Chuong 1 Linear Equation

MATHEMATICS
FOR ECONOMICS AND BUSINESS

IAN JACQUES CHAPTER 1
Linear Equations
The main aim of this chapter is to introduce the mathematics of linear equations. This is an
obvious first choice in an introductory text, since it is an easy topic which has many applications.
There are seven sections, which are intended to be read in the order that they appear.
Sections 1.1, 1.2, 1.3, 1.4 and 1.6 are devoted to mathematical methods. They serve to revise the
rules of arithmetic and algebra, which you probably met at school but may have forgotten. In
particular, the properties of negative numbers and fractions are considered. A reminder is given
on how to multiply out brackets and how to manipulate mathematical expressions. You are also
shown how to solve simultaneous linear equations. Systems of two equations in two unknowns
can be solved using graphs, which are described in Section 1.3. However, the preferred method
uses elimination, which is considered in Section 1.4. This algebraic approach has the advantage
that it always gives an exact solution and it extends readily to larger systems of equations.
The remaining two sections are reserved for applications in microeconomics and macroeconomics.
You may be pleasantly surprised by how much economic theory you can analyse using just the
basic mathematical tools considered here. Section 1.5 introduces the fundamental concept of an
economic function and describes how to calculate equilibrium prices and quantities in supply and
demand theory. Section 1.7 deals with national income determination in simple macroeconomic
models.
The first six sections underpin the rest of the text and are essential reading. The final section is
not quite as important and can be omitted at this stage.
NINTH EDITION
TT GIÁO DỤC SỚM & XUẤT SẮC PMH

Vinhomes Grand Park Slide 1
Chapter 1: Linear equations

Content

1.1&1.2 Introduction to algebra
expression
! Expression: is a combination of variables, constants

and at least an arithmetic operator connecting them.
The operators maybe +, −,×,÷.

1.1&1.2 Introduction to algebra (cont.)
expression
• Variable: represent numbers which are unknown or

uncertain, e.g., y = the height of a father , x = the height of
his son
• the letter as name of variable, e.g., F = the future value of an
investment, Q = the quantity demanded ...

expression
• Constant: takes place a number that is unchanged

• Coefficient: the number in front of a variable,
which represents how many times the variable is
multiplied

equation
! Equation: a statement that values of two expressions

equal.

equation
! A solution of an equation is any value of the variable

for which two sides of the equation are equal.
• solution set: set of all solutions of the equation

equation
! Equations are equivalent if they have the same

solution set.

equation
! The solution set of an equation is unchanged when

apply the following rules:
• Adding to both sides of the equation the same
quantity
• Subtracting from both sides the same quantity
• Multiplying both sides by a nonzero number

inequality
! Inequality (bất phương trình): a statement that the

values of two expressions are unequal (<, >, ≤, ≥)

inequality
! A solution of an inequality is any number that

makes the statement (inequality) true
! Inequalities are equivalent if they have the same
solution set
! The solution set of an inequality is unchanged when
apply the following to both sides of the inequality:
• Adding the same quantity
• Subtracting the same quantity
• Multiplying a positive number

1.3 Graph of linear equations
coordinate axes
! Coordinate axes (trục tọa độ): two number lines that
intersect at a right angle to form a coordiate system

1.3 Graph of linear equations (cont.)
coordinate axes
! A coordinate axes:
• The horizontal line: x-axis, the vertical line: y-axis
• The intersection: origin O(0,0)
• Each point on the plane is located by its
coordinate (x,y)

! A line is set of points connecting to make a straight

path

! What is common for the points on the blue line?

• (-3, -3), (-1, 1), (0, 3), (1, 5), (3, 9)

! Any line on the coordiate plane can be described by

an equation A𝑥 + 𝐵𝑦 + 𝐶 = 0
• B = 0: vertical line
• A = 0: horizontal line
• 𝐵 ≠ 0: the equation can be rewritten in the slope-
intercept form 𝑦 = 𝑚𝑥 + 𝑏

slope-intercept form
• Slope-intercept form 𝑦 = 𝑚𝑥 + 𝑏

1.4 Solving simultaneous linear equations
! Simultaneous linear equations: two linear equations

in two varibales are taken together

1.4 Solving simultaneous linear equations (cont.)
! The solution of a system of simultaneous linear

equations: an ordered pair or tuple that satisfies both
the linear equations

• On the coordinate plane, each linear equation is a

straight line
• Intersection is the point that belongs both the
straight lines

elimination method
! Elimination method (phương pháp khử): when the
coefficients of the varibales are appropriate, do
adding (or subtracting) side by side to obtain a new
equation equivalent and simpler

substitution method
! Substitution method (phương pháp thế): find the value of x in
terms of y from the 1st equation à substitute or replace x in the
2nd equation à find the value of y à put the value of y in any
of the given equations to find x

! System of simultaneous linear equations may have:

no solution, one solution or infintely many solutions

1.5 Apply and demand analysis
function
! Function (hàm số) is a rule (law) that defines a
relationship between one variable (independent,
input, x) and another variable (dependent, output, y,
or f(x))

1.5 Supply and demand analysis (cont.)
demand
! Demand: the quantity of a good or service that
consumers are willing and able to buy at a given
price in a given time period.

1.5 Apply and demand analysis (cont.)
demand function
! Demand function (hàm cầu): is a mathematical function
describing how a variable, quantity demanded of a good,
depends on other factors.

demand function
! Algebraically, the demand function can be described
as the following
Dx = f(Px, I, Pr, E, T)
• The demand of commodity x (Dx)
• The function of product x (f)
• Price of good or service (Px)
• Incomes of buyers (I)
• Prices of related goods& services (Pr)
• The future expectation of the product (E)
• Taste patterns of buyers (T)

law of demand
! Law of demand states that the price of commodity
increases, demand decreases, provided other factors
remain constant.

demand curve
! For simplicity, we hypothesise that the demand
function is linear so that P = aQ + b

example
! Ex: Sketch a graph of the demand function 𝑃 =
− 2𝑄 + 50. Hence, determine the value of
a) P when Q = 9
b) Q when P = 10

example
! Ex: 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

answer
! Ans:
a) P = -2Q + 50
b)
c) Comment on the likely reliability of the model

endogenous and exogenous variables
! In the model of consumer demand,
Dx = f(Px, I, Pr, E, T),
• Dx, Px: endogenous (nội sinh)
• I, Pr, E, T: exogenous (ngoại sinh)

inferior good vs normal good
• Inferior good (hàng hóa thứ cấp): demand drops
when people’s income rises
• Normal good: demand rises as income rises

substitute goods vs complementary goods
• substitute goods (hàng thay thế): goods could be
used for the same purpose by consumers
• complementary goods (hàng bổ sung): A and B are
complementary if using more of A requires the use
of more of B

supply
! In economics, supply (cung) is the number of
products that a producer or seller is willing and
capable to provide to buyers.

supply function
! The supply function in economics is a mathematical
formula that depicts the relationship between
quantity supplied, price of the commodity, and other
related variables.

law of supply
! The law of supply states that as the price of a good or
service increases, supply quantity of goods or
services increases and vice versa.

supply curve
! For simplicity, we hypothesises that the supply
function is linear so that P = aQ + b

equilibrium
! Equilibrium (cân bằng): a state in which the supply
and demand for a given good or service are in
balance.

equilibrium price
! Equilibrium price (giá cân bằng): of a given good or
service, also known as a clear-market price, is a price
where the demand and supply are matched.

equilibrium price
! Equilibrium point is intersection of the demand and
supply curves.

example
! Ex: The demand and supply functions of a good are
given by
1
𝑃 = −2𝑄! + 50 & 𝑃 = 𝑄" + 25
2
where P, QD, and QS denote the price, quantity
demanded and quantity supplied, respectively.
a)Determine the equilibrium price and quantity.

equilibrium price
! Market forces (lực thị trường) push prices toward
the equilibrium.

equilibrium price
! If the market price is above equilibrium, quantity
suplied will greater than quantity demanded;
creating a surplus (thặng dư). When that occurs,
market forces push the price downward toward
equilibrium until the surplus is eliminated.

equilibrium price
! If the market price is below equilibrium, quantity
suplied will less than quantity demanded; creating a
shortage (khan hiếm). When that occurs, market
forces pull the price upward toward equilibrium
until the shortage is eliminated.

shilfs in supply and demand
! Shilfs in supply or demand curves move the
equilibrium price and quantity.
• If demand increases, equilibrium price and
quantity both increase.

• If demand decreases, equilibrium price and
quantity both decrease.

• If supply increases, equilibrium price decreases
but equilibrium quantity.

• If supply decreases, equilibrium price increses but
equilibrium quantity.

double shilfs
! When supply and demand both shift, either price or
quantity will be indeterminate
• When supply and demand move in the same
direction, the equilibrium price is indeterminate,
the equilibrium quantity definitely increase.

double shilfs
• When supply and demand move in opposite
directions, the equilibrium quatity is
indeterminate, the equilibrium price definitely
decrease.

double shilfs
• Excise tax shilf the supply curve to the left
decreasing supply and increasing the equilibrium
price.

example
! Ex: The demand and supply functions of a good are
given by
1
𝑃 = −2𝑄! + 50 & 𝑃 = 𝑄" + 25
2
where P, QD, and QS denote the price, quantity
demanded and quantity supplied, respectively.
a)Determine the equilibrium price and quantity.
(done in the previous example)
b)Determine the effect on the market equilibrium if
the government decides to impose a fixed tax of $5
on each good.

answer
! Ans:

supply and demamd for two goods
! Suppose there are two goods: good 1 and good 2. The
demand for either good depends on the prices of
both good 1 and good 2. For simplicity, suppose that
the corresponding demand functions are linear, then
𝑄!! = 𝑎# + 𝑏#𝑃# + 𝑐#𝑃$
𝑄!" = 𝑎$ + 𝑏$𝑃# + 𝑐$𝑃$
• 𝑎# > 0, why?
• 𝑏# < 0, why?
• 𝑐# > 0 if good 2 is substitutable, why?
𝑐$ < 0 if good 2 is complementary, why?

example
! Ex: The demand and supply functions for two
interdependent commodities are given by
𝑄!! = 10 − 2𝑃# + 𝑃$ & 𝑄!" = 5 + 2𝑃# − 2𝑃$
𝑄"! = −3 + 2𝑃# & 𝑄"" = −2 + 3𝑃$
where 𝑄!# , 𝑄"# and 𝑃% denote the quantity demanded,
quantity supplied and price of good i, respectively.
Determine the equilibrium price and quantity for
this two-commodity model

1.6&1.7 National income determination
factors of production
! Factors of production (yếu tố sản xuất): the inputs needed
for creating a good or service, which include land, labor,
entrepreneurship (khởi sự doanh nghiệp), and capital
(vốn, tư bản).

1.6&1.7 National income determination (cont.)
national income
! National income (thu nhập quốc dân) is the monetary
value of the sum total of all final goods and services
produced by the factors of production of a country during
a year.

circular flow of income
! The circular flow of income (vòng chu chuyển của thu
nhập) shows the economy as a simple model where the
households own all the factor of production– land, labour,
capital and enterprise (tổ chức kinh doanh)-– and the
firms produce goods.

circular flow of income
! Money moves from households to firms for the
exchange of goods and services; and money moves
back to households as payment for the use of the
factors of production in the form of rent, wages,
interest and profit.

consumption function
! The consumption function (hàm tiêu dùng) is an
economic formula that measures the relationship
between income and total consumption of goods and
services in the economy.

consumption function
! The consumption function is represented as
𝐶 = 𝐶! + 𝑐𝑌
• Y0 is known as autonomous consumption (tiêu dùng tự
định)
• Slope c is marginal propensity to consume (MPC, xu hướng
tiêu dùng cận biên)

withdrawals
! Withdrawals from the circular flow is money which
leaves the flow, and does not flow back from
households to firms.

withdrawals
• Savings (tiết kiệm): money saved by households
is not spent again so does not flow back to firms

withdrawals
• Taxation (thuế khóa): money paid by households
to the government (this money is not spent on
goods from firms)

withdrawals
• Imports (nhập khẩu): spending by residents on
goods and services made abroad

saving function
! The formula representing the relationship between
consumption, savings and income can be written as:
𝑌 =𝐶+𝑆

saving function
! Saving function (hàm tiết kiệm) establishes a functional
relationship between income and saving.
𝑆 = −𝐶! + (1 − 𝑐)𝑌
• -C0: autonomous saving (tiết kiệm tự định)
• 1 – c: marginal propensity to save (MPS, xu hướng tiết
kiệm cận biên)

example
! Ex: Determine the saving function that corresponds
to the consumption function 𝐶 = 0.8𝑌 + 25

injections
! Injections into the circular flow is concumption
which does not come from households

injections
• Investment: spending by firms on capital stock
• Government spending: spending by central or
local government
• Exports: spending by foreigners on goods and
services made domestically.

balance between injections and withdrawals
• If all the injections equal leakages, the economy is
in equilibrium
• If injections are greater than withdrawals: an
economic growth
• If withdrawals are greater than injections: a
negative economic growth

income and expenditure balance
! If the economy is in equilibrium, the flow of income and
expenditure balance so that
𝑌 =𝐶+𝐼

example
! Ex: Find the equilibrium level of income and
consumption if the consumption function is 𝐶 =
0.6𝑌 + 10 and planned investiment I = 12.

disposable income & discretionary income
• Disposable income (thu nhập khả dụng): income after tax
• Discretionary income (thu nhập tùy dụng): after necessities
out of the disposable income

example
! Ex: Given that
G = 20, I = 35, C = 0.9Yd + 70, T = 0.2Y + 25
Calculate the equilibrium level of national income.

IS-LM model
! The IS-LM model, which stands for “investment-saving” and
“liquidity preference-money supply”, is a Keynesian
macroeconomic model that shows how the maket for economic
goods (IS) interacts with the money market.

IS curve
! The IS curve relates the level of real GDP and the real
interest rate.

interest rate
! Interest rate (lãi suất): interest is what a lender
charges you to borrow money. It is usually expressed
as a percentage of the amount borrowed, known as
the interest rate.

interest rate vs investment
! Higher interest rates reduce investment: higher rates
increase the cost of borrowing and require
investment to have a higher rate of return to be
profitable

IS equation
• In short run, real GDP equals spending: 𝑌 = 𝐶 + 𝐼
• As the interest rate rises, so the investment falls:
𝐼 = 𝑐𝑟 + 𝑑,
where 𝑐 < 0 and 𝑑 > 0, (why?)
• The consumption function is 𝐶 = 𝑎𝑌 + 𝐶&
• The equation, relating national income Y and
interest rate r, is
1 − 𝑎 𝑌 − 𝐶& = 𝑐𝑟 + 𝑑
• It is called the IS schedule (biểu thị trường hàng
hóa).

LM curve
! The LM curve represents the combinations of the
interest rate and income such that money supply and
money demand are equal.

demand for money
! Demand for money comes from three sources:
transactions (giao dịch), precautions (phòng xa) and
speculations (đầu cơ).

demand for money
• Transaction motive: hold money for the
conduction of day-to-day transactions.
• Households: demand money to meet the
household needs and expenditure; business
firms: carry on their bussiness activities.

demand for money
• precautionary motive: hold money for unforeseen
contigent situations, such as accidents, sickness,
etc.

demand for money
! More or less cash holding for the transaction and
precautionary motive directly depends on the income
level of people.
! Let L1 denote the aggregate transaction-
precautionary demand then
𝐿# = 𝑘#𝑌
• k1 is a positive constant, Y is the national income

demand for money
• speculative motive: hold cash as an alternative to
different financial assets. People may use it to
exchange back and forth to make a quick profit.

demand for money
! The speculative demand of money at high interest
rates becomes less, and at low interest rates becomes
high.
! We model this by writing
𝐿$ = 𝑘$𝑟 + 𝑘'
• where L2 denotes speculative demand, k2 is
negative constant and k3 is a positive constant

total demand for money
! The total demand, MD, is the sum of the transaction-
precautionary demand and speculative demand:
𝑀! = 𝐿# + 𝐿$
= 𝑘#𝑌 + 𝑘$𝑟 + 𝑘'

money supply
! Money supply (cung tiền tệ): the total currency and
the liquid assets avaiable in an economy at a given
time. It consists of physical currency, such as coins
and banknotes, and digital money stored in various
forms in banks.

LM schedule
! If the money market is in equilibrium, then 𝑀" = 𝑀!
! 𝑀"∗ = 𝑘#𝑌 + 𝑘$𝑟 + 𝑘', where k2 is negative
This equation, relating national income Y and
interest rate r, is called the LM schedule (biểu tiền
tệ).

equilibrium
! The intersection of two curves is the combination of
the interest rate and real GDP, denoted (𝑟 ∗ , 𝑌 ∗ ), such
that both the money market and the goods market
are in equilibrium.

example
! Ex: Determine the equilibrium income and interest
rate given the following information about the
commodity market:
C = 0.8Y + 100, I = −20r + 1000
and the money market:
MS = 2375, L1 = 0.1Y, L2 = −25r + 2000
What effect would a decrease in the money supply have
on the equilibrium levels of Y and r?

answer
! Ans: IS schedule is 0.2𝑌 + 20𝑟 = 1100 and LM
schedule is 0.1𝑌 − 25𝑟 = 375
The equilibrium levels of Y and r are 5000 and 5,
respectively.

answer (cont.)
! Ans: the general LM schedule
𝑘" 𝑌 + 𝑘# 𝑟 + 𝑘$ = 𝑀%∗
' ('# )*$∗
can be transposed to 𝑌 = − ! 𝑟+
'" '"

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MATHEMATICS

FOR ECONOMICS AND BUSINESS

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! Expression: is a combination of variables, constants

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

• Variable: represent numbers which are unknown or

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

• Constant: takes place a number that is unchanged

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! Equation: a statement that values of two expressions

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! A solution of an equation is any value of the variable

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! Equations are equivalent if they have the same

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! The solution set of an equation is unchanged when

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! Inequality (bất phương trình): a statement that the

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! A solution of an inequality is any number that

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! A line is set of points connecting to make a straight

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! What is common for the points on the blue line?

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! Any line on the coordiate plane can be described by

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! Simultaneous linear equations: two linear equations

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! The solution of a system of simultaneous linear

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

• On the coordinate plane, each linear equation is a

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

! System of simultaneous linear equations may have:

TT GIÁO DỤC SỚM & XUẤT SẮC PMH

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TT GIÁO DỤC SỚM & XUẤT SẮC PMH

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TT GIÁO DỤC SỚM & XUẤT SẮC PMH

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