Objectives

After completing this unit, students will be able to:

• Discuss the fundamental principle of economic

analysis

• Explain the basic terms of economics

• Identify various graphs, curves and slopes

• Summarize the importance of a slope

Overview

Economic theories are made to explain different perspectives.

The relation between two or more variables is defined by these
theories. Mathematical tools are used to explain economic theories
in a process called economic analysis. Experts use several tools in

economic analysis.

To solve the complicated aspects of economic theories and models,

the modern economists take the help of Matrix, Calculus, Algebra
and Derivatives to calculate more precisely and accurately. Graphs
enable us to understand economics.
Basic Terms of Economics

Here are a few basic terms used in the application of economic analysis:

01 02
Ceteris
Variables
Paribus

A measurable value is a variable. When the relation

The magnitude of variables can between two variables
change, and at different times or is analyzed, we
places, a variable can assume assume all the other
different values. Variables used factors remain the
in economics include saving, same. Ceteris Paribus
imports, exports, etc. Each is a Latin phrase that
of these is represented by a implies “other things
symbol. remain constant.”
 03
Function
The relation between two or more economic
variables describes a function.
The demand function for certain goods is
expressed as:
D = f (P, Pr, T, F)
Where,
D = Demand, P = Price,
Pr = Price of similar goods
T = Taste and Preferences
F = Fashion
f = Functional relationship
04
Equations
In economics, there is an expression of functional relationships
between economic variables, which, when transformed into algebraic
expressions, provide equations.
Each equation shows a relation. as:
For example, C = a + b Y is the π = TR – TC
consumption function.
Where,
Identities: π is the total profit,
TR indicates the total revenue
An identity is the one that shows
and TC is taken as the total cost.
an equilibrium condition. For
example, total profit is denoted
 05 06
Graphs and Lines and
Diagrams Curves

A graph shows the relationship between two or more sets
of variables.
For example, Figure 3.1 shows a typical graph with its
four quadrants.
The relationship between different variables can be shown with the
help of a line graph. For example, the relationship between income
and consumption is shown below:

Quadrant 2 Quadrant 1

Quadrant 4 Quadrant 3

Figure 3.1: Four Quadrants in a Typical Graph Figure 3.2: Relationship between Income and Consumption
 07
Slope

A slope indicates the change in one variable in response to the change in another variable. The following
figure shows the different methods of measurement of a slope:

Figure 3.3: Different Methods of Slope Measurement

A slope helps in identifying both steepness and direction. If a line moves upward when going from left to
right, the slope is positive, and when the line moves down when going from left to right, the slope is negative.
Summary
• This chapter introduces different concepts
of mathematics that are useful in analyzing
of economics.
• The relation between two or more economic
variables describes a function.
• An identity is the one that shows an
equilibrium condition.

• Equations, slopes, lines, identities, • A graph shows the relationship between

graphs, diagrams and curves are used in two or more sets of variables.
economics.
• A slope indicates the change in one variable
• A measurable value is a variable. The in response to the change in another
magnitude of variables can change. variable.

Assessment Questions

1. What do you mean by a function?

2. How is a slope beneficial to an economist?

3. What is the importance of a graph in economic analysis?