Mathematics for Economics and Business (MEB

Mathematics for Economics and Business
Le Thi Thanh An: anltt@uel.edu.vn
Faculty of Economic Mathematics,

University of Economics and Law
October 11, 2021
1 / 47
Books and resources
The main recommended texts are
Ian Jacques, Mathematics for Economics and
Business, 9th edition, Pearson Education
Limited, 2018. click here
Syllabus, slides and more click here
Other resources:
Raymond A. Barnett,Michael R. Ziegler, Karl E. Byleen, Calculus
for Business, Economics, Life Sciences and Social Sciences,
Pearson 2018
Howard Anton, Chris Rorres, Elementary linear algebra,
applications version, Wiley 2019.
Hillier and Lieberman, Introduction to operations research, Mc
Graw Hill 2021.
Haeussler et al., Introductory Mathematical Analysis for Business,
Economics, and the Life and Social Sciences, Pearson 2021.
Introduction to MEB 2 / 47
What will be included in our MEB course?
Link download syllabus: click here

MEB: The first Mathematics course for Economics and Business. a
mathematics module introduces the concept of
Linear models and applications (week 1, 2);
Non-linear models and applications (week 3);
Mathematics of finance (week 4,5);
Differentiation and applications (week 6, 7);
Partial differentiation and applications (week 8, 9);
Using integration in economics and business (week 10);
What will be included in our MEB course?
Link download syllabus: click here

MEB: The first Mathematics course for Economics and Business. a
mathematics module introduces the concept of
Linear models and applications (week 1, 2);
Non-linear models and applications (week 3);
Mathematics of finance (week 4,5);
Differentiation and applications (week 6, 7);
Partial differentiation and applications (week 8, 9);
Using integration in economics and business (week 10);
And extra reading
Matrices and relevant economic models;
Linear programming;
Introduction to dynamics.
Evaluation
1 Minimum attendance: 80%.

2 Finish assignment on time and correct!
3 Speaking: English, Vietnamese.
4 Writing: English.
Forms of Assessments Type of Collaboration Weight

Attendance, assignments Individual, team 30%
Midterm Individual, team 20%
Final exam Individual 50%
Table 1: Assessments.
Create your team: can be done later this week!
Each group has maximum 5 members! Link for making teams
Questions?
Chapter 1. Linear economic models: outlines
Recall about linear equation systems

Learn some common linear models in supply and demand,
compute equilibrium state of single-commodity market and
multi-commodity market
Set up and determine national income and relevant values at the
equilibrium
Explain and solve the IS - LM schedules.
Linear equations
WARMING UP!
Go to this link: https://www.menti.com/4gy43wruaz
Linear equations Some example of linear equations 8 / 47

Some key terms
Equality Divided by Factor

Equation Substitute x = 1 into Negative
Solution Eliminate x from Solve
Variable Identity Less than
Add Fraction Finite
Subtract Calculate Imply
Multiply by Evaluate Equivalent

Linear equations
Example
Solve the following equations and comment on the number of solutions
1 0.5x = 10 2 0x = 3 3 0x = 0

Linear equations
Example
Solve the following equations and comment on the number of solutions
1 0.5x = 10 2 0x = 3 3 0x = 0
Example
Solve the following systems and comment on the number of solutions:
( ( (
1
x + 2y = 4 2
3x + 2y = 4 3
x + 2y = 3
2y = 2 9x + 6y = 5 2x + 4y = 6

Solving linear equation system: Elimination method
Solve the following system of equations:

 x + 2y + 3z = 7
 (1)
x + 3y + 4z = 9 (2)
 x + 3y + 6z = 11 (3)

Linear equations Elimination method 11 / 47

Solve the following system of equations:

 x + 2y + 3z = 7
 (1)
x + 3y + 4z = 9 (2)
 x + 3y + 6z = 11 (3)

Solution:
1 Eliminate x from (2) and (3) by operations (2) − (1), (3) − (1).

 x + 2y + 3z = 7 (1)

y + z = 2 (20 )
y + 3z = 4 (30 )


2 Eliminate y from (30 ) by operation (30 ) − (20 ).


 x + 2y + 3z = 7 (1)

y + z = 2 (20 )
2z = 2 (300 )



3 Solve z in (300 ) to get z = 1,

4 Substitute z = 1 into (20 ) to get y + 1 = 2, or y = 1.
5 Finally, substitute y = 1, z = 1 into (1) to get x = 2. Therefore,
the system has exactly one solution (x = 2, y = 1, z = 1).
Example
Solve the following systems of equations:
 
 x
 + 2y + 3z = 10 
 x + 2y + 3z = 10
1 2y + 3z = 7 3 2x + 4y + 6z = 12
3z = 3 y + 3z = 5

 


 x + 2y + 3z
 = 10
2 x + 4y + 7z = 26
y + 2z = 8



Linear economic models
A linear economic model is the economic model in which every

functions are linear. Their graphs are straight lines.
P P = cQs + d
b
c
P = aQd + b
Q
Example
Some linear economic models we are going to study are
Supply and demand analysis.
National income determination.

Teamwork
Example
A distribution centre sends three different types of parcels. One
consignment has 6 small, 8 medium and 9 large parcels which cost
$173.20 to post. Another consignment has 7 small, 13 medium and 17
large parcels with total postage $291.05. A large parcel costs twice as
much to post as a small one. Work out the total cost of posting 3 small
parcels, 9 medium parcels and 2 large parcels.
Link to write: https://padlet.com/anltt/b76dml82vcv7m2ud

Chapter 1. Linear economic models
1 Linear equations
Some example of linear equations
Elimination method
2 Supply and demand analysis

Demand functions: single-commodity market
Supply functions: single-commodity market
Market with two goods
3 National income determination

Consumption and saving function
Macro-economic model with investment
IS-LM Schedule
Supply and demand analysis 15 / 47

Supply and demand analysis
Key terms.
Supply Parameters Equilibrium

Demand Decreasing Intersection
Capital Increasing Firms
Price Graph Markets
Variable Slope
Supply and demand analysis 16 / 47

Demand functions
1 In microeconomics the quantity demanded,

Q, of a good depends on the market price, P .
Q = f (P )
Figure 1: Alfred
Marshall (1842-1924)
Supply and demand analysis Demand functions: single-commodity market 17 / 47

Demand functions
1 In microeconomics the quantity demanded,

Q, of a good depends on the market price, P .
Q = f (P )
Figure 1: Alfred
Marshall (1842-1924)
2 Alternatively, economists consider P , the

price, as a function depending on quantity,
Q.
P = g(Q)
Figure 2: Léon Walras
(1834-1910)
Demand function as a linear function
Modelling
The process of identifying the key features of the real world and making
appropriate simplifications and assumptions.

Demand function as a linear function
Modelling
The process of identifying the key features of the real world and making
appropriate simplifications and assumptions.
Law of demand: Demand

usually falls as the price rises.
P is often a decreasing
function of Q
P = aQ + b,
where a, b are parameters

(a < 0 and b > 0).
Exception: for some inferior
goods, parameter a ≤ 0! Figure 3: A demand curve.

Exercise - Teamwork
A potter makes and sells ceramic bowls. It is observed that when the
price is $32, only 9 bowls are sold in a week; but when the price
decreases to $10, weekly sales rise to 20. Assuming that demand can be
modelled by a linear function,
a. obtain a formula for P in terms of Q;
b. sketch a graph of P against Q;
c. comment on the likely reliability of the model.
Link to write: https://padlet.com/anltt/5zq8ljlpeqpy0mck

Exercise - Teamwork
A potter makes and sells ceramic bowls. It is observed that when the
price is $32, only 9 bowls are sold in a week; but when the price
decreases to $10, weekly sales rise to 20. Assuming that demand can be
modelled by a linear function,
a. obtain a formula for P in terms of Q;
b. sketch a graph of P against Q;
c. comment on the likely reliability of the model.
Link to write: https://padlet.com/anltt/5zq8ljlpeqpy0mck
Solutions: p71.

Supply functions
1 Law of Supply: a fundamental principle of

economic theory which states that, keeping
other factors constant, an increase in price
results in an increase in quantity supplied.
Q = f (P )
To distinguish quantity demanded and

2
Figure 4: Law of supply quantity supplied, we denote them

respectively by Qd and Qs .
3 Similarly to the demand function, we usually write the supply
function as a function of price P depending on quantity, Q.
P = g(Qs )
Supply and demand analysis Supply functions: single-commodity market 20 / 47

Supply function as a linear function
Law of supply and demand: P P = cQs + d

b
supply and demand pull
against each other until the
c
market finds an equilibrium
P = aQd + b
price.
The linear supply function P Q
is a increasing function of Qs At market equilibrium:
P = cQs +d, where c > 0, d > 0. Qs = Qd .

Equilibrium
At the market equilibrium, Qs = Qd , so price and equilibrium quantity
are solution of this system
P = aQ + b;
P = cQ + d.
Example
The demand and supply functions of a good are given by
P = −2Qd + 50
P = 1/2Qs + 25
where P, Qd and Qs denote the price, quantity demanded and quantity

supplied, respectively.
a. Determine the equilibrium price and quantity.
b. Determine the effect on the market equilibrium if the government
decides to impose a fixed tax of $5 on each good.
Solution
a. At the equilibrium, Qd = Qs we solve the system with two

variables P and Q
P = −2Q + 50
P = 1/2Q + 25
and obtain Q = 10, P = 30. So, the price at equilibrium is $30 and
the quantity is 10 units.

Solution
a. If the government decides to impose a fixed tax of $5 on each

good, the supply curve would normally rise 5 units as following

Solution
a. At the new equilibrium, Qd = Qs we solve the system with two

variables P and Q
P = −2Q + 50
P = 1/2Q + 25 + 5
and obtain Q = 8, P = 34. So, the price at equilibrium increases to

$34 and the quantity reduces to 8 units.

Exercises - Teamwork
Example
The demand and supply functions of a good are given by
P = −4Qd + 120
P = 1/3Qs + 29
where P, Qd and Qs denote the price, quantity demanded and quantity

supplied, respectively.
a. Calculate the equilibrium price and quantity.
b. Calculate the new equilibrium price and quantity after the
imposition of a fixed tax of $13 per good. Who pays the tax?
Link to write: https://padlet.com/anltt/4njelwxuv99kza8v

Suppose that there are two goods in related markets, which we call
good 1 and good 2. The demand for either good depends on the prices
of both goods. If the corresponding demand functions are linear, then
Qd1 = a1 + b1 P1 + c1 P2
Qd2 = a2 + b2 P1 + c2 P2
where Pi and Qdi denote the price and demand for the good i; and
ai , bi , ci are parameters.
1 For the first equation, a > 0 while b < 0.
1 1
What is the sign of c1?
Supply and demand analysis Market with two goods 25 / 47

Substitutable good and complementary good
Suppose that
Qd1 = f (P1 , P2 ).
Definition
A substitutable good is one that could be consumed instead of the
good under consideration.
A complementary good is one that is used in conjunction with
other goods.
Example
Grab car and traditional taxis could obviously be substituted for
each other in urban areas. So they are substitutable goods.
Laptops and printers are consumed together. So they are
complementary goods.

Sign of ci
Qd1 = a1 + b1 P1 + c1 P2
Qd2 = a2 + b2 P1 + c2 P2
1 If the goods are substitutable, then an increase in the price of

good 2 would mean that consumers would switch from good 2 to
good 1, causing Qd1 to increase. Substitutable goods are therefore
characterised by a positive value of c1 .
2 On the other hand, if the goods are complementary, then a rise in
the price of either good would see the demand fall, so c1 is
negative.
3 Similar results apply to the signs of a2 , b2 and c2 .

Examples: market with two goods
Example
The demand and supply functions for two interdependent commodities
are given by
Qd1 = 10 − 2P1 + P2
Qd2 = 5 + 2P1 − 2P2
Qs1 = −3 + 2P1
Qs2 = −2 + 3P2
where Qdi , Qsi and Pi denote the quantity demanded, quantity
supplied and price of good i, respectively. Determine the equilibrium
price and quantity for this two-commodity model. Are these goods
substitutable or complementary?
Link to write: https://padlet.com/anltt/sp2218oseosyyo5y

Exercises - Homework
Reference: page 81-82, exercises 3-9.

If you have some question concerning the homework and related things,
please post them on our class forum:
https://elearning.uel.edu.vn/mod/forum/view.php?id=46263

Chapter 1. Linear economic models
1 Linear equations
Some example of linear equations
Elimination method
2 Supply and demand analysis

Demand functions: single-commodity market
Supply functions: single-commodity market
3 National income determination

Consumption and saving function
IS-LM Schedule
National income determination 30 / 47

National income determination: key terms
Factors of Production Taxation

National income Disposable income
Consumption Equilibrium level of national
Autonomous consumption income
Marginal propensity to consume Transactions demand
Marginal propensity to save Precautionary demand
Autonomous savings Speculative demand
Investment IS schedule
Government expenditure LM schedule
National income determination 31 / 47

Consumption function and saving function
We denote Y as the national income - independent variable. Usually, Y

could be used for consumption of good or put into savings. The
consumption function C and saving function S:
C = f (Y ), S = Y − C.
f is often an increasing function of Y . In the simplest case, we

may assume C = aY + b, where a and b are parameters.
National income determination Consumption and saving function 32 / 47

Consumption function and saving function
We denote Y as the national income - independent variable. Usually, Y

could be used for consumption of good or put into savings. The
consumption function C and saving function S:
C = f (Y ), S = Y − C.
f is often an increasing function of Y . In the simplest case, we

may assume C = aY + b, where a and b are parameters.
The intercept b is the level of consumption when there is no
income and is known as autonomous consumption, b > 0.
The slope a, is the change in C brought about by 1-unit increase
in Y and is known as the marginal propensity to consume (MPC).
Usually 0 < a < 1, explain why?

Graphs of the functions
C C = 0.6Y + 10
(40, 34)
10
Y
Graphs of the functions
C C = 0.6Y + 10
(40, 34)
10 S = 0.4Y − 10
Y
25
−10

Consumption and Saving functions
If C = aY + b then
S = Y − C = (1 − a)Y − b.
Marginal propensity to save (MPS) is the slope of the savings

function.
MPS = 1 − a = 1 − MPC.
Autonomous savings, the value of S when Y = 0, are equal to −b.

National income determination Macro-economic model with investment 35 / 47

The equilibrium level of income and consumption
At equilibrium level, Y = C + I, so we obtain the system
Y = C +I
C = aY + b
Example
Find the equilibrium level of income and consumption if the
consumption function is
C = 0.6Y + 10
and the planned investment I = 12 (trillions of dollars).

Equilibrium level of national income
To make the model more realistic, let us now include government

expenditure, G, and taxation, T, in the model.
The income that households have to spend on consumer goods is
no longer Y but rather Y − T , which is called disposable income,
Yd .
Y = C +I +G
C = aYd + b
Yd = Y − T
T = cY + d
where 0 ≤ a, c ≤ 1; b, d ≥ 0.

Equilibrium level of national income
Example
Given the unit as trillion dollars and
G= 40
I= 55
C= 0.8Yd + 25
T = 0.1Y + 10.
Calculate the equilibrium level of national income?

IS Schedule
In 1936, a British economist, John Hicks, introduced the IS-LM model.

IS-LM stands for ”Investment - Savings” and ”Liquidity preference -
Money supply”. To understand this, we recall the two-sector models.
As the interest rate r rises, the investment I falls so we have
I = cr + d, where c < 0 and d > 0.
From the equations

Y = C +I
C = aY + b
I = cr + d,
we may eliminate C and I to set up an equation with two variables Y
and r, which is called IS schedule.
National income determination IS-LM Schedule 39 / 47

IS schedule
Example
Suppose that the unit is ”trillion dollars” and
C = 0.8Y + 100
I = −20r + 1000.
Given Y = C + I, determine the IS schedule.

The equilibrium of the money market
In order to determine the national income and the interest rate, we will
need some additional information from the equilibrium of the money
market.
The equilibrium of the money market
The money market is said to be in equilibrium when the supply of
money, Ms , matches the demand for money, Md : that is, when
Ms = Md .

Money supply
The level of money supply, Ms , is assumed to be controlled by the

central bank and is taken to be autonomous, so that
Ms = Ms∗
for some fixed value Ms∗ .

Money demand
The demand for money comes from three sources: transactions,

precautions and speculations.
1 The transactions demand is used for the daily exchange of goods
and services.
2 The precautionary demand is used to fund emergency situations
requiring unforeseen expenditure.
3 The speculative demand is used as a reserve fund in case
individuals or firms decide to invest in alternative assets such as
government bonds.

Money demand
1 We assume transactions demand and precautionary demand are

proportional to national income and put them together:
L1 = k1 Y, (k1 > 0).
2 As interest rates rise, speculative demand falls. In a simple form:
L2 = k2 r + k3 ; (k2 < 0, k3 > 0).
3 The total money demand:
Md = L1 + L2 = k1 Y + k2 r + k3 .

LM Schedule
At the equilibrium of money market, Md = Ms , or
Ms∗ = k1 Y + k2 r + k3 .
LM Schedule
The above equation, relating national income, Y , and interest rate, r,
is called the LM schedule.
If we assume that equilibrium exists in both the commodity and money
markets, then the IS and LM schedules provide a system of two
equations in two unknowns, Y and r. We can solve them to determine
Y and r.

Exercises - Teamwork
Example
Determine the equilibrium income Y and interest rate r, given the
following information about the commodity market (all unit is ”trillion
dollars”:)
C = 0.7Y + 85
I = −50r + 1200
and the money market
Ms = 300
L1 = 0.2Y
L2 = −40r + 30.
Sketch the IS and LM curves on the same diagram. What effect would
an increase in the value of autonomous investment have on the
equilibrium values of Y and r?

Exercises - Homework
Exercises 4, 5, 6, 7 page 106, and exercise 5 page 107.

Study in advance the key terms in Chapter 2.

Any question?
Thank you!

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Mathematics for Economics and Business

Le Thi Thanh An: anltt@uel.edu.vn

Faculty of Economic Mathematics,

October 11, 2021

Link download syllabus: click here

Link download syllabus: click here

1 Minimum attendance: 80%.

Forms of Assessments Type of Collaboration Weight

Each group has maximum 5 members! Link for making teams

Recall about linear equation systems

Linear equations Some example of linear equations 8 / 47

Equality Divided by Factor

Linear equations Some example of linear equations 9 / 47

Linear equations Some example of linear equations 10 / 47

Linear equations Some example of linear equations 10 / 47

Linear equations Elimination method 11 / 47

2 Eliminate y from (30 ) by operation (30 ) − (20 ).

Linear equations Elimination method 11 / 47

3 Solve z in (300 ) to get z = 1,

Linear equations Elimination method 12 / 47

A linear economic model is the economic model in which every

Linear equations Elimination method 13 / 47

Link to write: https://padlet.com/anltt/b76dml82vcv7m2ud

Linear equations Elimination method 14 / 47

2 Supply and demand analysis

3 National income determination

Supply and demand analysis 15 / 47

Supply Parameters Equilibrium

Supply and demand analysis 16 / 47

1 In microeconomics the quantity demanded,

Supply and demand analysis Demand functions: single-commodity market 17 / 47

1 In microeconomics the quantity demanded,

2 Alternatively, economists consider P , the

Supply and demand analysis Demand functions: single-commodity market 18 / 47

Law of demand: Demand

where a, b are parameters

Supply and demand analysis Demand functions: single-commodity market 18 / 47

Supply and demand analysis Demand functions: single-commodity market 19 / 47

Supply and demand analysis Demand functions: single-commodity market 19 / 47

1 Law of Supply: a fundamental principle of

To distinguish quantity demanded and

Figure 4: Law of supply quantity supplied, we denote them

function as a function of price P depending on quantity, Q.

Supply and demand analysis Supply functions: single-commodity market 20 / 47

Law of supply and demand: P P = cQs + d

Supply and demand analysis Supply functions: single-commodity market 21 / 47

where P, Qd and Qs denote the price, quantity demanded and quantity

a. At the equilibrium, Qd = Qs we solve the system with two

Supply and demand analysis Supply functions: single-commodity market 23 / 47

a. If the government decides to impose a fixed tax of $5 on each

Supply and demand analysis Supply functions: single-commodity market 23 / 47

a. At the new equilibrium, Qd = Qs we solve the system with two

and obtain Q = 8, P = 34. So, the price at equilibrium increases to

Supply and demand analysis Supply functions: single-commodity market 23 / 47

where P, Qd and Qs denote the price, quantity demanded and quantity

Supply and demand analysis Supply functions: single-commodity market 24 / 47

What is the sign of c1?

Supply and demand analysis Market with two goods 25 / 47

Supply and demand analysis Market with two goods 26 / 47

1 If the goods are substitutable, then an increase in the price of

Supply and demand analysis Market with two goods 27 / 47

Supply and demand analysis Market with two goods 28 / 47