1.1 Sequences Slides

Mathematics for Economists
Sequences
Sequences
• Economists are often interested in how variables change over time.

• Sequences of observations.
1
Consider a model of a perfectly competitive market.
• Quantity supplied (s) is an increasing function of price (p).

• Quantity supplied (d) is a decreasing function of price (p).
2

3

4

5

6

7
• The market is in equilibrium when s = d.

8
Suppose the market is always in equilibrium.
• Could there still be price fluctuations?
9

• Periodic external “shocks” to the demand and/or supply functions.
10

11

12

13

14

15
Another possibility: Time delays within the market.
• For example: Supply depends on the market price in the previous

time period.
16

time period.
17

time period.
18

time period.
19

time period.
20

time period.
21

time period.
22

time period.
23

time period.
24

time period.
25

time period.
26

time period.
27

time period.
28

time period.
29

time period.
30

time period.
31

time period.
32
Example: Linear supply and demand functions
st = 10pt−1 − 60
dt = 75 − 5pt
Note: Supply in time period t is determined by price in time period t − 1,

but demand is determined by the price in the same time period.
• pt is the price in period t.

• pt−1 is the price in period t − 1.
33
Example: Linear supply and demand functions
st = 10pt−1 − 60
dt = 75 − 5pt
In equilibrium, st = dt .
• We can use these 3 equations to solve for pt as a function of pt−1 :
pt = 27 − 2pt−1
This gives us a sequence of equilibrium prices: p1 , p2 , p3 , p4 , . . .
• If you know the price in any time period, you can calculate the price
in any other time period.
• How does this sequence behave?
34
A sequence is an ordered list of numbers.
• Each of those numbers is called a term or an element of the

sequence.
• A sequence normally has a first term, but need not have a last term
(it could be infinite).
Usually represented as:
x1 , x2 , x3 , x4 , . . . or x0 , x1 , x2 , x3 , . . .
35
Fibonacci sequence
0, 1, 1, 2, 3, 5, 8, 13, 21, . . .
• The first and second terms are 0 and 1.

• From the third term onwards, each term is the sum of the previous
two terms.
36
Fibonacci sequence
From the third term onwards, each term is the sum of the previous two
terms.
Algebraically: xi = xi−1 + xi−2
A function that relates the current state of a discrete variable (xi ) to its
previous state(s) (e.g., xi−1 ) is called a difference equation.
• Another type is a (first order) linear difference equation:

xi = bxi−1 + c
• For example: pt = 27 − 2pt−1
37
pt = 27 − 2pt−1
The appearance of this sequence depends on its starting point.
• What is p1 ? 8?
8 11 5 17 −7 41 −55 137 −247 521
38
pt = 27 − 2pt−1
The appearance of this sequence depends on its starting point.

• What is p1 ? 8? 9?
9 9 9 9 9 9 9 9 9 9
• 9 is called a particular solution to this equation: Every term is equal

to the preceding term. 39
xi = bxi−1 + c
If b = 0, then xi = c.
=⇒ There’s only one sequence satisfying this difference equation:

• Every term in the sequence equals c.
If b ̸= 0, then for any given value of c, there’s an infinite number of

sequences satisfying the difference equation.
• For example, if b = 1 then: xi = xi−1 + c

• There’s an infinite number of sequences in which each term is c
greater than the preceding term.
• This type of sequence is called an arithmetic progression.
40
xi = bxi−1 + c
If b ̸= 1, then, among the infinite number of sequences satisfying the

difference equation, there is one where each term is equal to the
preceding term.
• Called the particular solution.
41
xi = bxi−1 + c
If pt = 27 − 2pt−1 , what is the particular solution?
42
xi = bxi−1 + c
pt = 27 − 2pt−1
43
xi = bxi−1 + c
pt = 27 − 2pt−1
pt = 27 − 2pt
44
xi = bxi−1 + c
pt = 27 − 2pt−1
pt = 27 − 2pt
3pt = 27
45
xi = bxi−1 + c
pt = 27 − 2pt−1
pt = 27 − 2pt
3pt = 27
pt = 9
46
xi = bxi−1 + c
pt = 27 − 2pt−1
pt = 27 − 2pt
3pt = 27
pt = 9
In general, if xi = bxi−1 + c (and b ̸= 1), the particular solution is given

by:
c
xi =
1−b
47
How do sequences behave?
48
The particular solution c/(1 − b) has a key role in the behaviour of

sequences given by a (first order) linear difference equation
xi = bxi−1 + c.
• It may oscillate around c/(1 − b).

• It may converge to c/(1 − b)
If we know the behaviour of a sequence, we can predict its future values.
49
The difference between xi and the particular solution is:

c
xi −
1−b
The absolute value value of this expression is denoted by
c
xi −
1−b
and gives us the distance between xi and the particular solution.
• We need to look at the absolute value since the expression is

negative when xi is less than the particular solution.
50
Since xi = bxi−1 + c, we can show that:

c c
xi − = b xi−1 −
1−b 1−b
51

c c
xi − = b xi−1 −
1−b 1−b
The value of b tells us a lot about the behaviour of the sequence.
c c
If b > 0, then xi − 1−b has the same sign as xi−1 − 1−b .
• I.e., either all terms in the sequence are bigger than the particular
solution, or they are all smaller than the particular solution.
52

c c
xi − = b xi−1 −
1−b 1−b
c c
If 0 < b < 1, then xi − 1−b is smaller than xi−1 − 1−b .
• I.e., the distance between xi and the particular solution is decreasing.

• E.g., if b = 12 , then this distance is halved in each time period.
• The sequence is converging to c
1−b .
• Will it ever reach 1−b
c
?
• No. But limi→∞ xi = 1−b c
.
53

c c
xi − = b xi−1 −
1−b 1−b
c c
If b > 1, then xi − 1−b is bigger than xi−1 − 1−b .
• I.e., the distance between xi and the particular solution is increasing.

• E.g., if b = 2, then this distance is doubled in each time period.
• The sequence is diverging from c
1−b .
54

c c
xi − = b xi−1 −
1−b 1−b
c c
If b < 0, then xi − 1−b is of opposite sign to xi−1 − 1−b
• and the sequence oscillates around c

1−b .
And again, if −1 < b < 0, the distance between xi and the particular
solution is decreasing.
• The sequence is converging to c

1−b .
If b < −1, the distance between xi and the particular solution is

increasing.
• The sequence is diverging from c

1−b .
55
pt = 27 − 2pt−1
Recall that the particular solution is 9 and note that b = −2.
• b < 0, so the sequence oscillates around 9.

• b < −1, so the sequence diverges from 9.
56
To summarise, the behaviour of sequences of the form xi = bxi−1 + c

depends on the value of b as follows:
57
General solutions
• We now know how to find the particular solution to a difference

equation of the form xi = bxi−1 + c.
• But if b ̸= 0, there are infinitely many sequences that satisfy the
equation, one for every possible starting term x0 .
• An expression that describes every possible sequence satisfying the
equation is called a general solution.
• It should be a function xi (i, x0 ) that assigns a number for every i,
given some starting term x0 .
• Even though xi = bxi−1 + c describes every sequence satisfying the
equation, it is not a general solution.
• It doesn’t directly assign a number to each xi as xi−1 is not a number
but a variable that changes with i (unlike x0 which is just a number).
58
General solutions
Let’s try to find the general solution for xi = bxi−1 + c. First recall that:

c c
xi − = b xi−1 − (1)
1−b 1−b
Similarly:
c c
xi−1 − = b xi−2 − (2)
1−b 1−b
By inserting the RHS of (2) into the RHS of (1), we get:

c 2 c
xi − = b xi−2 −
1−b 1−b

2 c c
xi = b xi−2 − +
1−b 1−b
59
General solutions

2 c c
xi = b xi−2 − +
1−b 1−b
• This gives xi as a function of i and xi−2 . By repeating these steps,

we can find xi as a function of i and x0 (the general solution).
• First note that, for any n:

c c
xi = b n xi−n − +
1−b 1−b
Let’s pick i such that i = n, then i − n = 0 and xi−n = x0 :

i c c
xi = b x0 − +
1−b 1−b
60
General solutions

c c
xi = b 2 xi−2 − +
1−b 1−b
• This gives xi as a function of i and xi−2 . By repeating these steps,

we can find xi as a function of i and x0 (the general solution).
• First note that, for any n:

c c
xi = b n xi −n − +
1−b 1−b
Let’s pick i such that i = n, then i − n = 0 and xi−n = x0 :

i c c
xi = b x0 − +
1−b 1−b
This is a general solution to xi = bxi−1 + c.
61
General solutions

i c c
xi = b x0 − +
1−b 1−b
Note that the choice to start with x0 was arbitrary. We could have picked
i such that i − n = 1 and n = i − 1. This would give us an equivalent
general solution:

c c
xi = b i−1 x1 − +
1−b 1−b
These are both general solutions as they have the key property that
everything except i is just a number (a constant).
=⇒ You can insert any value of i into this expression to find the value of
x in time period i.
62
General solutions

i c c
xi = b x0 − +
1−b 1−b
Thus, given pt = 27 − 2pt−1 , the general solution is:
pt = (p0 − 9)(−2)t + 9
63
xi = bxi−1 + c
An important special case is when c = 0. Then xi = bxi−1 + c becomes:
xi = bxi−1
Then each term in the sequence is b times as large as the previous term.
• xi
xi−1 is called the constant ratio.
The particular solution is:

c
xi = =0
1−b
And the general solution is can be given by:
xi = x1 b i−1
This is a geometric progression.
64
Geometric progressions, xi = x1 b i−1
The sequence becomes:
x1 = x1 b 0 x2 = x1 b 1 x3 = x1 b 2 x4 = x1 b 3 and so on
x1 , x1 b, x1 b 2 , x1 b 3 , . . .
a, ab, ab 2 , ab 3 , . . .
65
Geometric progressions
I will receive £100 one year from now. What is this worth to me now?
Geometric progressions are very important in economics because they can

help us answer such questions.
66
Present value
• I could borrow (and spend) some money now, and next year use the
£100 to repay the loan.
• The amount I can borrow in this way depends on the rate of interest.
• E.g., if the interest rate is 25%, then I could borrow £80 now. The
interest payable next year would then be 0.25 × £80 = £20.
67
Present value
interest payable next year would then be 0.25 × $ 80 = $ 20.
80 + 0.25 × 80 = 100
Here, 80 is the principal, 0.25 × 80 is the interest payment, and 100 is

the total amount you have to pay back.
68
Present value
interest payable next year would then be 0.25 × $ 80 = $ 20.
80 + 0.25 × 80 = 100
80(1 + 0.25) = 100
100
80 =
1 + 0.25
• £80 is the present value of £100 one year from now.

69
Present value
What if I will receive £100 two years from now?
• If the interest rate is 25%, then I could borrow (and spend) £64 now:
64 + 0.25 × 64 + 0.25(64 + 0.25 × 64) = 100

64(1 + 0.25)(1 + 0.25) = 100
100
64 =
(1 + 0.25)2
Generally, the present value of £y in t years time is:
y
or equivalently: y (1 + r )−t
(1 + r )t
where r is the interest rate.
70
Present value
The present value (PV) of £y in t years time is:
y (1 + r )−t
t=0 t=1 t=2 t=3 ...

y y (1 + r )−1 y (1 + r )−2 y (1 + r )−3 ...
This is a geometric progression: a, ab, ab 2 , ab 3
• Where a = y and b = (1 + r )−1 .
71
Present value
Suppose instead that you receive £100 this year, another £100 next year,
and yet another £100 the year after that. If the interest rate is 25%,
what’s the value of this stream of income today?
• Just add the present value of each year’s income:
100 + 100(1 + 0.25)−1 + 100(1 + 0.25)−2 = 244
72
Present value
100 + 100(1 + 0.25)−1 + 100(1 + 0.25)−2 = 244

PV this year
73
Present value
100 + 100(1 + 0.25)−1 + 100(1 + 0.25)−2 = 244

PV this year + PV next year
74
Present value
100 + 100(1 + 0.25)−1 + 100(1 + 0.25)−2 = 244

PV this year + PV next year + PV in two years
75
Present value
100 + 100(1 + 0.25)−1 + 100(1 + 0.25)−2 = 244

PV this year + PV next year + PV in two years = 244
• Before calculating anything, you should expect something slightly

less than 3 · 100 = 300.
• Always confirm that your numbers make sense.
76
Present value
In general, the total present value of £y in each of n years, starting now,

is:
y + y (1 + r )−1 + y (1 + r )−2 + y (1 + r )−3 + ... + y (1 + r )−(n−1)
This is the sum-to-n of a geometric progression:
a + ab + ab 2 + ab 3 + · · · + ab n−1
Where a = y and b = (1 + r )−1 .
• a is always the first term in the sum.

• b can always be found by dividing any term by the preceding term.
77
Sum-to-n
The sum-to-n of a geometric progression a, ab, ab 2 , ab 3 , . . . is just the

sum of its first n terms.
sn = a + ab + ab 2 + ab 3 + · · · + ab n−1
E.g., a = 2, b = −3:
1 2 3 4 5 6 7 8 9
xi 2 −6 18 −54 162 −486 1458 −4374 13122
sn 2 −4 14 −40 122 −364 1094 −3280 9842
78
Sum-to-n

sn = a + ab + ab 2 + ab 3 + · · · + ab n−1
E.g., a = 2, b = −3:
1 2 3 4 5 6 7 8 9
xi 2 -6 18 −54 162 −486 1458 −4374 13122
sn 2 -4 14 −40 122 −364 1094 −3280 9842
79
Sum-to-n

sn = a + ab + ab 2 + ab 3 + · · · + ab n−1
E.g., a = 2, b = −3:
1 2 3 4 5 6 7 8 9
xi 2 -6 18 −54 162 −486 1458 −4374 13122
sn 2 −4 14 −40 122 −364 1094 −3280 9842
80
Sum-to-n

sn = a + ab + ab 2 + ab 3 + · · · + ab n−1
E.g., a = 2, b = −3:
1 2 3 4 5 6 7 8 9
xi 2 -6 18 -54 162 −486 1458 −4374 13122
sn 2 −4 14 -40 122 −364 1094 −3280 9842
sn itself forms a sequence (a geometric series).
81
Sum-to-n
E.g., a = 2, b = −3.
1 2 3 4 5 6 7 8 9
xi 2 −6 18 −54 162 −486 1458 −4374 13122
sn 2 −4 14 −40 122 −364 1094 −3280 9842
Whenever b ̸= 1, we can calculate sn using the following formula:
1 − bn

sn = a
1−b
In the example above, if n = 9 we get:
1 − (−3)9

s9 = 2 = 9842
1 − (−3)
82
Sum-to-n
E.g., a = 2, b = −3.
1 2 3 4 5 6 7 8 9
xi 2 −6 18 −54 162 −486 1458 −4374 13122
sn 2 −4 14 −40 122 −364 1094 −3280 9842
Whenever b ̸= 1, we can calculate sn using the following formula:
1 − bn

sn = a
1−b
In the example above, if n = 9 we get:
1 − (−3)9

s9 = 2 = 9842
1 − (−3)
83
Sum-to-n
sn = a + ab + ab 2 + ab 3 + · · · + ab n−1

1−b n
What if b = 1? We clearly can’t use the formula sn = a 1−b as we
can’t divide by zero. The sequence becomes:
sn = a + a × 1 + a × 12 + a × 13 + · · · + a × 1n−1
sn = na
84
Sum-to-n
The total present value of £y in each of n years, starting now, is:
y + y (1 + r )−1 + y (1 + r )−2 + y (1 + r )−3 + ... + y (1 + r )−(n−1)
This is the sum-to-n of a geometric progression with a = y and

b = (1 + r )−1 .
1 − bn 1 − (1 + r )−n

sn = a =⇒ sn = y
1−b 1 − (1 + r )−1
E.g., if y = 500, r = 0.07 and n = 10, then the total present value is:
1 − (1.07)−10

s10 = 500 ≈ 3757.6
1 − (1.07)−1
85
Sum-to-n
The total present value of £y in each of n years, starting next year, is:
y (1 + r )−1 + y (1 + r )−2 + y (1 + r )−3 + ... + y (1 + r )−n
This is the sum-to-n of a geometric progression with a = y (1 + r )−1 and

b = (1 + r )−1 .
1 − bn 1 − (1 + r )−n

−1
sn = a =⇒ sn = y (1 + r )
1−b 1 − (1 + r )−1
E.g., if y = 500, r = 0.07 and n = 10, then the total present value is:
1 − (1.07)−10

−1
s10 = 500 × (1.07) ≈ 3511.8
1 − (1.07)−1
86
Summation operator
P
Geometric series are often written using the summation operator :
n
X
ab i−1 = a + ab + ab 2 + · · · + ab n−1
i=1
It’s the sum of all numbers of the form ab i−1 , where i runs in integer
values from 1 to n.
• Thus, we can write:
n
1 − bn
X
i−1
ab =a
1−b
i=1
87
Exercise
An individual will receive £3000 each year for n years, starting in three
years’ time.
Given a constant interest rate of r = 0.01, the present value of this

income stream is:
n
X
3000(1.01)−(2+i)
i=1
This is the sum-to-n of a geometric progression with first term a and

constant ratio b. Evaluate a and b. What is sn ?
88

1.1 Sequences Slides

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1.1 Sequences Slides

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Mathematics for Economists

• Economists are often interested in how variables change over time.

• Quantity supplied (s) is an increasing function of price (p).

• Quantity supplied (s) is an increasing function of price (p).

• Quantity supplied (s) is an increasing function of price (p).

• Quantity supplied (s) is an increasing function of price (p).

• Quantity supplied (s) is an increasing function of price (p).

• Quantity supplied (s) is an increasing function of price (p).

• The market is in equilibrium when s = d.

• Could there still be price fluctuations?

• Could there still be price fluctuations?

• Could there still be price fluctuations?

• Could there still be price fluctuations?

• Could there still be price fluctuations?

• Could there still be price fluctuations?

• Could there still be price fluctuations?

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

• For example: Supply depends on the market price in the previous

Note: Supply in time period t is determined by price in time period t − 1,

• pt is the price in period t.

• We can use these 3 equations to solve for pt as a function of pt−1 :

This gives us a sequence of equilibrium prices: p1 , p2 , p3 , p4 , . . .

• Each of those numbers is called a term or an element of the

Usually represented as:

• The first and second terms are 0 and 1.

Algebraically: xi = xi−1 + xi−2

• Another type is a (first order) linear difference equation:

The appearance of this sequence depends on its starting point.

8 11 5 17 −7 41 −55 137 −247 521

The appearance of this sequence depends on its starting point.

• 9 is called a particular solution to this equation: Every term is equal

=⇒ There’s only one sequence satisfying this difference equation:

If b ̸= 0, then for any given value of c, there’s an infinite number of

• For example, if b = 1 then: xi = xi−1 + c

If b ̸= 1, then, among the infinite number of sequences satisfying the

• Called the particular solution.

If pt = 27 − 2pt−1 , what is the particular solution?

If pt = 27 − 2pt−1 , what is the particular solution?

If pt = 27 − 2pt−1 , what is the particular solution?

If pt = 27 − 2pt−1 , what is the particular solution?

If pt = 27 − 2pt−1 , what is the particular solution?

If pt = 27 − 2pt−1 , what is the particular solution?

In general, if xi = bxi−1 + c (and b ̸= 1), the particular solution is given

The particular solution c/(1 − b) has a key role in the behaviour of

• It may oscillate around c/(1 − b).

If we know the behaviour of a sequence, we can predict its future values.

The difference between xi and the particular solution is: