The Nature of

Mathematical Economics
and Economic Models
 Outline
The nature of mathematical economics
Ingredients of mathematical model
Introduction to function
Drawing a function
Solving a simple system of functions (equations)
 The Nature of
Mathematical Economics

What is Mathematical Economics?

An approach to economic analysis employing
mathematical techniques
The purpose of any theoretical analysis
To derive a set of conclusions/theorems from
a given set of assumptions/postulates thru a
process of reasoning
 The Nature of
Mathematical Economics
Mathematical Economics vs Literary Economics
Statement of assumptions and conclusions
Sentences vs symbols

Reasoning
literary logic vs math. theorems
 The Nature of
Mathematical Economics

Mathematical approach advantages:

More concise and precise
Equipped with a wealth of mathematical
theorems
Explicit assumptions
Suitable for n-variable case
 Example of Literary Economics

Quantity demanded (demand) of a certain good is

determined by its own price, price of other commodity,
income, number of population, and taste.
Assuming a normal good and rationality of consumer,
demand will decrease when its own price increases.
Demand will decrease (increase) when the price of
complementary (substitute) good increases. When the
income of consumer increases, then the demand will
tend to increase
What mathematical notation to summarize all of the
above?
 Equations in
Economics Application
Definitional Equation
Identity Definition
examples: profit, cost, GDP
Behavioral Equation
Function
examples: production, utility
Conditional Equation
Requirement
examples: equilibrium condition S = D
 Ingredients of
Mathematical Model

Variables
Endogenous Exogenous
Dependent Independent

Constant, Coefficient, parameter

(parametric constant)

C = 75 + 10Q TC = 10,000 + 5,000L

C = a + bQ TC = FC + wL
 Introduction to Function

What is function?
Behavioral equation
unique relation from mapping/transformation
process
f: xi y or y = f(xi)
One unique value of xi will only result in one
unique value of y, but one unique value of y
can be resulted from some (>1) values of
xi
 Introduction to Function

Function domain Function range

1.7
 Types of Function

Polynomial Function

For n = 0: constant function

For n = 1: linear function
For n = 2: quadratic function
For n = 3 or more:
degree nth function
 Types of Function
Rational Function
y as a ratio of two polynomials of x

Non-algebraically Function
independent variable (x) is an exponent
example: exponential, logarithm, trigonometric
functions
 Generalization of a Function

Replacing exact numbers with parameters

Hiding exact relationship of the function

1.10
 Summary of Function

Behavioral
Equation
(Function)

Polynomial Rational Non-algebraical

Linear Non Linear

1 or >1
independent
variables

Numeric Parametric
 Drawing a Function

Worth noting in drawing

a graph of a particular function
Identify whether the function has
cross points or asymptote
Determine cross points on
horizontal and vertical axis
Determine the slope
Figure out the shape
 Drawing a Function
y
Cross point
when x=0

(Linear) curve
which has
cross points

Cross point
when y=0
Curve which
has asymptote
Slope
x

Graph a linear function whose line passes

point (-1, 3) and its coefficient/gradient is:
(1) -1 (2) 2 (3) 5 (4) 0
Solving for Particular Function:
system of linear equation
Elimination & Substitution Methods
.(1)
.(2)
Eliminate / substitute one or
more variables
Leave 1 final equation and 1
variable to solve
or
1.14
Solving for Particular Function:
a quadratic function
Using Quadratic formula

1.15
Solving for Particular Function:
general polynomial function
Factoring
f(x) = (x + c1)g(x)
= (x + c1) (x + c2) h(x)
= (x + c1) (x + c2) (x + ci)
to solve quadratic or >2nd degree
polynomial equation

See Exercise
3.3-1(a),5(a)
1.16
Solving for Particular Function:
system of linear equations

Matrix Approach

Then the system of linear equations is

solved by Cramers Rule or Inverse Matrix
methods