CHAPTER ONE

INTRODUCTION

1.1. Theoretical versus mathematical economics

Theoretical economics explains the relationship between variables in words.

Example.
The relationship between income and consumption can be explained as follows in the theoretical
economics.
Example
If the income of individual is increasing his consumption will increase by less than his income
has increased other things being constant.
Mathematical Economics is a branch of economics which explains the relationship between or
among variables using mathematics.
Example 1. y=c+s
Here, y is income and c is consumption and s savings.
The major difference between mathematical economics & theoretical economics lies.
 In mathematical economics the assumptions and conclusions are stated in mathematical
symbols, equations & theorem.
 In theoretical economics we are using words, sentences & logic in the reasoning process.
Mathematical approach has the following advantages.
a) The relationship of economic variables explained using mathematical economics are more
concise & precise.
b) There exists mathematical theorems that makes the problems simple
c) It forces us to state the assumptions explicitly (clearly) & enable us to use mathematical
theorem. It avoids the use of implicit (hidden) assumptions.
d) Mathematical economics allow us to use n (large) -variable case.
Econometrics Vs Mathematical Economics
Econometrics concern with the measurement of data. It is the study empirical observation using
statistical methods of estimation and statistical testing. Whereas, mathematical economics refers
to the application of economics to the purely theoretical aspects of economic analysis, with title
or no concern about such statistical problem as the error of measurement of the variable under
study. In economics we have three types of equations.
1) Definitional equation sets up an identity between two alternative expressions that have
exactly the same meaning.
Example:
Total Profit =total revenue –total cost
2) Behavioral equation specifies the manner in which variable behave in response to change in
other variables. Under this equation it is always necessary to adopt definite an assumptions
before writing the mathematical equations.
It can be used to describe the general institutional setting up of the model.
Example:
Cost as a function of output C=ca+cYd
Output as function of factors of production Q=F(LK) assuming short run production period.

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3) Equilibriums condition

It describes the pre requisite for attainment of equilibrium.

Example :
Simple market equilibrium model: MD=MS (quantity demanded = quantity supplied)
Simple national income equilibrium model: S=I (intended saving =intended investment

1.2 Relation VS Functions

Relations (old terminology mutivalued function): any order pair associates any value with an
x value, any collection of order pairs constitute a relation between y & x. Given an x value one
or more y values will be specified by that relation. Or relation is the set of ordered pair. A
relation to be a function the range must not be repeated.
To check whether a relation is a one to one function we can check with vertical line test .if the
graph of the function touches at a point it is a one to one function unless not .
Example.1
Given {( x , y) |y = 2 x is a set of order pairs if
x=1 y= 2 , if x=0 then y =o ,& if x=−1 y will be −2
On the other hand given the value of x it may not always be possible to determine unique value
of y from the relation.
Example. 2
Given {( x , y)|y ≤ x
In this case when x is equal to one, y can take various values either less than or equal to x such as
0, 1,-4, etc. In each case the relation will be (1, 0), (1, 1), (1,-4) etc. in example 1 for each x
values we can have only one corresponding value of y. But in example 2 for a single value of x
we may have many corresponding values of y. this is also another example of relation.
Function old terminology single valued function (mapped/transformed /: it can be
represented as Y=f(X) is a set of order pairs with the property that any x value uniquely
determines a y value. It should be known that a function must be a relation, but a relation may
not be a function.
To check weather a given relation is a function we can apply the vertical line test.
The range must not repeat for different domain i.e a function is a relation such that for each value
of X there exist only one corresponding Y value.
Example :
Given {( x , y)|y = 2 x X is the function of Y
Example :
Y=X2 it is a relation but not function. The coordinate point (1,1) , (-1,1), (2,4) (-2,4) here both
1 and 4 is repeated range for different domain .
Note: If the extreme value of domain is not attained, it difficult to find the range of a given
function .
Example :
Given the firms TC =100+5Q the firm has a capacity limit of 50 quintals per day .the determine
A) The domain of the cost function?
B) The range of cost function?
Solution:

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A) Domain Q: 0≤Q≤50 quintals.
B) Range=C: 100≤C≤350 quintals.

1.2.1. Types of functions

1) Constant function: a function whose range consists of only one element. Their graph will be
horizontal starlight line with slope zero i.e their value is exogenously determined.
Y=f(X) =a where a is any constant real number.
Example:
Y=4
Example:
Io=30
2) Polynomial functions: polynomial function of a single variable is given by the general form :
o 1 2 3 n
P(x) = Y = aox + a1x + a2x + a3x + …… + anx

Where ai ∈ R and n ∈ whole numbers (the degree of the polynomial function )

 Zero is the only non degree polynomial
 If n = 0, Y will be a constant function like Y = 3
 If n = 1, Y will be a linear function like Y = 2x+3
2
 If n = 2, Y will be a quadratic function like Y = 2 + 4x + x

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 If n = 3, Y will be a cubic function like Y=2+4x+ x2+3x

3) Rational functions: A rational function of Y is a function which is the ratio of two

polynomial functions in the variable x. That is,

But,P2≠0

4) Multi-Variable Functions (Functions of Several Independent Variables)

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You will be familiar with single variable functions such as f(x) = 2 + 4x + x . However, a multi
variable function is a function such that the function value is dependent on more than single
variable, or sometimes we say a vector in multi dimensional space.
Example :

is called the Cobb–Douglas production function where, L is the number of

units of labor, K is the number of unit of capital, and a, b, c are constants two variable function.
Example :
U=f(X,Y)=X1/2 Y3/5

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5) Inverse Functions
From every function y=f(x), we may be able to get a function x=g(y), such that the composition
fog =y, gof =x. In an inverse function, we may be able to express the independent variable in
terms of the dependent variable. Or f-1(f(x)) =f (f-1(x)) =x
Example1
y=f(x)=(x+1)/x−1
y=x+1/x−1
y(x−1)=x+1
xy−y=x+1
xy−x=1+y
x(y−1)=y+1
x=(y+1)/(y−1)=g(y)
Let us find (gof)(x)=g[f(x)]
=g[(x+1)/(x−1)]
=x+1/x−1+1/x+1/x−1−1
= x+1+x−1x−1x+1−x+1x−12xx−1×x−12
=x
similarly, we can prove that (fog) (y) =y, hence g is the inverse of f and f is the inverse of g
Example 2. f= (0,3),(1,5)
f-1(x)= = (3,0),(5,1) simply by reversing the Order of the coordinate points. If domain
is repeated after reversing such a type of coordinate point will not inverse.
Example 3.
Find the inverse of a function f(x) =y=4x-3
Step1. Interchanging the variable x and y
x=4y-3
Step2. Solve for y
x+3=4y
x+3
= f-1(x) =
4
To check
f-1(f(x)) =f (f-1(x))=x
( 4 x−3 )+ 3 4 ( x +3 )−3
Or =x=
4 4

We use horizontal line test to check a given function has inverse or not .if the horizontal line
touch the graph at one point the given function will have inverse.
Example 4 f(x) =x2
When we draw the graph of the above function it will have upward parabola where it is touched
at two points and hence the function will not have inverse or one domain will not pared with a
single range. The coordinate points (2,4) ,(-2,4) (1,1) ,(-1,1) ,(0,0)

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6) Explicit Function:
When the dependent function is expressed clearly in terms of the independent variables, the
function is said to be explicit function. 
Example:
1. y=2x+7
3 x −7
2. y=
x 2 +1

6) Implicit Function:
 An implicit function is that which contains two or more variables that are not independent of
each other.
Example: 
1. x2+ y2 =0            
2. f(x,y)=0  
3. x2+y2-x+y+3=0 

7) Exponential functions
An exponential function is a function defined by the form f(x) = bn, b>0 & b≠1, b=base, and
n=exponent .The domain of exponential function is the set of real numbers and the range of the
function is that set of positive real numbers.
7.1) Graphs of Exponential Functions and Property of exponential function
Here are some properties of the exponential function
1) When the base is greater than 1(a>1) and a ≠1

 The graph passes through the point (0,1)

 The domain is all real numbers
 The range is y>0(the set of all positive real number).
 The graph is increasing
 The graph is asymptotic to the x-axis as x approaches negative infinity
 The graph increases without bound as x approaches positive infinity i.e f(x) tends to
positive infinity as X tends to positive infinity
 F(0)=1
 F(x) tends to zero as X tends to negative infinity.
 The graph is continuous
 The graph is smooth
Let us see the graph of Y=2X

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2) When the base is between 0 and 1(0<a<1) are;

 The graph passes through the point (0,1)

 The domain is all real numbers
 The range is y>0(set of all positive real number)
 F(x) tends to 0 as X tends to positive infinity
 F(x) tends to positive infinity as X tends to negative infinity
 The graph is decreasing
 The graph is asymptotic to the x-axis as x approaches positive infinity
 The graph increases without bound as x approaches negative infinity
 The graph is continuous
 The graph is smooth. Notice the only differences regard whether the function is
increasing or decreasing, and the behavior at the left hand and right hand ends.
Example: f(x) = (1/2) x =2-x

7.2 Rule of exponential functions

1) X m × X n= X n+m
Xm
2) n = X m−n , (X≠0)
X
1
3) X −n= n , (X≠0)
X
0
4) X =1 (X≠0)
1
5) X n =√n X
6) X (m)n= X mn
7) X m ×Y m= XY m
m
8) X n =√( X)m
n

Applications of Exponential Functions

The best thing about exponential functions is that they are so useful in real world situations.
Exponential functions are used to model populations, carbon date artifacts, help coroners

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 determine time of death, compute investments, as well as many other application. We will
discuss in this lesson three of the most common applications: population growth, exponential
decay, and compound interest. For other applications, consult your textbook
1. Population growth
Many times scientists will start with a certain number of bacteria or animals and watch how the
population grows. For example, if the population doubles every 5 days, this can be represented as
an exponential function. Most population models involve using the number e.
Population models can occur two ways. One way is if we are given an exponential function. The
second way involves coming up with an exponential equation based on information given. Let’s
look at each of these separately.

Example:

1) The population of a city is P = 250,342e 0.012t where t = 0 represents the population in the year 2000.
a) Find the population of the city in the year 2010.

Solution :

To find the population in the year 2010, we need to let t = 10 in our given equation.

P = 250,342e0.012(10) = 250,342e0.12 = 282,259.82

Since we are dealing with the population of a city, we normally round to a whole number, in this
case 282,260 people.
b) Find the population of the city in the year 2015.

Solution :

To find the population in the year 2015, we need to let t = 15.

P = 250,342e0.012(15) = 250,342e0.18 = 299,713.8
We’ll round this answer to 299,714 people.

c. Find when the population will be 320,000.

We know the population in the year 2015 is almost 300,000 from our work in part
(b). so it makes sense that the answer has to be higher than 2015.
Remember that P in the equation represents the population value, which we are given to be
320,000. Only now we do not know the time value t.
The equation we need to solve is
320,000 = 250,342e0.012(t)
To review solving exponential equation

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 So it will take between 20 and 21 years for the population to reach 320,000. This means between the
years 2020 and 2021 the population will be 320,000.

To summarize the general form for population models. Most of the time, we start with an
equation that looks like
P = Poekt
P represents the population after a certain amount of time
Po represents the initial population or the population at the beginning
k represents the growth (or decay) rate
t represents the amount of time
Remember that e is not a variable, it has a numeric value. We do not replace it with information
given to us in the problem.
Example:

2) A scientist starts with 100 bacteria in an experiment. After 5 days, she discovers that the population
has grown to 350.

a. Determine an equation for this bacteria population

Solution :

To find the equation, we need to know values for Po and k. Remember the equation is in the form
P = Poekt. where P, e, and t are all parts of the equation we will come up with. We only need
values for Po and k. Po is given by the amount the scientist a start with which is 100. Finding k
requires a little more work. We know that Po is 100 and after t = 5 days the population P is 350

100. Finding k requires a little more work.

We know that Po is 100 and after t = 5 days the population P is 350. We can use this information
to find k.

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Now that we know k, we go back to our general form of and replace Po and k. So our equation is
P = 100e0.25055t

b. Use the equation to find out the population after 15 days.

Solution :

We will substitute the value of 15 for t in P = 100e0.25055t.

P = 100e0.25055(15) = 100e3.75825 = 4287.33
or approximately 4287 bacteria after 15 days.

c. Use the equation to find out when the population is 1000.

Solution :

We will set our equation equal to 1000 to get 1000 = 100e0.25055t and solve.

So between 9 and 10 days, the bacteria population will be 1000.

3. Exponential Decay

Solving an exponential decay problem is very similar to working with population growth. In fact,
certain populations may decrease instead of increase and we could still use the general formula
we used for growth. But in the case of decrease or decay, the value of k will be negative.

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Example 1:

iii. The number of milligrams of a drug in a person’s system after t hours is given by the
function D = 20e-0.4t.

a. Find the amount of the drug after 2 hours

Solution :.

To solve the problem we let t = 2 in the original equation.

D = 20e-0.4(2) = 20e-0.8 = 8.987
After 2 hours, 8.987 milligrams of the drug are left in the system.

b. Find the amount of the drug after 5 hours.

Solution :

Replace t with 5 in the equation to get

D = 20e-0.4(5) = 20e-2.0 = 2.707
After 5 hours, 2.707 milligrams remain in the body.

c. When will the amount of the drug be 0.1 milligram (or almost completely gone from the
system)?

Solution :

We need to let D = 0.1 and solve the equation 0.1 = 20e-0.4t

Solving After approximately 13 hours and 15 minutes, the amount of the

drug will be almost gone with only 0.1 milligrams remaining in the body an exponential decay
problem is very similar to working with population growth.
4. Compound Interest

The formula for interest that is compounded is

 A represents the amount of money after a certain amount of time

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  P represents the principle or the amount of money you start with
 r represents the interest rate and is always represented as a decimal
 n is the number of times interest is compounded in one year

 t represents the amount of time in years

if interest is compounded annually then n = 1

if interest is compounded quarterly then n = 4
if interest is compounded monthly then n = 12
Let's Practice:

iv. Suppose your parents invest $1000 in a savings account for college at the time you are
born. The average interest rate is 4% and is compounded quarterly. How much money
will be in the college account when you are 18 years old? We will use our formula

and let P = 1000, r = 0.04, n = 4 and t = 18.

Exercise: Suppose your parents had invested that same $1000 in a money market account that
averages 8% interest compounded monthly. How much would you have for college?

8) Logarithmic functions
x
If we start with an exponential functions y=b and interchanging the two variables we get an
expression given by logbx =y, b>0,x>0,y∈R. Thus, exponential and logarithmic functions are
inverse functions.
The function Y=logbX, where b>0, ≠1 known as the logarithmic function .thus it is the inverse of
exponential function Y=bX . From this we see that the domain of the logarithmic function is the
set of all positive real numbers, and the range is the set of all real number (IR).
Note: both logarithm and exponential function are non algebraic function
Examples: Evaluate the following
1.log28 = 3
=2x=8
=2x=23
=X=3
2.Log864
=8x=64
=8x=82
=x= 2
1
3.Log3( )
81
=3x=81-1

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 =3x=3-4
X=-4

Examples:
1. Log4x=3
=43
=64
3
2. Log 81x=
4
3
=81
4

=81 ()1
4
3

=33 =27

8.1) the graph of logarithmic function

From the graphs we see that
 The range is IR
 The domain is the set of all positive real numbers
 The function is continuous in its domain
 The function is increasing if a > 1 and decreasing if 0 < a < 1
 The y-axis is a vertical asymptote

8.2) Rule of logarithms

For a, m, n, positive real number and r any real number, and a > 0 and a ≠ 1
 loga 1 = 0,
 loga a x = x (for any real number x,)
 aloga x = x for any positive number x.
 loga m + loga n = loga (mn),
 loga m − loga n = loga (m/n) ,
 loga (mr ) = rloga m.
1 1
loga√r n= logn r = loga
r

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Example1:

log a3+loga4-loga6
Solution :
3x4
loga
loga6
3x 4
= loga( )
6
= loga2
Example 2: find the value of x satisfying
x 2 20 1.6
loga =3 loga +loga -loga
Solution :
3
=loga 2 x loga 20
8 x20
loga
= 1.6
loga
x 100
¿ loga =loga
X=100
9) Monotonic Function

A function which is entirely non- increasing or non- decreasing. A function is monotonic if its
first derivative does not change sign.

9.1) monotonically increasing function

In calculus, a function f defined on a subset of the real numbers with real values is called
monotonic (also monotonically increasing, increasing or non-decreasing), if for all x and y such
that x ≤ y one has f(x) ≤ f(y), so f preserves the order

Figure 1.
9.2) monotonically decreasing function
Figure 1 .monotonically increasing function
Likewise, a function is called monotonically decreasing (also decreasing or non-increasing) if,
whenever x ≤ y, then f(x) ≥ f(y), so it reverses the order (see Figure 2).

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Figure 2 .monotonically decreasing function
Note; If the order ≤ in the definition of monotonicity is replaced by the strict order <, then one
obtains a stronger requirement. A function with this property is called strictly increasing. Again,
by inverting the order symbol, one finds a corresponding concept called strictly decreasing.
Functions that are strictly increasing or decreasing are one-to-one (because for x not equal to y,
either x < y or x > y and so, by monotonicity, either f(x) < f(y) or f(x) > f(y), thus f(x) is not
equal to f(y)). The terms "non-decreasing" and "non-increasing" are meant to avoid confusion
with "strictly increasing" respectively "strictly decreasing", but should not be confused with the
(much weaker) negative qualifications "not decreasing" and "not increasing"; see also strict.
When functions between discrete sets are considered in combinatory, it is not always obvious

that "increasing" and "decreasing" are taken to include the possibility of repeating the same value
at successive arguments, so one finds the terms weakly increasing and weakly decreasing to
stress this possibility. The terms "non-decreasing" and "non-increasing" should not be confused
with the (much weaker) negative qualifications "not decreasing" and "not increasing".
Figure 3. A function that is not monotonic. First falls, then rises, then falls again. It is therefore
not decreasing and not increasing, but it is neither non-decreasing nor non-increasing.
The term monotonic transformation can also possibly cause some confusion because it refers
to a transformation by a strictly increasing function. Notably, this is the case in economics with
respect to the ordinal properties of a utility function being preserved across a monotonic
transform.
A function f(x) is said to be absolutely monotonic over an interval (a, b) if the derivatives of all
orders of f are nonnegative at all points on the interval.
To sum increasing/decreasing/monotone function: Let A be a subset of ℝ, and let f be a
function from f: A→ℝ. Then
1. F is increasing ( weakly increasing) if x ≤y implies f(x)≤f(y) ( for all x and y in A)
2. F is strongly(strictly) increasing if x<y implies that f⁢(x)<f⁢(y) ( for all x and yin A)
3. F is decreasing (weakly) if x ≤y implies that f⁢(x)≥f⁢(y)( for all x and y in A)
4. F is strictly decreasing or strongly decreasing if x<y implies that f⁢(x)>f⁢(y)
5. F is monotone, if f is either increasing or decreasing.
6. F is strictly monotone or strongly monotone, if f is either strictly increasing or strictly
decreasing.
Example 1:
Consider these two graphs. The f(x) =3x, while the green one is g(x) =3 x+1: are both increasing
function through their domain.
Y
Y=3x+1

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 Y=3x

10) Homogeneous Function

A function of one or several variables that satisfies the following condition: when all
independent variables of a function are simultaneously multiplied by the same (arbitrary) factor,
the value of the function is multiplied by some power of this factor. In algebraic terms, a
function f(x, y, …, u) is said to be homogeneous of degree n if for all values of x, y, …, u and for
any t
f (tx, ty, …, tu) = tnf(x, y, …, u) or alternatively;
A function f of n variables for which (tx1... txn) is in the domain whenever t > 0 and (x1, ..., xn) is
in the domain is homogeneous of degree k if f (tx1, ..., txn) = tk f (x1, ..., xn) for all (x1, ..., xn) in
the domain of  f  and all t > 0
 Constant return to scale production function which is homogeneous of degree t = 1.
 Increasing return to scale- production function which is homogeneous of degree t >1.
 Decreasing return to scale- production function which is homogeneous of degree t <1.
 Non homogenous independent of degree t=0 which implies that by any amount we add
the value of inputs output never changed
Example1.

5 2 3 10 5¿ 2 3
ደf (tx,ty,tz)=(xt) (ty) (tz) =t (xalignl¿¿ y z )¿¿¿
Homogeneous function therefore the function is homogeneous function degree 10
The degree is the sum of the exponents on the variables; in this example, 10=5+2+3=10.

Example 2.
Let f (x1, x2) = x1 + x22, with domain {(x1, x2): x1 ≥ 0 and x2 ≥ 0}. Then
f (tx1, tx2) = tx1 + t2x22.
It doesn't seem to be possible to write this expression in the form tk(x1 + x22) for any value of
k. But how do we prove that there is no such value of k? Suppose that there were such a value.
That is, suppose that for some k we have
tx1 + t2x22 = tk(x1 + x22) for all (x1, x2) ≥ (0, 0) and all t > 0.
Then in particular, taking t = 2, we have
2x1 + 4x2 = 2k(x1 + x22) for all (x1, x2).
Taking (x1, x2) = (1, 0) and (x1, x2) = (0, 1) we thus have
2 = 2k and 4 = 2k, which is not possible. Thus f is not homogeneous of any degree. When
homogeneous function degree zero. A property of an equation the exists if independent variables

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are increased by a constant value, then the dependent variable is increased by the value raised to
the power of 0. In other words, for any changes in the independent variables, the dependent
variable does not change. This is a special type of homogeneous equation.
Example 4. f(x;y) = 5x/y,
f(tx,ty)=5(tx)/(ty)=t0(5x/y) t=0 ,degree zero
Example 5. f(x;y) =(tx)2+(ty2)/(tx)2+(yt)2=t0( x2+y2/x2+y2) , t=o ,degree zero.
Example 6.
For the function f (x1, x2) = Ax1ax2b with domain {(x1, x2): x1 ≥ 0 and x2 ≥ 0} we have f (tx1, tx2) =
A(tx1)a(tx2)b = Ata+bx1ax2b = ta+b f (x1, x2), so that  f  is homogeneous of degree a + b
Let f (x1, x2) = x1 + x22, with domain {(x1, x2): x1 ≥ 0 and x2 ≥ 0}. Then f (tx1, tx2) = tx1 + t2x22.
It doesn't seem to be possible to write this expression in the form tk(x1 + x22) for any value of k.
But how do we prove that there is no such value of k? Suppose that there were such a value. That
is, suppose that for some k we have tx1 + t2x22 = tk(x1 + x22) for all (x1, x2) ≥ (0, 0) and all t > 0.
Then in particular, taking t = 2, we have 2x1 + 4x2 = 2k(x1 + x22) for all (x1, x2).Taking (x1, x2) =
(1, 0) and (x1, x2) = (0, 1) we thus have 2 = 2 k and 4 = 2k, which is not possible. Thus f is not
homogeneous of any degree.

Applications of Functions to Economics

Functions, in economics, have diverse and versatile importance. To come up with neater
theoretical results, it is good to model relationships in terms of mathematical functions. Though
functions are used almost in all specializations of economics extensively, in this course you will
be introduced with the most common microeconomic and macroeconomic functions. Detailed
acquaintance with these functions is left for your “life in economics”.
The most common microeconomic functions are demand functions, supply functions, production
function, cost f0unctions, revenue functions, profit functions, pollution functions, and other
natural resource functions. The most common macroeconomic functions are consumption,
saving, investment, and aggregate production functions. There are also, a lot of other economic
functions, but we don’t discuss them here due to time limit we have. For the sake of introduction,
let’s take some examples of economic functions.

1. The cost function

The cost function C gives the cost C (q) of producing a quantity q of some good. A linear cost
function has the form

C (q) = b +mq ; Where, the vertical intercept b is called the fixed costs, i.e. the costs incurred
even if nothing is produced, and the slope m is called the variable costs per unit.

Example
What is the cost function of manufacturing a product with fixed costs of $400 and variable costs
of $40 per item, assuming the function is linear?
Solution.
The cost function is C (q) = 400+ 40q:

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2. Revenue function

A revenue function R gives the total revenue R(q) from the sale of a quantity q at a unit price p
dollars. Thus, R(q) = pq:
Example
A company that makes a certain brand of chairs has fixed costs of $5000 and variable costs of
$30 per chair. The company sells the chairs for $50 each. Find formulas for the cost and revenue
functions.

Solution.
The cost function is C(q) = 5000 +30q: The revenue function is R(q) = pq =50q:
In any business, decisions are made based on the profit function. Profit is defined to be revenue
minus cost. That is
P(q) = R(q) - C(q):

The break-even point is the point where the profit is zero, i.e. R (q) = C (q):
Example2:
A company has cost and revenue functions, in dollars, given by C (q) = 6; 000+10q and R (q) =
12q:
(a) Graph the functions C (q) and R(q) on the same coordinate axes.
(b) Find the break-even point and illustrate it graphically.
(c) When does the company make a profit? Loses money?
Solution.
(a) The graph is given below;

(b) The break-even point is the point of intersection of the two lines. To find the point, set 12q =
10q + 6000 and solve for q to find q = 3000: Thus, the break-even point is the point (3000;
$36000):
(c) The company makes profit for q > 3000 and loses money for 0 <q < 3000:
4. Marginal Analysis
In economics the term marginal stands for a rate of change. Marginal analysis is an area of
economics concerned with estimating the effect on quantities such as cost, revenue, and profit
when the level of production is changed by a unit amount. For example, if C (q) is the cost of
producing q units of a certain commodity, then the marginal cost, MC(q); is the additional cost of
producing one more unit

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Similarly marginal revenue MR(q); is the additional revenue of selling one more unit

5. Supply and Demand Curves

The quantity q manufactured and sold depends on the unit price p: In general, when the price
goes up then manufacturers are willing to supply more of the product whereas consumers are
going to reduce their buying’s. Since consumers and manufacturers react differently to changes
in price, there are two curves relating p and q:

The supply curve is the quantity that producers are willing to make at a given price. Thus,
increasing price will increase quantity.

The demand curve is the quantity that will be bought by consumers at a given price. Thus,
decreasing price will increase quantity.
The supply and demand curves intersect at a point (q*; p*) called the point of equilibrium. We
call p*the equilibrium price and q* the equilibrium quantity.
Assume that the market demand and market supply functions of a particular product are given as
given the demand and the supply function given below;
MQd =a−bP ,(a , b ,>0 )
MQ s=−c+ dP ,(c ,d >0 )
At equilibrium market demand equal to market supply
MQd=MQs
Then the equilibrium Price, P̄ is
a+c
P*= b+d

Q* =a-bp*
Q* =a-b (a+c/b+d)
=a-ba-bc/b+d
=ab+bd-ab-bc/b+d
Q* = bd-bc
b+d
Example 1.
Given the inverse demand function given as Qd =40-20p and then supply function QS=-20+30P,
Find the equilibrium level of output and equilibrium level of price.
Solution :
At equilibrium market demand equal to market supply
MQd=MQs
40-20P*=-20+30P*
60=50p
P=60/50
P*=1.20 birr
Q*= (40-(1.20(20))

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Q*=16unit.

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