Faculty of Economics and Business

Universitas Gadjah Mada

Mathematics for Economics

Semester I  AY 2019-2020

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 Hi guys,
introducing . . .
I am
du Mairy

duMairy,
duMairy, © 2010
© 2019, FEB-UGM
 Basic Things to Know
• Main reference: Alpha Chiang & Kevin Wainwright,
4th edition: Fundamental methods of Mathematical
Economics.
• My working-room (in case you need a consutation):
MEP Building, second floor, Jln. Teknika Utara.
Please, arrange an appoinment first.
• Sign of class cancellation or postponement: 14.01.
• Please sharpen your mathematical skill with your
own interest, do not wait for assignment/homework!

duMairy, © 2019, FEB-UGM

 Sources of Grades
No. Source Weight
1 Mid-Term Exam 30%
2 Final-Term Exam 40%
3 Assignments 30%
Total 100%

No. Sources of Grade Scores Weight Weighted

Earned Scores
1 Mid-Term Exam 70 30% 21
2 Final-Term Exam 65 40% 26
3 Assignments 80 30% 24
Total 71

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 EC ON OM ICS
A science that deals with human behaviour
in managing their households.
persons, individuals family
directors, management firm, company
government, community country, nation
A science that studies resource allocation.
A science on efficiency.
A science on optimization.

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 MACRO-MICRO LINKAGE

Subjects of Micro-Economics are individual persons and

firms. Subjects of Macro-Economics are community and
the government .
Economic agents in macro –scope consist (are the sets) of
economic agents in micro-scope.
Macroeconomic events are “sets of interactions” of
microeconomic events.
Movements and developments of macroeconomic
variables affect microeconomic variables.

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 MATHEMATICS and/in ECONOMICS

Functions of Mathematics in Economics:

1. as an auxiliary tool of analysis;
2. as the foundation of special business/ec. analysis.
By mathematics:
1. behaviours of economic/business variables will be
or can be easier to understand and explain;
2. analysis of various economic problems can be
easier to be worked out;
3. economic/business will be or can be carried out
more accurately and more exact.

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 Law of Demand

If the price of a good increases then the

quantity demanded will decrease, and if the
price decreases then the quantity demanded
will increase.

142 characters (letters, reading

signs, and blank spaces)
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Unit Price Quantity Demanded

PRICE affects QUANTITY

(QUANTITY is affected by PRICE)
PRICE QUANTITY
QUANTITY = f (PRICE)
P Q
Q = f (P)

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 Function

Function is a mathematical expression that

shows a causal relationship of a certain
variable* with respect to one or more
variable(s) that influence** it.

* is called dependent variable.

** is called independent variable(s)

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 TYPES OF FUNCTION

1. Based on the number of independent variables:

Simple Function
Multiple Function

2. Based on location of its variables:

Explicit Function
Implicit Function

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3. Based on the degree or power of variables
Linear Function
Non-Linear Function
4. Based on the realtionship between/among its
variables:
Behavioural Function
Identity

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 Simple Function and Multiple Function

Simple Function
contains only one independent variable.
y = f(x) y = 5+2x
S = f(r) S = 500.000+20.000r
Multiple Function
contains more than one independent variable.
y = f(x,z) y = 5+2x  4z
S = f(r,Y) S = 500.000+20.000r+0,10Y

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 Explicit Function and Implicit Function

Explicit Function
the dependent variable lies on a different side from the
independent variable(s).
y = f(x) y = 5+2x
y = f(x,z) y = 5+2x  4z
Implicit Function
all variables are located on the same side; in some cases it
is uneasy to identify which one is the dependent and the
independent variables.
f(x,y) = 0 2x  y + 5 = 0
f(x,y,z) = 0 2x  y  4z + 5 = 0

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 Linear Function and Non-linear Function

Linear Function
all variables are in the power of one; sometimes is called
the function of degree one; the graph is a (straight) line.
y = f(x) y = 5 + 2x
y = f(x,z) y = 5 + 2x  4z

Non-linear Function
a function wherein at least one the variables is in the power
of other-than-one; the graph is a curve.
y = 5+2x2 y = 5 + 2x  4 z
y = 5+2x  3x2 2x  5 y + 4z2  7 = 0

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 Exponential and Logarithmic Functions

Linear and non-linear functions are generally called

power functions (Indonesia: fungsi pangkat).
Exponential Function
a function wherein the independent variable is a power.
y = 5x y = n.ek.x + c [e  2,72]

Logarithmic Function
a function that contains variable(s) in logarithmic term; this
type of function is the inverse of exponential function.
y = nlog5x y = aln(1+x) + b

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 Behavioural Function and Identity
Behavioural Function
a function that explains causal relationship between the
dependent and the independent variable(s).
behavioural function is also called equation (Ind: persamaan).
C = f(Q) C = 2.000.000 + 4.000Q micro
C = f(Y) C = 300.000 + 0,80Y macro

Identity
a mathematical expression that explains relation of several
variables in terms of definition or category.
identity is also called equaltity (Indonesia: kesamaan).
C = FC + VC R = P Q micro
Y =C+I+G+XM macro
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 Equation, Equality, and Inequality

Equality: R=PQ C = FC + VC
Inequality: R  8.000.000 C  7.000.000
Equation: R=5000Q C=2.000.000+4000Q
Equality reflects a computation formulae, or a definition,
or a detailed category. Inequality shows a certain
condition or requirement that must be fulfilled by one or
several variable(s). Both equality and inequality are
generally called identity.
Equation explains a behaviour of causal relationship, that
is, the effect of changes in independent variable(s) on the
dependent variable.

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 Modeling a Function

Pattern or direction of the causality:

CAUSE EFFECT
Independent Vrbl Dependent Vrbl
expressed in functional notation:
EFFECT = f(CAUSE)
Dependent Vrbl = f(Independent Vrbl)
if the direction: x  y, then the notation: y = f(x)
but if the pattern: y  x, then the notation: x = f(y)

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 Modeling a Function light quiz

Suppose r represents rate of interest, s represents

savings, what is the functional model?
r = f(s) or s = f(r)
Let w  wage and j  job, what is the model?
j = f(w) or w = f(j)

Which functional model is true:

P = f(R) or R = f(P)
[P  power, kekuasaan; R  richness]

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 Drawing a Function

Drawing a function here means presenting an equation

(or identity) graphically on a Cartesian co-ordinate
system.
Pure Mathematics:
Independent Variable (x) on horizontal axis
Dependent Variable (y) on vertical axis
Applied Mathematics in Economics:
no such a regulation, it is (and you are) free

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 Drawing a Linear Function
The graph of a linear function is a straight line or
linear curve. A straight line can be drawn if
coordinates of two points are known, namely, by
connecting the two identified points.
If an equation or identity is given, an easy way to
draw the line or curve is by setting its two
intercepting points.
The two intercepting points are: (first) interception
point on the x –axis (by setting y=0), and (second)
interception point on the y -axis (by setting x=0).

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 Drawing a Linear Function
General form of a Linear Function: y = a + bx
x : independent variable
y : dependent variable
a : a constant, the value of y if or at x=0, the
intercept of y=f(x) on the vertical or y-axis.
b : slope, represents the response of y with
respect to changes in x, b=y/x.

x=0 y=a y=0 x = a/b

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 Drawing a Linear Function
General Form : y = a + bx

y = 6 + 2x y = 60  3x
y y
60
U
D
D
6 U
x x
-3 O O 20
b>0 positively sloped b<0 negatively sloped
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 What is a Slope?
The ratio of changes (increases, decreases) in the
variable on vertical axis (y, dependent variabel) with
respect to changes in the variable on horizontal axis
(x, independent variabel).
slope = changes in dependent variable (y) divided by
changes in a corresponding independent variable (x)

b = y/x
Slope of a line or curve represents response of a certain
variable to changes in another variable that affects it.
Slope of a linear function is constant, the b (that is,
y/x) never changes.

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 Positive Relationship
between two variables
y=a+bx b>0

Increases in the independent variable x

causes (followed by) increases in the
dependent variable y.
Decreases in the independent variable x
causes (followed by) decreases in the
dependent variable y
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 Recreation Spending
at various Income Level
Recreation Yearly
Spending Income
C Y
$1,000 $10,000
$2,000 $20,000
$3,000 $30,000
$4,000 $40,000
Look, the higher the income (Y) the more the
recreation spending (C). C and Y are positively
related.
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C (Ð ribu) Positively Sloped Line

4 D
b = 1/10 = 0,1
C
3
C=1
B
2
E
A Y=10
1

0
Y
10 20 30 40 (Ð ribu)
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 Negative Relation
between two variables

y=a+bx b<0

Increases in the independent variable x

causes (followed by) decreases in the
dependent variable y.
Decreases in the independent variable
x causes (followed by) increases in
the dependent variable y
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Quantity of flash disk sold at various Price Level

Price of f-d Sales Volume

($ per unit) (unit)
$20 25,000
$15 50,000
$10 75,000
$5 100,000
P Q

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P ($) Negatively Sloped Curve

A
20

B b = -5/25 = -0,2
15
Y=-5
10 C
E
X=25 D
5

0
Q
25 50 75 100
(thousand units)
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If two variables are Independent
(not related)

y=a+bx b=0  y=a

Changes (increases, decreases) in the

independent variable x has no effect on
the dependent variable y.
(y is constant or un-affected when x
changes).
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The amount of tooth-paste consumed by a
family at various level of their Income
Income TP Consumed
(Ð/month) (tube)
$10,000 3
$20,000 3
$30,000 3
$40,000 3
Y Q

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Q (tube)
Horizontal Curve

B C
3 A D
Y=10 Q=0
2
b = 0/10 = 0
1

10 20 30 40
Y
0 ($ 000)
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Can the slope Yes, it can if
of curve the curve is not
change? linear

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y

3
K
slope at B = 2/30
2 B y=2

1
x=30

0 10 20 30 40
x
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y

4
slope at K = 2/10
3
K
slope at B = 2/30
2 B y=2

x=10
1
x=30

0 10 20 30 40
x
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 y

20

15

10 y=
-10
S

5
x=50

25 50 75 100 x
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 Quadratic-Parabolic Equation
General Form: y = ax2 + bx + c

y y
ym a<0
a>0

xm

xm
ym

the coordinate of extrem points:

xm= b/2a; ym=(b24ac)/4a
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 Movements along a Curve
Shifts of a Curve
If y=f(x), changes in x will cause changes in y.
Graphically this will result in movements along
the curve.
Besides moving along its own-self, a curve can
also shift (upward, or downward). This happens
if changes in the dependent variable y are not
caused changes in the independent variable x,
but by changes in influencing variable(s) other-
than x.

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y Shifts of a Curve

3 K (25; 3)
B (40; 3)

2 A (25; 2)

0 10 20 25 30 40 xx
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 y

K (25; 3) B (40; 3)

A (25; 2)

Movement from A to B is a movement along a curve

y changes (increases) because x changes (increases)
Movement from A to K is a shift of a curve
y changes (increases) while x does not change
What makes y change? What causes y change?

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 Drawing Non-linear Functions

Graphs of non-linear functions can take many kinds

of shape. It depends on the degree or type of the
corresponding non-linear function.
There is no “short-cut” for completely drawing any
non-linear function.
Non-linear functions frequently used in economic
(including business and managerial) analysis are
those of quadratic-parabolic, cubic, exponential,
and logarithmic.

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 Drawing Non-linear Functions
In drawing a non-linear function regarding economic
analyses the more important thing is the location
(coordinate) of special points of interest of the
corresponding function.
Those special points of interest are:
- intersections on the horizontal and vertical axis
- extrem points (maximum and minimum values)
- inflexion or turning point
- inter-curve intersections (in case of more than
one function or curves)

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