ൗ
x1 34 34 34 0.5294
= 7 3 = 29 = 0.8529
x2 5 ൗ34 −2 ൗ34 ൗ34
3x1+4x2=5
7x1-2x2=2
67
Consider the system
x + 2y – z = –5
2x –y + z = 6
x –y – 3z = –3
x 1 2 –1 –1 –5
y = 2 –1 1 6
z 1 –1 –3 –3
Source: Sydsaeter (2012), problems for section 16.8 , page 616
1 2 –1
𝑨 = 2 –1 1
1 –1 –3
𝑨 = 19
Determinant is non−zero, the matrix is nonsingular. Thus 𝐀−1 exist.
4 7 1
1
𝑨−1 = 7 –2 –3
19 –1 3 –5
68
And the solution to the matrix equation is derived as:
x 4 7 1 –5
1
y = 7 –2 –3 6
z 19 –1 3 –5 –3
x 1
y = –2
z 2
Alternatively, the same system can be solved using Cramer’s rule

x + 2y – z = –5
2x –y + z = 6
x –y – 3z = –3
–5 2 –1 1 –5 –1 1 2 –5
6 –1 1 2 6 1 2 –1 6
–3 –1 –3 1 –3 –3 1 –1 –3
x= 1 2 –1 y = 1 2 –1 z= 1 2 –1
2 –1 1 2 –1 1 2 –1 1
1 –1 –3 1 –1 –3 1 –1 –3
69
PRACTICE: Find the solutions of the following system for all values of 𝐩.
px + y = 1 [a]
x –y + z = 0 [b]
2y –z = 3 [c]
p 1 0
𝑨 = 1 –1 1
0 2 –1
𝑨 =1–p
The matrix is nonsingular (and will thus have a unique solution) if p ≠ 1.
If p ≠ 1
px + y = 1 [a]
x –y + z = 0 [b]
2y –z = 3 [c]
1 1 0 p 1 0 p 1 1
0 –1 1 1 0 1 1 –1 0
3 2 –1 0 3 –1 0 2 3
x= p 1 0 y= p 1 0 z= p 1 0
1 –1 1 1 –1 1 1 –1 1
0 2 –1 0 2 –1 0 2 –1
70
The solution for all values of p are as follows:
2
1–𝑝
x 1–3𝑝
,p ≠ 1
y = 1–𝑝
z –1–3𝑝
1–𝑝
↯,p = 1
Economic Application:
LEONTIEF INPUT-OUTPUT (I/O)
MODELS
71
LEONTIEF MODEL is a model for the economics of an entire
country or region. For his work on input-output tables, Wassily
Leontief won the Nobel prize in economics in 1973. The economy
is regarded as consisting of a number of industries whose inputs
are produced by using other inputs from other industries (called
intermediate inputs) and inputs from sectors outside the industries
(called primary inputs)
The output of an industry is, therefore, demanded as inputs to the production
of the other industries and itself. When outputs are demanded for the
production of more outputs, these demands are called intermediate demands.
Outputs that are demanded for final consumption by sectors external to the
industries (such as households, the government, and foreign sector) and are
also called final demands.
Source: https://www.math.ksu.edu/~gerald/leontief.pdf, date accessed 04 January 2019.
INTERPRETING AN INPUT-OUTPUT (I/O) TABLE

Intermediate demand Final Total
A I S demand output
A 44.7 214.5 15.8 197.3 472.3
Intermediate
I 42.8 210.1 174.2 861.9 1289.0
input
S 28.6 149.9 290.8 1105.0 1574.3
Primary input 356.2 714.5 1093.5
Total input 472.3 1289.0 1574.3
The economy illustrated above has three production sectors: agriculture (A),
industry (I), and services (S). Other demands outside A, I, and S sectors (e.g.
driven by households, government, and foreign sectors) were compressed
into one final demand, and other inputs sourced outside A, I, and S sectors
were also compressed into one primary input. At equilibrium, the value of total
output equals the value of total inputs used to produced that output.
72
EXAMPLE. Consider the glass manufacturing industry
To be able to produce glass, inputs from other industries will have to be
purchased (e.g. machinery). These will serve as intermediate inputs to
production. Other non-sectoral factors of production such as land and labor,
also called primary inputs, will also be needed.
On the other hand, manufactured glass, as an output, can be sold directly to

household consumers (which constitutes final demand), or can be used as an
intermediate input for other industries such as for cars production.
INTERPRETING AN INPUT-OUTPUT (I/O) TABLE - ROW

A I S demand output
A 44.7 214.5 15.8 197.3 472.3
Intermediate
I 42.8 210.1 174.2 861.9 1289.0
input
S 28.6 149.9 290.8 1105.0 1574.3
Primary input 356.2 714.5 1093.5
Total input 472.3 1289.0 1574.3
The total agriculture sector output is 472.3 billion pesos, of which 44.7 billion
pesos was purchased by agriculture sector itself to produce its output, 214.5
billion pesos was purchased by industry to produce its output, 15.8 billion
pesos was purchased by services to produce its output, and 197.3 billion
pesos was the total accumulated purchased of households, the government,
and foreign sectors constituting final demand.
73
INTERPRETING AN INPUT-OUTPUT (I/O) TABLE - ROW
A I S demand output
A 44.7 214.5 15.8 197.3 472.3
Intermediate
I 42.8 210.1 174.2 861.9 1289.0
input
S 28.6 149.9 290.8 1105.0 1574.3
Primary input 356.2 714.5 1093.5
Total input 472.3 1289.0 1574.3
The total services sector output is 1574.3 billion pesos, of which 290.8 billion
pesos was purchased by services sector itself to produce its output, 28.6
billion pesos was purchased by agriculture to produce its output, 149.9 billion
pesos was purchased by industry to produce its output, and 1105.0 billion
pesos was the total accumulated purchased of households, the government,
and foreign sectors constituting final demand.
INTERPRETING AN INPUT-OUTPUT (I/O) TABLE - COLUMN

A I S demand output
A 44.7 214.5 15.8 197.3 472.3
Intermediate
I 42.8 210.1 174.2 861.9 1289.0
input
S 28.6 149.9 290.8 1105.0 1574.3
Primary input 356.2 714.5 1093.5
Total input 472.3 1289.0 1574.3
The total 472.3 billion pesos worth of agricultural sector output was produced
by using 44.7 billion pesos worth of products from agriculture sector itself, 42.8
billion pesos worth of products from industry, 28.6 billion pesos worth of
products from services, and 356.2 billion pesos worth of other (primary) inputs.
74
INTERPRETING AN INPUT-OUTPUT (I/O) TABLE - COLUMN
A I S demand output
A 44.7 214.5 15.8 197.3 472.3
Intermediate
I 42.8 210.1 174.2 861.9 1289.0
input
S 28.6 149.9 290.8 1105.0 1574.3
Primary input 356.2 714.5 1093.5
Total input 472.3 1289.0 1574.3
The total _________ billion pesos worth of industry sector output was
produced by using _________ billion pesos worth of products from industry
sector itself, _________ billion pesos worth of products from agriculture,
_________ billion pesos worth of products from services, and _________
billion pesos worth of other (primary) inputs such as land and labor.
INPUT-OUTPUT (I/O) TABLE – as per cent of column total

A I S demand output
A 44.7/ 472.3 214.5/ 1289.0 15.8/ 1574.3 197.3 472.3
Intermediate
I 42.8/ 472.3 210.1/ 1289.0 174.2/ 1574.3 861.9 1289.0
input
S 28.6/ 472.3 149.9/ 1289.0 290.8/ 1574.3 1105.0 1574.3
Primary input 356.2/ 472.3 714.5/ 1289.0 1093.5/ 1574.3
Total input 472.3/ 472.3 1289.0/ 1289.0 1574.3/ 1574.3
The input-output coefficients can be calculated by dividing each element in the

input-output sector table by its column total. This will give the share of each
sector to the total inputs needed.
75
INPUT-OUTPUT (I/O) TABLE – as percent of column total
A I S demand output
A 0.095 0.167 0.010 197.3 472.3
Intermediate
I 0.091 0.163 0.111 861.9 1289.0
input
S 0.060 0.116 0.185 1105.0 1574.3
Primary input 0.754 0.554 0.694
Total input 1.000 1.000 1.000
Thus, 1 peso worth of agriculture output required 9.5 cents of agricultural

products, 9.1 cents worth of industrial products, 6 cents worth of services, and
75.4 cents worth of primary inputs. In terms of percentages, agriculture
represents 9.5% percent of its total input, industry with 9.1%, services with
6.0%, and other inputs with 75.4%.
DERIVING THE LEONTIEF EQUATION

1 2 3 demand output
1 x11 x12 x13 d1 x1
Intermediate
2 x21 x22 x23 d2 x2
input
3 x31 x32 x33 d3 x3
Primary input z11 z12 z13
Total input x1 x2 x3
The Leontief model is formulated using the following notations: xi= output level
of sector i, xij= output of sector i supplied to sector j, di= final demand on sector
i, zkj= amount of primary input k on sector j.
76
DERIVING THE LEONTIEF EQUATION – as percent of column
total Intermediate demand Final Total
1 2 3 demand output
1 a11 a12 a13 d1 x1
Intermediate
2 a21 a22 a23 d2 x2
input
3 a31 a32 a33 d3 x3
Primary input b11 b12 b13
Total input 1 1 1
As percent of total input, aij= xij/xj is the output of sector I supplied to sector j to
produce 1 unit of output j, and bkj is the amount of primary input k needed to
produce one unit of output j.
For an economy with 𝐧 inter-linked industries producing 𝐧 different

products, and with final demand, 𝐝𝐢, for each product 𝐢 = 1, 2,...,n,
the economy should produce, at equilibrium:
x1 = a11 x1 + a12 x2 + ... + a1n xn + d1
x2 = a21 x1 + a22 x2 + ... + a2n xn + d2
······································
xn = an1 x1 + an2 x2 + ... + ann xn + dn
77
The following system of equations can be translated in matrix form
as follows:
x1 = a11 x1 + a12 x2 + ... + a1n xn + d1
x2 = a21 x1 + a22 x2 + ... + a2n xn + d2
······································
xn = an1 x1 + an2 x2 + ... + ann xn + dn
𝐱 = 𝐀𝐱 + 𝐛
The matrix form of the Leontief equation can be solved as follows:
x = Ax + b 1. General form of the Leontief matrix equation
x –Ax = b 2. Matrix addition operation
(In – A) x = b 3. Distributive property of matrices
x = (In – A) -1b 4. Definition of matrix inverses
78
Example. Solve the equilibrium condition of the economy below
Intermediate
demand Final Total
demand output
A B
Intermediate A 140 30 30 200
input B 40 180 80 300
Primary input 20 90
Total input 200 300
Interpret: In order to produce 200 units of sector A output, it must use 140 units
of its own product, 40 units of B, and 20 units of primary inputs. Therefore, to
produce one unit, A needs 140/200 = 0.7 units of A, 40/200 = 0.2 units of B,
and 0.1 primary input units.
Example. Solve the equilibrium condition of the economy below

Intermediate
demand Final Total
demand output
A B
Intermediate A 0.7 0.1 30 200
input B 0.2 0.6 80 300
Primary input 0.1 0.3
Total input 1.0 1.0
The total demand requirements for A and B can be derived as follows:

A = 0.7A + 0.1B + 40
B = 0.2A + 0.6B +80
79
A = 0.7A + 0.1B + 40
B = 0.2A + 0.6B +80
Simplifying the equations above:
0.3A – 0.1B = 40
– 0.2A + 0.4B = 80
0.3 –0.1 A 40
=
–0.2 0.4 B 80
−1
A 0.3 –0.1 40
=
B –0.2 0.4 80
−1
0.3 –0.1
Solve for
–0.2 0.4

−1
0.3 –0.1
Solve for
–0.2 0.4
Using the method of determining matrix inverses:
−1
0.3 –0.1 4 1
=
–0.2 0.4 2 3
Thus:
A 4 1 40
=
B 2 3 80
A 240
=
B 320
At equilibrium, the economy produces 240 units of sector A output,

and 320 units of sector B output.
80

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introduction

The course is divided into four major topics

Introductory mathematical economics focuses on static analysis

Because resources are scarce, optimization is the process maximizing

Source: Sydsaeter (2012), problems for section 2.1, page 37

Solution to numbers 2 and 3

(2x +1)-1 =(x+2 )-1

Source: Sydsaeter (2012), page 38

Substituting parameters in the structural form derives the reduced form

PRACTICE: Consider the simplest model of the macroeconomy – a closed

Source: Sydsaeter (2012), problems for section 2.1, page 39

Derive the reduced form of the model in terms of r.

Source: Sydsaeter (2012), problems for section 2.1, page 39

PRACTICE: Solve for the solution of the following equations

Source: Sydsaeter (2012), problems for section 2.1, page 40

Suppose we are to determine the values of x and y that satisfy both

Source: Sydsaeter (2012), page 46

Solution for number 1

Solution for number 3

Derive the reduced form of the model at equilibrium in terms of P. In terms of Q.

Source: Sydsaeter (2012), problems for section 2.1, page 39

Consider the case of m equations in n unknowns, If the unknowns are

Source: Sydsaeter (2012), page 546

a11 a12 … a1𝑛

Source: Sydsaeter (2012), page 548

a a12 Square matrix

The coefficients in a system of linear equations can be represented in a

𝒂𝟑𝟐 n/a n/a n/a

𝒂𝟐𝟑 n/a n/a 2

𝐀mxn = 𝐁mxn ⇒ aij = bij

Source: Sydsaeter (2012), problems for section 15.2, page 549

Firs, t = 3 since A11 = 3 = B11 = t. By definition of equal matrices, t -1 = 2v.

𝐀 + 𝐁 = (aij)mxn + (bij)mxn =(aij + bij)mxn

Source: Sydsaeter (2012), page 550

SCALAR MULTIPLICATION OF MATRICES. To multiply a matrix by a

Source: Sydsaeter (2012), page 550

0 0 0 Zero matrix of order 2x3

RULES FOR MATRIX ADDITION AND MULTIPLICATION BY

Source: Sydsaeter (2012), problems for section 15.2, page 551

MULTIPLICATION OF MATRICES. Suppose that 𝐀 = (aij)m×n and that

Source: Sydsaeter (2012), page 553

Notation on convention. Since matrix multiplication is not commutative,

Source: Sydsaeter (2012), page 554

PRACTICE: Solve for AB

PRACTICE: Compute the matrix product 𝐀𝐁. Is the product 𝐁𝐀defined?

Source: Sydsaeter (2012), page 553

Source: Sydsaeter (2012), problems for section 15.3, page 556

RULES FOR MATRIX MULTIPLICATION

[1] (𝐀𝐁)𝐂 = 𝐀(𝐁𝐂)

Source: Sydsaeter (2012), page 556

Source: Sydsaeter (2012), page 557

Linear systems of equations can be expressed by means of matrix

The matrix equation is of the form 𝐀𝐱 = 𝐛

Source: Sydsaeter (2012), page 558

Thus, (PQ)2 = Q4P2

Source: Sydsaeter (2012), page 559

𝐈𝐧 is the matrix equivalent of 1 in the real number system. Given a

Source: Sydsaeter (2012), page 560

Source: Sydsaeter (2012), problems for chapter 15, page 583

TRANSPOSE OF A MATRIX. Consider any m×n matrix 𝐀. The

a11 a12 … a1𝑛 a11 a21 … am1

Matrix of order mxn Matrix of order nxm

Source: Sydsaeter (2012), page 562