Lecture notes on Mathematics for Business

Nguyen Thi Thu Van

International School of Business, UEH, Vietnam

3 Jan - 2020

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 Chapter Zero: Linear Equations, Non-linear Equations

Outline of the chapter: The aim of this chapter is to revisit the linear and
non-linear equations. The topic includes
Expressions with one or more variables

Equations, inequalities of one or more variables

Linear, non-linear equations

Linear, non-linear inequalities

Sketching linear equations/inequalities of 2 variables

Haeussler E., Paul R., and Wood R (2014). Introductory Mathematical Analysis for Business, Economics, and the Life

and Social Sciences (13th ed.). Pearson.

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 Chapter Zero: Linear Equations, Non-linear Equations 0.1. Algebraic expressions with one or more variables

An algebraic expression is simply a combination of letters, brackets and

other mathematical symbols such as +, −, ×, :, and so on. Letters used
in algebraic expressions represent variables/unknown.

Example
x
20 + x, , x + 2y , x 2 + 3(y − 5),
y

Note that in order to evaluate these expressions, you need the numerical
value of each letter and can work out the final value by performing the
operations in the order: Brackets first (B) - Indices second (I) - Division
and Multiplication third (DM) - Addition and Subtraction fourth (AS).
This is sometimes remembered using the acronym BIDMAS!

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 Chapter Zero: Linear Equations, Non-linear Equations 0.1. Algebraic expressions with one or more variables

Mathematical expressions provide a precise way of representing

calculations that need to be worked out in many business models.
Example
A company has a policy to reimburse employees for use of their cars for
travel: for the first 50 miles they may be able to claim 90 cents a mile, but
this could fall to 60 cents a mile thereafter. If the distance, x miles, is no
more than 50 miles, then travel expenses, E (in dollars), could be worked
out using the formula E = 0.9x. If x exceeds 50 miles, the employee can
claim $0.9 a mile for the first 50 miles but only $0.6 a mile for the last
(x − 50) miles. The total amount is E (x) = 0.9 × 50 + 0.6(x − 50).

Travel expenses can therefore be worked out using two separate

expressions:
E = 0.9x when x is no more than 50 miles,
E = 15 + 0.6x when x exceeds 50 miles.
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 Chapter Zero: Linear Equations, Non-linear Equations 0.2. Equations, Inequalities of one or more variable

An equation is a mathematical statement that consists two equal algebraic

expressions, one on each side of an ’equals’ sign. For example,
2x = 5, 2x = 3y are equations. Below are some equations/formulas
commonly used in economics:
Example
Net Income = Revenue – Expenses (net income equation)

Assets = Liabilities + Shareholder’s Equity (accounting equation)

[Business assets are items of value your business owns. Liabilities are
debts you owe. And, business equity is how much ownership you have
in your business.]

Break-even Point = Fixed Costs / (Sales Price Per Unit – Variable

Costs Per Unit) [Use the break-even point formula to determine how
many products you need to sell during a period to break even.]

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 Chapter Zero: Linear Equations, Non-linear Equations 0.2. Equations, Inequalities of one or more variable

Inequality identifies two algebraic expressions are not equal by means of

the symbols like 6=, <, >, ≤, ≥. For example, x < 2, x + 3y > 5.

Inequalities arise in business when, for instance, there is a budgetary

restriction on resource allocation.
Example
A firm’s Human Resources department has a budget of $25,000 to spend
on training and laptops. Training courses cost $700 and new laptops are
$1200.
(a) If the department trains E employees and buys L laptops, write down
an inequality for E and L.

(b) If 12 employees attend courses, how many laptops could be bought?

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 Chapter Zero: Linear Equations, Non-linear Equations 0.3. Linear, non-linear equations

A linear equation is of the form

a multiple of x + a multiple of y = a number

That is ax + by = c in which a, b, c are given, and x and y are variables.

For example, 2x + 3y = 1.

Equations that are not falling in the above form are called non-linear
equations. For example, 2x 2 + 1 = 2, x + y 3 = 4.

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 Chapter Zero: Linear Equations, Non-linear Equations 0.4. Linear/non-linear inequalities

Similar to linear equations, a linear inequality is of the form

a multiple of x + a multiple of y < a number (or >, ≤, ≥)

For example x + y > 2.

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 Chapter Zero: Linear Equations, Non-linear Equations 0.5. Sketching a linear equation/inequality of 2 variables

In general, to sketch a straight line from its mathematical equation, it is

sufficient to perform the following steps:
calculate the coordinates of any two distinct points lying on it by
simply choosing a numerical value for x and to substitute it into the
equation and then using the equation obtained to deduce the
corresponding value of y .

plot these two points on graph paper and use a ruler to draw the line
passing through them.
Noting that the easiest thing to choose a value of x (in terms of the
amount of arithmetic involved) is to put x = 0 and find y and then to put
y = 0 and find x.
Example
Sketch the line according to the equation 2x + 3y = 6.
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 Chapter Zero: Linear Equations, Non-linear Equations 0.5. Sketching a linear equation/inequality of 2 variables

Graphing linear inequalities is nearly similar to doing with linear equation.

The difference is that the solution to the inequality is not the drawn line
but the area of the coordinate plane that satisfies the inequality. So you
need to do as follows:
draw a line of equation. This line divides the coordinate plane into
two halves and is called boundary line. One side of the boundary line
contains all solutions to the inequality.

choose a test point not lying on the boundary line. If coordinates of

the test point satisfy the inequality then the solution set of the
inequality is the part which consisting the point, otherwise choose
other part as the solution set. The boundary line is dashed for > and
< and solid for ≥ and ≤.

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 Chapter Zero: Linear Equations, Non-linear Equations 0.5. Sketching a linear equation/inequality of 2 variables

The area shaded darkly in the figure is the set of all points (x, y ) satisfying
the inequality y ≤ x + 2

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 Chapter 1. Mathematics of Finance

Outline of the chapter: In this chapter, we will introduce some basic

features in Finance.
Percentages

Simple interest - Compound interest

Geometric series. Savings - Loans.

Investment appraisal

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 Chapter 1. Mathematics of Finance 1.1. Percentages

What is a percentage?

Percentage changes - scale factors

How to compute overall percentage changes

Applications of percentages in macroeconomics
Index number

Adjust value data for inflation

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 Chapter 1. Mathematics of Finance 1.1. Percentages

The word percentage literally means per cent, i.e. per hundred or out of
100. It stands for a portion of a whole expressed as a number between 0
and 100 rather than as a fraction and it is represented by the symbol %
Example
20 students out of a total of 37 in the student list are female. What
percentage are female?

20
Answer. Our class has 37 × 100 ≈ 54.3% female students. [This does not
mean that there are more than 54 female students in the class.]

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 Chapter 1. Mathematics of Finance 1.1. Percentages

An investment rises from $2,500 to $3,375. So

3375−2500
The percentage increase of the investment is 2500 = 0.35 = 35%

new value 3,375 3,375−2,500

The scale factor is old value = 2,500 =1+ 2,500 = 1.35.

At the beginning of a year, the population of a small village is 8,400.

If the annual drop in population is 5%, the population at the end of
the year is
5 5
8400 − 8400 × = 8400(1 − ) = 8400 × 0.95 = 7980
100 100

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 Chapter 1. Mathematics of Finance 1.1. Percentages

If the government imposes a 15% tax on the price of a good, the

consumer pays for a good priced by a firm at $1,360 is
15
1, 360(1 + ) = $1, 564
100

If the government deducts, as tax, 15% of the market price of each

good priced by a firm at $1,360, the customer pays 1,360
0.85 = $1, 600.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

How to compute overall percentage changes

To compute the overall percentage change over an entire period, we

simply multiply all the scale factors together on each corresponding
individual period. For instance,
If share prices rise by 32% during the first half of the year and rise by
a further 10% during the second half, the overall percentage change
during the year can be calculated by
32 10
(1 + 100 ) × (1 + 100 ) = 1.32 × 1.1 = 1.452
If the price of a good rises by 5% in a year but then is reduced by
30% in a sale, the overall percentage change in the price is
5 30
(1 + 100 ) × (1 − 100 ) = 1.05 × 0.7 = 0.735. In this case, the price is
reduced by 26.5% over the entire period.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

Applications of percentages in macroeconomics

Macroeconomics is concerned with the analysis of economic theory and

policy at a national level. On this section, we focus on two applications of
percentage in macroeconomics: index number and inflation.

Index number is used to reflect the changes of price or any other

quantity compared with a standard of base value. The base value is
usually 100 and the index number of the underlying year is calculated by

Index number = the scale factor from the base year × 100

Index numbers enable us to identify trends and relationships in data which

are often given in the form of a time series.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

Example
The table below shows the values of household spending (in billions of
dollars) during a 5-year period.

If 2011 is taken as the base year, the index number of 2011 is 100 and the
index number of the year 2012 is 723.7
697.2 × 100 = 103.8, which means the
value household spending in 2012 is 103.8 % of its value in 2011. In other
words, the household spending increased by 3.8 % during 2012.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

The index number of each year w.r.t. the base year of 2011 are shown in
Table 3.2.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

There are two other index numbers called Paasche index and Laspeyres
index which are to measure the variation of a bundle of goods over time.
Passche index is an index number for groups of data weighted by the
quantities used in the current year
Laspeyres index is an index number for groups of data which are
weighted by the quantities used in the base year.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

Example
Table 3.6 below shows the number of each type bought in 2014 together
with the unit prices of each item in 2014 and 2015.

So, the Laspeyres index w.r.t. the base year of 2014 is

20 × 10 + 35 × 23 + 10 × 5
× 100 = 124.1
20 × 8 + 35 × 18 + 10 × 6

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 Chapter 1. Mathematics of Finance 1.1. Percentages

If the quantities bought in 2015 are those shown in Table 3.7 then the
current weighted index in 2015 (which is called the Passche index) is

17 × 10 + 38 × 23 + 12 × 5
× 100 = 129.9
20 × 8 + 35 × 18 + 10 × 6

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 Chapter 1. Mathematics of Finance 1.1. Percentages

Adjust value data for inflation is to find again the real data after
removing the effect of inflation. So what is the inflation?
Inflation is basically a rise in prices.

A more exact definition of inflation is a situation of a sustained

increase in the general price level in an economy. Inflation means an
increase in the cost of living as the price of goods and services rise.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

Example
The table below shows the price (in thousands of dollars) of an average
house in a certain town during a 5-year period. The price quoted is the
value of the house at the end of each year.

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 Chapter 1. Mathematics of Finance 1.1. Percentages

Use the annual rates of inflation given in Table 3.9 to adjust the prices to
those prevailing at the end of 1991 and compare the rise in both the
nominal and real values of house prices during this period?

Answer: Remember that 1991 is chosen as the base year. The real value
of the house
at the end of 1992 is 93,000 (the1.071
nominal value)
= 86, 835.
Thus the house has fallen in value by over $2000 compared with its
price in 1991 ( $ 89,000)
100,000
at the end of 1993 is 1.035×1.071 = 90, 213
100,006
at the end of 1994 is 1.023×1.035×1.071 = 93, 476

at the end of 1990 is 72, 000 × 1.107 = 79, 704

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 Chapter 1. Mathematics of Finance 1.1. Percentages

The table below shows the nominal values and adjusted values rounded to
the nearest thousand for comparison after taking inflation into account.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

Suppose that Peter invests P0 dollars into a bank with the annual interest
rate of r %. How much will he receive?

After t days (t < 365), Peter receives

t t
Pt = P0 + INT = P0 + P0 × r % × = P0 + P0 × r % ×
365 365

Thus, after 1 year, he receives

P1 = P0 (1 + r %)

where INT is the interest paid direct to the investor and it is called
the simple interest.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

However after 1 year, Peter still lets that amount in his account, so at
the end of the second year, he will receive

P2 = P0 (1 + r %) + r % × P0 (1 + r %) = P0 (1 + r %)2 .

The interest received in this case is called the compound interest,

which means interest earns on interest.
Recursively, after n years: Peter receives Pn = P0 (1 + r %)n .

Notations: P0 is called the present value and P1 , P2 , . . . , Pn are called the

future values of P0 after 1 year, 2 years, ..., n years, respectively.

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

Example
If $10,000 invested at 5% interest compounded annually then the amount
the investor receives
5
after 216 days is P216 days = 10, 000 + 10, 000 × 100 × 216
365 ≈ 10, 295.89

5 4


at the end of the fourth year is P4 = 10, 000 1 + 100 = $12, 155.06

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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

If no other specification is stated, the interest rate is the annual interest

rate. It is worth noting that the interest are often compounded more
frequently than a year, so the periodic interest rates are required to be
considered. The following is the simple rule for periodic rates w.r.t. the
annual rate r %:
If the interest is compounded semiannually then
r % 2×n
 
Pn = P0 1 +
2
If the interest is compounded quarterly then
r % 4×n
 
Pn = P0 1 +
4
If the interest is compounded monthly then
r % 12×n
 
Pn = P0 1 +
12
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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

More general, if the periodic interest rate is rp % then after n periods P0

becomes
Pn = P0 (1 + rp %)n

Example
A principal of $10 is invested at 12% interest for 1 year. The future value
if the interest is compounded
annually =
semiannually =
quarterly =
monthly =
weekly =

After calculating the future values above, we will see that the future value
rises as the frequency of compounding rises.
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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

If the interest is compounded in a smaller and smaller time periods (which

means m becomes very large) then the future value rises, however, after n
years, they appear to be approaching a fixed number
 n " m/r % #n×r %
r% 1
Pn = lim P0 1+ = lim P0 1+ m = P0 e r %×n
m→∞ m m→∞
r%

In this case the interest is said to be compounded continuously.

Example
A principal of $2,000 is invested at 10% interest compounded continuously.
After how many days will the investment first exceed $2,100?

The number e is named after the Swiss mathematician Leonhard Euler

m
and is limm→∞ 1 + m1 .
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 Chapter 1. Mathematics of Finance 1.2. Simple interest - Compound interest

To summarize, if the investment earns a return of r % compounded

periodically then after k periods the future value of P0 is calculated by

Pk = P0 (1 + rp %)k

If interest is compounded continuously then after n years, P0 becomes

Pn = P0 e r %×n

The number e is often, in the scope of the course, approximated by 2.72.

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 Chapter 1. Mathematics of Finance 1.3. Geometric series

A geometric sequence is a sequence of numbers a1 , a2 , . . . , an with a

an
constant ratio between consecutive terms r = an−1 . Thus

an = r × an−1 = r 2 × an−2 = · · · = r n−1 × a1 , n = 2, 3, . . .

1 1 1 1
Example: 2 , 4 , 8 , 16 is a geometric sequence.
The geometric series of the first n terms is
n
X rn − 1
ai = a1 +r ×a1 +r 2 ×a1 +. . . r n−1 ×a1 = a1 (by the Newton binomial)
r −1
i=1

We’ll make use of the Newton binomial formula in the two important
activities in Finance, such as savings and loans.

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 Chapter 1. Mathematics of Finance 1.3. Geometric series

In this section we focus on two applications of geometric series into

finance: savings and loans
Savings: Imagine simply one decides to invest regularly an equal
amount of money into a bank account in order to meet some future
financial commitment. This is sometimes referred to as a sinking
fund!
⇒ If each payment is made at the beginning of the periods, then the
accumulated amount, after n periods, will be calculated by
(1 + r )n − 1
Vn = a(1 + r ) + a(1 + r )2 + · · · + a(1 + r )n = a(1 + r )
r
⇒ If each payment is made at the end of the periods, then the accumulated
amount is
(1 + r )n − 1
Vn = a + a(1 + r ) + · · · + a(1 + r )n−1 = a
r
where a is payment. However, if there is no other specification, as for
savings, payments are usually made at the beginning of each period.
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 Chapter 1. Mathematics of Finance 1.3. Geometric series

Loans: one needs an amount of money right now and decides to

borrow it from a bank. The loan is promised to pay back by a series of
repayments (or, also called, an annuity) made at equal time intervals.
Such an annuity can be thought of as the opposite of a sinking fund!
⇒ If each repayment is made at the end of the periods, then the
actual value of a debt, after n repayments made, is
1 − (1 + r )−n
V0 = a(1 + r )−1 + a(1 + r )−2 + · · · + a(1 + r )−n = a
r
⇒ If each repayment is made at the beginning of the periods, then

1 − (1 + r )−n
V0 = a+a(1+r )−1 +a(1+r )−2 +· · ·+a(1+r )−(n−1) = a(1+r )
r
Analogously, as for loans, if there is no other specification, repayments are
usually made at the end of each period.

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 Chapter 1. Mathematics of Finance 1.3. Geometric series

Example
[Savings] Peter saves $100 in a bank account at the beginning of
each month. The bank offers a return of 12% compounded monthly.
How much does Peter save after 12 months?

[Loans] Determine the monthly repayments needed to repay a

$100,000 loan which is paid back over 25 years when the interest rate
is 10% ?

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 Chapter 1. Mathematics of Finance 1.3. Geometric series

Example
[Savings] Suppose $1,000 is placed in a savings account on the 1st of
December 2016 and, from then on, $50 is deposited in the account on
the first of the next months. If the interest is at 4.3% compounded
monthly, how much is in the account on 1 Jan., 2019?

[Loans] A debtor is to amortize an $18,000 car loan by making equal

repayments at the end of each month for 36 months. If the interest is
at 5% compounded monthly.
What is each monthly repayment?

Just after the 16th repayment, the debtor would like to pay off the rest
of loan by only three quarter repayments at the interest rate of 4.5%
compounded quarterly. What is each quarterly repayment?

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 Chapter 1. Mathematics of Finance 1.4. Investment appraisal

Present value: P0 = Pn (1 + r %)−n . Let’s recall that

Pn is the future value.

r % is the annual interest rate. In the backwards process, r % is

referred to as the discount rate.

If interest is compounded continuously, P0 = Pn e −r %×n .

Example
Find the present value of $1,000 in 4 years’ time if the discount rate is
10% compounded
semiannually and
continuously ?

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 Chapter 1. Mathematics of Finance 1.4. Investment appraisal

Present values are a useful way of appraising investment projects. Two

ways of assessing individual projects are based on Net Present Value
(NPV) and Internal Rate of Return (IRR).
NPV = the present value of revenue - the present value of the costs.

A project is considered worthwhile if the NPV is positive.

IRR = the annual rate which, when applied to the initial outlay, yields
the same return as the project after the same number of years.

A project is considered worthwhile if the IRR is larger than market

rate.
It is often that if a decision is to be made between two different projects
then the one with higher NPV or IRR is the better choice. Of course, in
practice, other factors such as risk need to be taken into account before a
decision is made.
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 Chapter 1. Mathematics of Finance 1.4. Investment appraisal

Example
A project requiring an initial outlay of $15,000 is guaranteed to produce a
return of $20,000 in 3 years’ time. Use the
Net Present Value

Internal Rate of Return

methods to decide whether this investment is worthwhile (i.e., the NPV is
positive) if the prevailing market rate is 5% compounded annually. Would
your decision be affected if the interest rate were 12%?

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 Chapter 1. Mathematics of Finance Project 1

Project 1: Excel functions in Finance

Write a report on Excel functions and formulas most commonly used
in finance for solving finance problems.
In the report, please introduce at least one example for each function
used.
Also, please specify the contribution of each member in group.
Notice: report must be submitted on the lesson day of the first week
of March and group’s presentation will be due on the lesson day of
the second week of March.

Haeussler E., Paul R., and Wood R (2014). Introductory Mathematical Analysis for Business, Economics, and the Life

and Social Sciences (13th ed.). Pearson.

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 Chapter 2: Functions, Limits, and Continuity

Outline of the chapter: We will introduce the following features such

as functions, limits, and continuity.

Notice that at the end of this chapter, you must be able to:
determine independent/dependent variables of issues mostly arising in
economics
represent relationship between quantities using
equations/inequalities/functions
recognize possible properties of a quantity based on other quantities
find the domain of a function and sketch a function
finally know how to compute exactly or approximately related
quantities.

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

In this section, we will introduce the following features:

What is a function?

Four ways to represent a function

Monotonic functions, symmetric functions, periodic functions

Special functions

Combinations of functions

Some functions used in economics

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

What is a function?

Functions are essential factors in modeling phenomena/issues in reality.

We construct/use functions to model relationship between quantities.

Example
Revenue of a certain good is variable, it depends on quality, price,
demand, or even advertising expenses, etc. In other words, revenue,
quality, price, expenses are related by a way or another.

So understanding of functions is very important! The aim of this section is

to state systematically briefly the definition of a function, the properties of
functions, the four ways of representing a function. Some functions used
in economics will also be introduced in this section.

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Let X, Y be two sets (or also called, for example, two events in
probability). A function f : X → Y is a rule that assigns, to each element
x of X , at most one element y of Y , denoted f (x).

It is useful to think of function as a machine: putting x into the machine

f , out of the machine we get f (x). Thus, x is called independent
input/variable, while f (x) is dependent variable/output which depends on
the input x.

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Domain: the set of all inputs x allowable is called the domain of function
f and denoted D. Mathematically speaking,
D = {x|f (x) is well defined}
Range: If D is the domain of f then the set of all outputs f (x) is called
the image/range of f and denoted R. Briefly,
R = {f (x)|x ∈ D}
From now on, if no other specification is stated, D and R mean the
domain and the range of function of interest, respectively.
Example
Which following rule is a function? If it’s a function, find the domain and
range.
(a) x and f are related by f (x) = x1 .

(b) x and f are related by (f (x))2 = x.

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Four ways to represent a function

A function can be represented

by a formula (algebraically)

by a table (algebraically)

by a graph (graphically) :

in words (verbally)

Notice that if a single function can be represented in all four ways, it’s
often useful to go from one representation to another to gain additional
insight into the function.

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Example
Let C be the cost of mailing an envelope with weight w . The rule that the
US Postal Service used as of 2010 is as follows: The cost is 88 cents for
up to 1 oz, plus 17 cents for each additional ounce (or less) up to 13 oz.

The mailing cost can be given by a table as shown below

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Properties of function
Monotone: A function f is called increasing (resp. decreasing) on I ⊂ D
if, for all x1 , x2 ∈ I , x1 < x2 implies f (x1 ) ≤ f (x2 ) (resp. f (x1 ) ≥ f (x2 ))

For example, f (x) = 2x + 1 is increasing on IR and g (x) = x 2 is increasing

on (0, ∞) and decreasing on (−∞, 0).
Symmetry: A function is called symmetric about the y −axis if
f (−x) = f (x).

For example, g (x) = x 2 is symmetric about the y −axis.

Periodic functions: A function is called periodic with period of T > 0 if
f (x + T ) = f (x) for all x.

For example, trigonometric functions such as sine, cosine, tangent,

cotangent are periodic.
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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Special functions
Polynomial function of degree n:
f (x) = an x n + an−1 x n−1 + · · · + a1 x + a0 , where n is non-negative
integer and the coefficients a0 , a1 , . . . , an are constants
n = 0: Constant functions f (x) = c, i.e. the value of f is always c
whatever x is.
n = 1: Linear functions f (x) = ax + b
n = 2: Quadratic function f (x) = ax 2 + bx + c
Case-defined functions (or called also piece-wise functions): functions
defined by more than a formula over different intervals are called
case-defined functions, example the absolute-value function is the
case: 
x if x ≥ 0
|x| =
−x otherwise.

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Combinations of functions
For any functions f and g , we define the following operations:
Sum/Difference: (f ± g )(x) = f (x) ± g (x)

Product: (fg )(x) = f (x) × g (x)

Quotient: (f /g )(x) = gf (x)

(x) for g (x) 6= 0, i.e. we further restrict the
domain to exclude any value of x for which g (x) = 0.

Composition: f ◦ g (x) = f (g (x)) : the domain of f ◦ g is the set of

those x in the domain of g such that g (x) is in the domain of f .

Inverse: If g and f satisfy the fact that g ◦ f (x) = x and

f ◦ g (x) = x then g is called the inverse of f and denoted f −1 ≡ g .
Theorem
If g is one-to-one then its inverse exists and is unique!
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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

A cryptograph is a coded message. The ability to code and decode messages is

useful because of the vast amount of information that is transmitted between
computers owned by companies, banks, governments and private users.

One method of protection from unauthorized viewers is to encode the information

using a mathematical function. This information can then be decoded only by
those who know the inverse of the encoding function.

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

When Alice wishes to send a secret message to Bob, she first converts the text of
her message to Unicode numbers. Once the letters of the text are changed to
Unicode numbers, Alice uses a mathematical function to encode the Unicode
numbers. Bob uses the inverse of the encoding function to change these encoded
numbers back to the original Unicode numbers and then converts the Unicode
numbers back to the original text.

Character Unicode: A = 65, B = 66, C = 67, · · · , Z = 90, SPACE = 32

Example
CODES ARE COOL
Unicode numbers:
Encoding function: y = 3x + 11
Encoded message:
Decoding function:
Decoded message:

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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Functions used in Economics

Supply and demand functions

Demand function: q = D(p) where p is referred to as the unit price of
a certain commodity if customer demands q units of the commodity.

Supply function: q = S(p) where p is referred to as the unit price of

a certain commodity at which the producer is willing to supply q units
of the commodity to the market.
In any competitive market, it is often that demand functions are
decreasing, while supply functions are increasing. However it is not always
true for all markets, for example, electronic market.

Economic equilibrium is a state in which supply and demand for a certain

commodity are equal.
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 Chapter 2: Functions, Limits, and Continuity 2.1. Functions

Cost, revenue, profit functions

Total Cost = variable cost + fixed cost
variable cost, denoted c(x) which varies with output, is a function used
to express how production expenses will change at different output
levels (or number of units) x.

c(x) = x × p (the cost per unit)

fixed cost is costs which are independent of output

Revenue function denoted r (x) is a function used to express the
amount one receives after selling x units of a commodity.

r (x) = x × p (the selling price)

Profit function denoted p(x) is the interest received after selling x

units of a commodity.

p(x) = r (x) − total cost

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 Chapter 2: Functions, Limits, and Continuity 2.2. Limits

In mathematics, a limit is the value that a function (or sequence)

”approaches” as the input (or index) ”approaches” some value. Limits are
essential to calculus and are used to define continuity, derivatives, and
integrals.
Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at a. We say loosely that the limit of f when x goes to a is L,
and write
limx→a f (x) = L

if we can make f (x) arbitrarily close to L by taking x sufficiently close but

not equal to a.

Example
−1 2
f (x) = xx−1 is not defined when x = 1. What can we say about the value
of f as x ≈ 1?
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 Chapter 2: Functions, Limits, and Continuity 2.2. Limits

Sometimes we also want to talk about limit from one side.

Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at a. We say that the limit of f when x goes to a on the right
(resp., on the left) is L, and write

limx→a+ f (x) = L (reps., limx→a− f (x) = L)

if we can make f (x) arbitrarily close to L by taking x sufficiently close but

bigger than a (reps., smaller than a ).

Theorem
limx→a f (x) exists if and only if limx→a+ f (x) and limx→a− f (x) exist and
are equal. In that case limx→a f (x) = limx→a+ f (x) = limx→a− f (x)

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 Chapter 2: Functions, Limits, and Continuity 2.2. Limits

We also want to talk about infinity as limit.

Definition
Let f be a function defined in a neighborhood of a point a but not
necessarily at a. We say that the limit of f when x goes to a is infinity,
and write
limx→a f (x) = ∞

if we can make f (x) arbitrarily big by taking x sufficiently close but not
equal to a.

Example
1
limx→0 x2
=0

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 Chapter 2: Functions, Limits, and Continuity 2.2. Limits

Theorem
If c ∈ R then the constant function f (x) ≡ c is often denoted c itself.
And we have
lim c = c and lim x = a
x→a x→a

It’d be worth introducing one of the important theorems of Euler:

1 x
 
1
lim (1 + x) x = e and lim 1+ =e
x→0 x→∞ x

The number e is named after the Swiss mathematician Leonhard Euler

m
and is limm→∞ 1 + m1 .

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 Chapter 2: Functions, Limits, and Continuity 2.2. Limits

Limit Laws
Theorem
If limx→a f (x) and limx→a g (x) exist then
(a) limx→a [f (x) + g (x)] = limx→a f (x) + limx→a g (x)

(b) limx→a f (x)g (x) = [limx→a f (x)][limx→a g (x)]

(c) limx→a gf (x)

(x) =
limx→a f (x)
limx→a g (x) if limx→a g (x) 6= 0.

The laws are still valid with the process x → ∞ instead of x → a.

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 Chapter 2: Functions, Limits, and Continuity 2.2. Limits

Corollary
Let n be a positive integer. If limx→a f (x) exists then
(a) limx→a cf (x) = c limx→a f (x)
(b) limx→a x n = an
(c) limx→a (f (x))n = (limx→a f (x))n
√ √
(d) limx→a n x = n a
In the above formula if n is even we assume that a > 0
p p
(e) limx→a n f (x) = limx→a n f (a)
In the above formula if n is even we assume that limx→a f (x) > 0.

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 Chapter 2: Functions, Limits, and Continuity 2.2. Limits

Below are some remarks that are worth noting:

the limit of function f when x → a can be thought as the limiting
value of f as x is very close to a.

the limit of function if exists must be unique.

Finally in reality nothing is exactly one hundred percent, so limits are

essential and you should know how to compute/use limits proficiently!

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 Chapter 2: Functions, Limits, and Continuity 2.3. Continuity

In mathematics, a continuous function is a function that does not have

any abrupt changes in value. More precisely,
Definition
f is said to be continuous at a if limx→a f (x) = f (a)

which also means that sufficiently small changes in the input of a

continuous function result in arbitrarily small changes in its output.

A function that is not continuous is called a discontinuous function.

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 Chapter 2: Functions, Limits, and Continuity 2.3. Continuity

Economists speak quite often about the continuity and discontinuity of

economic functions/relationships.
Example
Suppose that a salesperson receives a salary according to a contract that
establishes a relationship between pay and the level of sales made by the
salesperson. In particular, suppose that the contract stipulates that the
salesperson’s monthly salary will be composed of three parts:
(i) a basic amount of $800,
(ii) a commission of 10%,
(iii) a lump-sum bonus of $500 if the salesperson’s sales for the month
reach or exceed $20,000.
From this description, one can see that her salary will jump by $500 if the
critical level of $20,000 worth of sales is achieved. This implies a
discontinuity in her salary schedule.
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 Chapter 2: Functions, Limits, and Continuity 2.3. Continuity

The definition of continuity of functions at a point is also extended to an

interval as follows.
Definition
A function f is continuous on an interval [a, b) if it is continuous at every
point in the interval and limx→a+ f (x) = f (a).

A function f is continuous on an interval (a, b] if it is continuous at every

point in the interval and limx→b− f (x) = f (b).

Accordingly, a function f is continuous on an interval [a, b] if it is

continuous at every point in the interval and limx→a+ f (x) = f (a) and
limx→b− f (x) = f (b).
Intuitively, a continuous function at a is a function that its graph has no
holes at a or is not broken into two pieces at a.

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 Chapter 2: Functions, Limits, and Continuity 2.3. Continuity

One often says that a picture is worth more than thousand words. So in
order to understand the concepts of continuity, let do the example below.
Example
Let f be given by the graph in the figure below. Which intervals is f
continuous on?

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 Chapter 2: Functions, Limits, and Continuity 2.3. Continuity

Example
Suppose the long-distance rate for a telephone call from Hazleton,
Pennsylvania to Los Angeles, California, is $0.08 for the first minute or
fraction thereof and $0.04 for each additional minute or fraction thereof. If
y = f (t) is a function that indicates the total charge y for a call of t
minutes duration then
Formulate the charge function

Sketch the graph of f for 0 < t ≤ 3 21

Determine the values of t at which discontinuity occurs.

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 Chapter 3. Differentiation

Outline of the chapter:

Tangent and velocity problems

Derivative of a function

Rules of differentiation

Some applications of differentiation in Economics

Rates of change.

Relative rate of change - Percentage rate of change.

Elasticity

Marginal functions

Optimization in Economics

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 Chapter 3. Differentiation 3.1. Tangent and Velocity Problems

Recall that a linear function L(x) = mx + b changes at a constant rate m

w.r.t. x, that is, the rate of change of L(x) is the slope or the steepness of
the line y = mx + b.

However if a function f (x) is not linear, the rate of change is not a

constant but varies with x. In particular, when x = c, the rate is given by
the steepness of the graph of f (x) at the point P(c, f (c)), which can be
measured by the slope of the tangent line to the graph at P.

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 Chapter 3. Differentiation 3.1. Tangent and Velocity Problems

Tangent problem. Find the slope of a tangent line at P(c, f (c)) on the
curve C of equation y = f (x).

Strategy: consider a point Q(c + h, f (c + h)) nearby P (Q 6= P). The

slope of the secant line PQ:
rise change in f f (c + h) − f (c)
mPQ = = =
run change in x h

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 Chapter 3. Differentiation 3.1. Tangent and Velocity Problems

Observe that if we let Q approach P by letting c + h approach c then the

pink lines PQ approach the blue line at P. In other words, the blue line is
considered as the limiting line of the pink lines. As a result, the slope of
the tangent line at P can be calculated as
f (c + h) − f (c)
m = lim mPQ = lim
Q→P h→0 h

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 Chapter 3. Differentiation 3.1. Tangent and Velocity Problems

Velocity problem. If an object is moving along a straight line according

to an equation s = f (t), where s is the displacement of the object from
the origin at time t, then the average velocity of the object moving in the
time interval from time a to time a + h is
displacement f (a + h) − f (a)
va = =
elapsed time h

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 Chapter 3. Differentiation 3.1. Tangent and Velocity Problems

If we consider the movement of the object in a shorter and shorter time

interval, the average velocity becomes the instantaneous velocity

f (a + h) − f (a)
v (a) = limh→0
h

Note that we are not concerned with the direction in which the movement
occurs, but displacement and velocity. The speed of the movement is
|velocity |.

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 Chapter 3. Differentiation 3.2. Derivative

Both problems lead to finding limit

f (a + ∆x) − f (a)
lim .
∆x→0 ∆x
This limit arises actually not only in geometry and physics but in many
other practical situations, so it is given a special name: DERIVATIVE!

Definition
The derivative of a function at the number a, denoted by f 0 (a) (followed
by Newton’s notation) which is read ’f dashed of a‘, is

f (a + ∆x) − f (a) ∆f
f 0 (a) = lim = lim
∆x→0 ∆x ∆x→0 ∆x
if the limit exists and, in this case, f is said to be derivable (or also called
differentiable) at a.

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 Chapter 3. Differentiation 3.2. Derivative

Note that
f must be absolutely defined at a and about a if f 0 (a) exists

If f is derivable at every point in an interval (a, b) then f is said to be

derivable on (a, b)

If a number a is replaced by a variable x, the derivative of f is also a

function in terms of x that is also called a derived function!

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 Chapter 3. Differentiation 3.2. Derivative

If it is so hard, there are other ways to approach the concept of

‘DEVIRATIVE’, such as simply thinking of it as the rate of change in y
w.r.t. the change in x.
Example

So the slope of the tangent line at −2 to the curve, called the derivative of
the function at -2, is
∆y f (−3) − f (−1)
= = −4
∆x (−3) − (−1)

Note that the tangent line to the curve at 0 is horizontal, so its slope at
x = 0 is zero, and thus, f 0 (0) = 0.
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 Chapter 3. Differentiation 3.2. Derivative

It is easy to deduce from the definition of the derivative that

If f 0 > 0 on a certain interval then the curve of f rises from the left to
the right of the interval and thus the function is said to be increasing.

If f 0 < 0, the curve of f drops and the function is decreasing.

Example

Observe that the graph of f drops on (−∞, 0) (so f 0 < 0 on this interval)
and rises on (0, +∞) (so on this interval f 0 < 0).
The point at which x = 0 is called the turning point!
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 Chapter 3. Differentiation 3.2. Derivative

Noting that not all functions are derivable. For example, function is not
continuous at a point then it is not derivable at that point, that is, the
graph at this point is broken into two pieces or has a hole.

Even continuous functions that whose graph has a sharp corner are also
not derivable.

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 Chapter 3. Differentiation 3.3. Rules of Differentiation

Theorem
If f and g are derivable and c is a constant then
(f ± g )0 = f 0 ± g 0
(fg )0 = f 0 g + fg 0
f 0 g −fg 0
( gf )0 = g2
(cf )0 = cf 0

Theorem (Chain rule)

If f and g are derivable then

(f (g (x)))0 = f 0 (g (x))g 0 (x)

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 Chapter 3. Differentiation 3.3. Rules of Differentiation

Example
Given two functions f , g whose graphs are shown below. Let
u(x) = f (g (x)), v (x) = g (f (x)), and w (x) = g (g (x))

Find u 0 (1), v 0 (1), and w 0 (1).

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 Chapter 3. Differentiation 3.3. Rules of Differentiation

Second order derivatives. As mentioned above, whenever a functions is

differentiated, the thing that you end up with is itself a function. This
suggests the possibility of differentiating a second time to get the slope of
the slope function, written as f 00 (x), is calculated by f 00 (x) = (f 0 )0 (x).

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 Chapter 3. Differentiation 3.3. Rules of Differentiation

Moreover, the sign of f 00 enables us to identify the behavior of the function

f . Precisely,
If f 00 > 0 on a certain interval then the curve of f bends upwards on
that interval and the function is said to be convex.

If f 00 < 0, the curve of f bends upwards and the function is said to be

concave.

The point at which the function changes the concavity is called the point
of inflection.
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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

You may wonder what on earth differentiation has to do with economics?

In fact we cannot get very far from economic theory without making use
of calculus. In this section, we focus on the five applications:
Rate of change

Relative rate of change - Percentage rate of change

Elasticity

Marginal analysis

Optimization in economics

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Rate of change

The rate of change of f (x) at x is given by the slope of its tangent line at
x or the steepness of its graph : f 0 (x).

Example
An efficiency study of the morning shift [from 8:00 a.m. til 12:00 noon] at
a certain factory indicates that an average worker arriving on the job at
8:00 a.m. will have produced Q(t) = −t 3 + 8t 2 + 15t units t hours later.
At what time is the worker performing most efficiently? and least
efficiently?

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Relative rate of change

In many practical situations, the rate of change of a quantity Q is not as

significant as its relative rate of change, which is defined as change in Q
size of Q .

Example
A yearly rate of change of 500 individuals in a city whose total populations
is 5 million yields a negligible relative (per capita) rate of change of
500
5,000,000 = 0.0001 or 0.01%, while the same rate of change in a town of
500
2,000 would yield a relative rate of change 2,000 = 0.25 or 25%, which has
enormous impact on the town.
Q 0 (x)
The relative rate of change of Q(x) = Q(x) and the corresponding
100 Q 0 (x)
percentage rate of change of Q(x) = Q(x) .

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Elasticity

We are known that demand, in general, is a decreasing function, that is,

an increase in the unit price of a commodity will result in decreased
demand. However, the sensitivity or responsiveness of demand to a change
in price varies from one product to another.

For instance, the demand for products such as soap, flashlight batteries, or
salt will not be much affected by a small percentage change in unit price,
while a comparable percentage change in the price of airline tickets or
home loans can affect demand dramatically.

Economists use a quantity called elasticity of demand to measure the

sensitivity of the change.

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Elasticity is defined, supposed that q is a demand function in terms of unit

price p, by
q0
percentage rate of change in demand q × 100 p × q0
E (p) = = p0
=
percentage rate of change in price × 100 q
p

Demand is said to be
elastic if |E | > 1 ⇒ the percentage decrease in demand is greater
than the percentage increase in price that caused it, and thus,
demand is relatively sensitive to changes in price

inelastic if |E | < 1 ⇒ demand is relatively insensitive to changes in

price

unit elastic if |E | = 1

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

The relationship between revenue and price is shown below. Note that the
revenue curve is rising where demand is inelastic, falling where demand is
elastic, and has a horizontal tangent line where the demand is of unit
elasticity.

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Example
The manager of a bookstore determines that when a certain new
paperback novel is priced at p dollars per copy, the daily demand will be
√
q = 300 − p 2 copies, where 0 ≤ p ≤ 300
(a) Determine where the demand is elastic, inelastic, and of unit elasticity
with respect to price.

(b) Interpret the results of part (a) in terms of the behavior of total
revenue as a function of price.

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Marginal functions

We are known briefly economic concepts in the second chapter such as

cost, revenue, profit, and supply, demand, and market equilibrium. At this
stage, we use the derivative to explore rates of change involving economic
quantities.

Recall that
f (a + ∆x) − f (a) ∆f
f 0 (a) = lim = lim
∆x→0 ∆x ∆x→0 ∆x

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Suppose C (q) is the total cost of producing q units of a particular

commodity. If q0 units are currently being produced, then the derivative
C (q0 + ∆q) − C (q0 )
C 0 (q0 ) = lim
∆q→0 ∆q
is the marginal cost of producing q0 units. In addition, the average cost of
a unit of product if q0 units are produced is AC (q0 ) = C (q0 +∆q)−C
∆q
(q0 )

This deduces, as ∆q = 1, that

C 0 (q0 ) ≈ C (q0 + 1) − C (q0 )

in which
the right hand side is the cost of increasing the level of production by
one unit, from q0 to q0 + 1

the left hand side approximates the additional cost incurred when the
level of production is increased by one unit, from q0 to q0 + 1.
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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

The geometric relationship between the marginal cost and the additional
cost are shown in the figure below.

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Example
Unit of output Total cost (in dollars) Marginal cost (in dollars)
1 5 5
2 9 4
3 12 3
4 16 4
5 21 5
6 29 8

Observe that the marginal cost curve decreases sharply with smaller
output and reaches a minimum. As production is expanded to a higher
level, it begins to rise at a rapid rate.
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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

In general, if the level of production is increased by ∆q then

C (q0 + ∆q) − C (q0 ) ≈ C 0 (q0 ) × ∆q

In other words,

change in total cost ≈ marginal cost × change in output

Example
Suppose the total cost in dollars of manufacturing q units of a certain
commodity is C (q) = 3q 2 + 5q + 10. If the current level of production is
40 units, estimate how the total cost will change if 40.5 units are produced.

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

The derivative formula applies not only to cost, but also for other
economic quantities, such as revenue, profit, and so on.

Marginal cost is important in the business decision-making process, for

example, when the management needs to decide whether to increase
production or not.
Marginal revenue increases whenever the revenue received from
producing one additional unit of a good grows faster (or shrinks more
slowly) than its marginal cost of production.

Increasing marginal revenue is a sign that the company is producing

too little relative to consumer demand, and there are profit
opportunities if production expands.

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Example
A company manufactures toy soldiers. After some production, it costs the
company $5 in materials and labor to create its 100th toy soldier. That
100th toy soldier sells for $15. Profit for this toy is $10.

Now, suppose the 101st toy soldier also costs $5, but this time can sell for
$17. The profit for the 101st toy soldier, $12, is greater than the profit for
the 100th toy soldier. This is an example of increasing marginal revenue.

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Optimization in Economics

In addition, we can use derivatives to optimize economic quantities.

[First order derivative] If f 0 (a) = 0 and f 0 changes sign around a, a is
an extreme point.

[Second order derivative] If f 0 (a) = 0 then

if f 00 (a) > 0 then f attains a minimum value at a

if f 00 (a) < 0 then f attains a maximum value at a

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 Chapter 3. Differentiation 3.4. Some applications of differentiation on Economics

Two general principles of marginal analysis.

[Maximum profit criterion] The profit P(q) = R(q) − C (q) is
maximized at a level of production q where marginal revenue equals
marginal cost and the rate of change of marginal cost exceeds the
rate of change of marginal revenue; that is, where

R 0 (q) = C 0 (q) and R 00 (q) < C 00 (q)

[Minimal average cost] Average cost is minimized at the level of

production where average cost equals marginal cost; that is, when
AC (q) = C 0 (q)

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 Chapter 4. Partial Differentiation

Outline of the chapter:

Functions of several variables

Unconstrained/constrained optimization

Partial elasticity and marginal functions

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Most relationships in economics involve more than one variable. For

instance, the demand for a good depends not only on its own price but
also on the price of substitute and complementary goods, incomes of
consumers, advertising expenditure and so on. Likewise, the output from a
production process depends on a variety of inputs, including land, capital
and labor.

Note that
Substitutes are products/services in different forms that have the same
functionality.
Alternatives are products/services with different functions serve the same
purpose.
Complementary goods/services is an item used in conjunction with another
good/service. Usually the complementary good has little to no value when
consumed alone, but when combined with another goods/services, it adds to
the overall value of the offering. Ex, an iPhone and apps with it.
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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

To analyze general economic behavior we must extend the concept of a function,

and particularly the differential calculus, to functions of several variables.

Definition
A function, f , of n variables is a rule that assigns to each incoming tuple of
numbers, (x1 , x2 , . . . , xn ), a uniquely defined outgoing number, z. In symbols we
write this as z = f (x1 , x2 , . . . , xn ).

Domain of a function of n variables is defined by

{(x1 , x2 , . . . , xn )|f (x1 , x2 , . . . , xn ) is well defined}

a subset of IR × IR × · · · × IR ≡ IRn called the n dimensional space. In particular, if

n = 2 then it is a two dimensional space or a real plane.
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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Graph of a function involving two variables is a surface in three

dimensional space. It is necessary to bear in mind that the graph of
function of one variable is a curve in xy −plane.

To help you have a feeling of what is the graph of a function of two

variables, let us analyze how to sketch the graph of the following functions.
Example
Graph of the function f (x, y ) = x 2 + y 2 (D is the whole xy − plane)

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Example
Graph of the equation x 2 + y 2 + z 2 = 1. In fact, we can write z as a
function in terms of x and y and hence D is a unit disk centered at (0, 0)
on the xy −plane.

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Recall that given a function of one variable, f 0 (x) represents the rate of
change of the function as x changes. For functions of several variables,
what do we do if we only want one of the variables to change, or if we
want more than one of them to change?
Only one variable to change:
Definition
First-order partial derivative w.r.t. x:
∂f f (x0 +∆x,y0 )−f (x0 ,y0 )
∂x (x0 , y0 ) ≡ fx (x0 , y0 ) = lim∆x→0 ∆x

First-order partial derivative w.r.t. y :

∂f f (x0 ,y0 +∆y )−f (x0 ,y0 )
∂y (x0 , y0 ) ≡ fy (x0 , y0 ) = lim∆y →0 ∆y

∂f
Accordingly to compute for example ∂x , we need only to differentiate
mathematical expressions with respect to x and let all remaining letters in
the mathematical expressions constants in disguise. It is the same for
other variables.
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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Similarly, we want to study higher order derivatives. Below is the definition

of second order partial derivatives.
∂2f
Second-order partial derivative w.r.t. x: ∂x 2
≡ fxx = (fx )x
∂2f
Second-order partial derivative w.r.t. y : ∂y 2
≡ fyy = (fy )y
∂2f
Second-order partial derivative w.r.t. x and y : ∂x∂y ≡ fxy = (fy )x
∂2f
Second-order partial derivative w.r.t. y and x: ∂x∂y ≡ fyx = (fx )y

Note that in general (fx )y 6= (fy )x . According to Weierstrass theorem,

(fx )y (x0 , y0 ) = (fy )x (x0 , y0 ) if the first order partial derivatives are
continuous at (x0 , y0 ). In the scope of this course, we will consider
functions that satisfy (fx )y = (fy )x .

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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

All variables to change: • If x changes a small amount ∆x and y changes a small

amount ∆y , the net change in z = f (x, y ) is
∂f ∂f
× ∆x +
∆z = × ∆y
∂x ∂y
which is called the small increments formula. The differential form of the small
increments formula states that
∂f ∂f
dz = × dx + × dy
∂x ∂y
• If z = f (x, y ) is a constant, then dz = 0. At this stage, after rearrangement, we
have that
∂z
dy
= − ∂x
∂z
dx ∂y
This formula is called the implicit differentiation and is a useful tool to compute
the derivative of an implicit function.
Example
Write the tangent line to the curve according to the equation x 3 + y 3 = 6xy at
the point (3.3) ?
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 Chapter 4. Partial Differentiation 4.1. Functions of several variables

Tangent plane.
Normal vector at a point (x0 , y0 ) on a surface z = f (x, y ) is
(fx (x0 , y0 ), fy (x0 , y0 ), −1)

Equation for the tangent plane to the surface at (x0 , y0 ) is

fx (x0 , y0 )(x − x0 ) + fy (x0 , y0 )(y − y0 ) − 1 × (z − z0 ) = 0

Intuitively, if the tangent plane is parallel to the xy −plane then the partial
derivatives fx (x0 , y0 ) = fy (x0 , y0 ) = 0.
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 Chapter 4. Partial Differentiation 4.2. Unconstrained optimization

Similarly optimization problem of real functions of several variables can be

extended from that of one variable. Let’s look at the three particular
surfaces:
Example
Graph of the function f (x, y ) = x 2 + y 2 has the shape of a paraboloid
opened upwards.

(x = 0, y = 0) is called a minimum of f . Note that the tangent plane to

the surface at the minimum point is the xy −plane and the surface is
convex, which means it holds water in itself.

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 Chapter 4. Partial Differentiation 4.2. Unconstrained optimization

Example
Graph of the function f (x, y ) = −x 2 − y 2 has the shape of a paraboloid
opened downwards

(x = 0, y = 0) is called the maximum of f . Note that the tangent plane to

the surface at the maximum point is the xy −plane and the surface is
concave, which means it pours water.

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 Chapter 4. Partial Differentiation 4.2. Unconstrained optimization

Example
Graph of the function f (x, y ) = x 2 − y 2 has the shape of a hyperbolic
paraboloid

(x = 0, y = 0) is called the saddle point or minimax point of f . This

surface is neither convex nor concave at (0, 0).

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 Chapter 4. Partial Differentiation 4.2. Unconstrained optimization

Steps to solve the unconstrained problem Min/Max z = f (x, y )

[Fermat’s necessary condition] Find the candidates (x0 , y0 ) of the
function f by solving the simultaneous system

fx = fy = 0
[Sufficient condition investigating the concavity of the function]
Classify the candidates as minimum or maximum or saddle points by
determine ∆ = fxx (x0 , y0 ) × fyy (x0 , y0 ) − fxy2 (x0 , y0 ). If
∆ < 0 then (x0 , y0 ) is the saddle point.
∆ > 0 then (x0 , y0 ) is the minimum if fxx (x0 , y0 ) > 0 and is the
maximum if fxx (x0 , y0 ) < 0.
∆ = 0 then no conclusion is stated yet. To get further information, we
have to consider δ = f (x, y ) − f (x0 , y0 ). If
δ < 0 for all x, y then (x0 , y0 ) is a maximum

δ > 0 for all x, y then (x0 , y0 ) is a minimum

Otherwise, (x0 , y0 ) is a saddle point.

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 Chapter 4. Partial Differentiation 4.3. Constrained optimization

Steps to solve the problem Min/Max z = f (x, y ) provided that

g (x, y ) = M
Construct the Lagrangian function
L(x, y , λ) = f (x, y ) + λ × [g (x, y ) − M], in which λ is called the
Lagrange multiplier

Solve simultaneous system Lx = Ly = Lλ = 0 to find the extreme

point (x0 , y0 )

It is worth noting that the Lagrange multiplier λ in economic functions

gives the approximate change in the value of the objective function when
the value of the constraint is increased by 1 unit.

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 Chapter 4. Partial Differentiation 4.4. Partial elasticity and marginal functions

Our aim in this section is to study several applications of partial

differentiation in economics that have been considered in the case of
functions of one variable, such as
Elasticity of demand

Marginal utility and marginal production and so on.

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 Chapter 4. Partial Differentiation 4.4. Partial elasticity and marginal functions

Elasticity. Suppose that demand function Q = f (P, PA , I ) in which P is

the price of a certain good, PA is the price of an alternative good, and I is
the income of consumers. So
P ∂Q
The price elasticity of demand is EP = Q × ∂P
PA ∂Q
The cross-price elasticity of demand is EPA = Q × ∂PA
I ∂Q
The income elasticity of demand is EI = Q × ∂I

Example
Given the demand function Q = 100 − 2P + PA + 0.1I where the price of
a certain good P = 10, the price of an alternative good PA = 12, and the
income of consumers I = 1000, find
price elasticity of demand
cross-price elasticity of demand
income elasticity of demand
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 Chapter 4. Partial Differentiation 4.4. Partial elasticity and marginal functions

Utility. Consumers are faced with a choice of how many hours each week
to spend working and how many to devote to leisure. To analyze the
behavior of consumers quantitatively, we associate with each set of options
a number, U, called utility, which indicates the level of satisfaction.

Accordingly suppose that there are two goods, G1 and G2 , and that the
consumer buys x1 items of G1 and x2 items of G2 . The variable U is then
a function of x1 and x2 , which we write as U = U(x1 , x2 )

Example
If U(3, 7) = 20 and U(4, 5) = 25 then the consumer derives greater
satisfaction from buying four items of G1 and five items of G2 than from
buying three items of G1 and seven items of G2 .

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 Chapter 4. Partial Differentiation 4.4. Partial elasticity and marginal functions

Production. The output, Q, of any production process depends on a

variety of inputs, known as factors of production. These comprise land,
capital, labor and enterprise.

For simplicity we restrict our attention to capital and labor. Capital, K ,

denotes all man-made aids to production such as buildings, tools and plant
machinery. Labor, L, denotes all paid work in the production process. The
dependence of Q on K and L may be written

Q = f (K , L)

which is called the production function.

Example
If Q = 100K 1/3 L1/2 then the inputs K = 27 and L = 100 lead to an
output
Q = 100(27)1/3 (100)1/2 = 100(3)(10) = 3000
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 Chapter 4. Partial Differentiation 4.4. Partial elasticity and marginal functions

∂U
Marginal utility of U w.r.t. x1 is ∂x1
the rate of change of U w.r.t. x1 . If
x1 and x2 both change then the net change in U can be found from the
∂U ∂U
small increments formula ∆U = ∂x 1
× ∆x1 + ∂x 2
× ∆x2

Note that production functions can be studied in a similar way to utility

∂f ∂f
functions. So we also have ∆Q = ∂K × ∆K + ∂L × ∆L

Example

1/4 3/4
Given the utility function U = x1 x2 determine the value of the
marginal utilities and when x1 = 100 and x2 = 200. Hence estimate the
change in utility when x1 decreases from 100 to 99 and x2 increases from
200 to 201.

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 Chapter 4. Partial Differentiation 4.4. Partial elasticity and marginal functions

Homogeneous function. A production function f (K , L) is said to be homogeneous

of degree n if, for any number λ,
f (λK , λL) = λn f (K , L)
A production function is then said to display decreasing returns to scale, constant
returns to scale or increasing returns to scale, depending on whether n < 1, n = 1
or n > 1, respectively. One useful result concerning homogeneous functions is
known as Euler’s formula, which states that
∂f ∂f
K +L = nf (K , L)
∂K ∂L

Example
The Cobb—Douglas production function given by Q = AK α × Lβ , in which
A, α, β are positive constants, is an homogeneous function of degree α + β. [It is
worth saying that this function is a particular form of the production function
widely used to represent the technological relationship inputs and output that can
be produced by those inputs and developed and tested against statistical evidence
by Cobb and Douglas during 1927–1947]
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 Chapter 4. Partial Differentiation 4.4. Partial elasticity and marginal functions

The special case n = 1 is worthy of note because the right-hand side of

Euler’s formula is then simply f (K , L), which is equal to the output, Q.
Euler’s formula for homogeneous production functions of degree 1 states
that

Total output = Capital × marginal product of Capital + Labor × marginal product of Labor

If each input factor is paid an amount equal to its marginal product then
each term on the left-hand side gives the total bill for that factor.

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 Chapter 5. Integration

Outline of the chapter:

Indefinite integration

Definite integration
Applications in economics
Consumer’s surplus

Producer’s surplus

Investment flow

Discounting

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 Chapter 5. Integration 5.1. Indefinite integration

Definition
If F (x) = f 0 (x) for all x in an interval I then then we say that F (x) is an
anti-derivative of f (x) on I .

Theorem
If F is an anti-derivative of f then all other anti-derivative have the form
F (x) + C where C is a real number.

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 Chapter 5. Integration 5.1. Indefinite integration

Definition
If the function f has an anti-derivative then the integral of f denoted by
R R
f or f (x)dx is the collection of all anti-derivatives of f .

If F is an anti-derivative of f then the integral of f is often written as

Z
f (x)dx = F (x) + C

where C is any real number.

Please never drop out the number C in the result without stating any
reason!

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 Chapter 5. Integration 5.2. Definite integration

Area between curves. Consider the region S that lies between the curves
y = f (x) and y = g (x) and limited by the vertical lines x = a and x = b,
where f (x) and g (x) are continuous functions such that f (x) ≥ g (x) for
all x ∈ [a, b]

y
y = f(x)

y = g(x)

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 Chapter 5. Integration 5.2. Definite integration

y
y = f(x)

y = g(x)

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 Chapter 5. Integration 5.2. Definite integration

The area of the indicated region can be calculated by performing the

following steps (Rectangular Approximation Method, or RAM for short).
1. We first approximate the area by small rectangles
2. Divide up [a, b] into n subintervals of equal length by n + 1 points
x0 = a < x1 < x2 < · · · < xn = b
3. Set
b−a
:= ∆x, ∀i = 1, 2, . . . , n
xi − xi−1 =
n
4. We take any point xi∗ ∈ [xi−1 , xi ], ∀i = 1, . . . , n
5. Area of a rectangle of width ∆x and height f (xi∗ ) − g (xi∗ ) is
(f (xi∗ ) − g (xi∗ )) ∆x
6. Total areas of rectangles = ni=1 (f (xi∗ ) − g (xi∗ )) ∆x
P

which is called a Riemann sum

7. Exact area
Rb
= limn→∞ ni=1 (f (xi∗ ) − g (xi∗ )) ∆x = a (f (x) − g (x)) dx
P

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 Chapter 5. Integration 5.2. Definite integration

Theorem (Fundamental theorem of Calculus)

If f is continuous on [a, b] and F is an anti-derivative of f then
Z b
f (x)dx = F (x)|ba = F (b) − F (a)
a

The theorem says the integral of the rate of change is the amount of
change.
Example
R1
Let compute the integral 0 x 2 dx by both the Riemann sum and the
Fundamental theorem, and then compare results obtained.

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 Chapter 5. Integration 5.2. Definite integration

Consumer’s surplus. Given a demand function P = f (Q).

At Q = Q0 the price P = P0 . The total amount of money spent on
Q0 goods is then Q0 P0 , which is given by the area of the rectangle
OABC.
Now, P0 is the price that consumers are prepared to pay for the last
unit that they buy, which is the Q0 th good. For quantities up to Q0
they would actually be willing to pay the higher price given by the
demand curve.
The shaded area BCD therefore represents the benefit to the
consumer of paying the fixed price of P0 and is called the consumer’s
surplus, CS. The value of CS can be found by observing that

Z Q0
area BCD = area OABD − area OABC = f (Q)dQ − P0 × Q0
0

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 Chapter 5. Integration 5.2. Definite integration

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 Chapter 5. Integration 5.2. Definite integration

Producer’s surplus. Given a supply function P = g (Q).

At Q = Q0 the price P = P0 . Assuming that all goods are sold, the
total amount of money received is then Q0 P0 , which is given by the
area of the rectangle OABC.
Now, P0 is the price at which the producer is prepared to supply the
last unit, which is the Q0 th good. For quantities up to Q0 they would
actually be willing to accept the lower price given by the supply curve.
The shaded area BCD therefore represents the benefit to the producer
of selling at the fixed price of P0 and is called the producer’s surplus,
PS. The value of PS is found by observing that
RQ
area BCD = area OABC −− area OABD = P0 × Q0 − 0 0 g (Q)dQ

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 Chapter 5. Integration 5.2. Definite integration

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 Chapter 5. Integration 5.2. Definite integration

Investment flow. Net investment, I, is defined to be the rate of change of

capital stock, K , so that I = dK
dt where
I (t) denotes the flow of money, measured in dollars per year
K (t) is the amount of capital accumulated at time t as a result of
this investment flow and is measured in dollars.
Thus, given a formula for capital stock in terms of time, to find capital
stock we integrate to calculate the capital formation during the time
Rt
period from t = t1 to t = t2 we evaluate the definite integral t12 I (t)dt.

Example
√
If the investment flow is I (t) = 9000 t, calculate
(a) the capital formation from the end of the first year to the end of the
fourth year
(b) the number of years required before the capital stock exceeds $100000
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 Chapter 5. Integration 5.2. Definite integration

Discounting. We have seen that P = Se −rt/100 was used to calculate the

present value, P, when a single future value, S, is discounted at r %
interest continuously for t years.

If the fund is to provide a continuous revenue stream for n years at an

annual rate of S dollars per year then the present value can be found by
evaluating the definite integral
Z n
P= Se −rt/100 dt
0

Example
If the discount rate is 9% the present value of a continuous revenue stream
R5
of a $1000 a year for 5 years is P = 0 1000e −0.09t dt

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 Chapter 6. Matrices

Outline of the chapter:

What is a matrix?

Basic matrix operations

Matrix inverse

Cramer’s rule

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 Chapter 6. Matrices 6.1. What is a matrix?

A rectangular table consisting of m rows and n columns

 
a11 a12 . . . a1n
 a21 a22 . . . a2n 
 
A= . 
 .
.


am1 am2 . . . amn

is called a matrix of order m × n.

Rows of a matrix are horizontal, columns of a matrix are vertical.

Notation. Am×n = [aij ], i = 1, . . . , m, j = 1, . . . , n in which aij is called

the ij entry.

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 Chapter 6. Matrices 6.1. What is a matrix?

In particular,
If m = 1 then A is also called row vector.
If n = 1 then A is called column vector.
If m = n then the matrix is said to be square and in this case, we call
A is the square matrix of order n.

Identity matrix of order n: aii = 1 for i = 1, . . . , n and aij = 0 for

i 6= j, i, j = 1, . . . , n
 
1 0 ... 0
0 1 . . . 0
 
In = 
 ..

.


0 0 ... 1

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 Chapter 6. Matrices 6.2. Matrix Operations

Equality. Let A and B be two matrices of order m × n.

A = B ⇔ aij = bij
Addition. Let A and B be two matrices of order m × n

A + B = [aij + bij ]
Subtraction. Let A and B be two matrices of order m × n

A − B = [aij − bij ]
Scalar Multiplication. Let k be a real number and A be a matrix of order m × n

k A = [k aij ]

Transposition. Let A = (aij ) be a matrix of order m × n. The transposition of A

denoted by AT is defined by symbolically AT = (aji ), that means the first row of
AT is the first column of A, the second row of AT is the second column of A, and
so on.
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 Chapter 6. Matrices 6.2. Matrix Operations

Scalar product. Given a = (a1 a2 . . . an ) and b = (b1 b2 . . . bn ). The

scalar product of a and b is defined by

n
X
ha, bi = ab T = a1 b1 + a2 b2 + · · · + an bn = ai bi
i=1

Example
a = (1 3 5), b = (−1 0 4) ⇒ ab T = 1 × (−1) + 3 × 0 + 5 × 4 = 19

Recall that the product of 2 vectors perpendicular to each other is 0.

Example
a = (1 0), b = (0 1) ⇒ ab T = 0

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 Chapter 6. Matrices 6.2. Matrix Operations

Matrix Multiplication. Let A be a matrix of order m × n and B be a

matrix of n × p. The product of A and B is

AB = [cij ],
Pn
where cij = k=1 aik bkj

We can multiply two matrices only when the number of columns in the
first matrix is equal to the number of rows in the second matrix.

Example
" #" #
4 2 −1 −3
=
1 5 2 4
" #
4 × (−1) + 2 × 2 4 × (−3) + 2 × 4
1 × (−1) + 5 × 2 1 × (−3) + 5 × 4
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"
UEH, Vietnam
# 3 Jan - 2020 140 / 162
 Chapter 6. Matrices 6.2. Matrix Operations

We have that
" #" # " #
1 0 a11 a12 a11 a12
=
0 1 a21 a22 a21 a22
and
" #" # " #
a11 a12 1 0 a11 a12
=
a21 a22 0 1 a21 a22
In general AI = A = IA

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 Chapter 6. Matrices 6.2. Matrix Operations

Example
A firm orders 12, 30 and 25 items of goods G1, G2 and G3. The cost of
each item of G1, G2 and G3 is $8, $30 and $15, respectively.
(a) Write down suitable price and quantity vectors, and use matrix
multiplication to work out the total cost of the order.

(b) Write down the new price vector when the cost of G1 rises by 20%,
the cost of G2 falls by 10% and the cost of G3 is unaltered. Use
matrix multiplication to work out the new cost of the order and hence
find the overall percentage change in total cost.

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 Chapter 6. Matrices 6.2. Matrix Operations

Example
A chain of sports shops, A, B and C , sells T-shirts, trainers and tennis racquets.
The weekly sales and profit per item are shown in the tables below:

The 3 × 3 matrices formed from the sales and profit tables are denoted by S and
P, respectively.

(a) If SP T is denoted by A, find the element a11 and give a brief interpretation
of this number.

(b) If S T P is denoted by B, find the element b33 and give a brief interpretation
of this number.
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 Chapter 6. Matrices 6.3. Inverse Matrix

Consider a system of linear equations:




 a11 x1 + a12 x2 + · · · + a1n xn = b1


a21 x1 + a22 x2 + · · · + a2n xn

= b2
..



 .

+ am2 x2 + · · · + amn xn

a
m1 x1 = bm
⇔
    
a11 a12 ... a1n x1 b1
 a21 a22 ... a2n  x2   b2 
    
 . .=  .  ⇔ AX = B
 . .  . 
 . .  . 
am1 am2 ... amn xn bm

Note that the equation ax = b has a solution x = a−1 b if a 6= 0. In the above

matrix equation, we would like to have something like this. So we define an
inverse matrix A−1 .
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 Chapter 6. Matrices 6.3. Inverse Matrix

Let A be a matrix of order n × n. If there exists a matrix B such that

AB = I = BA

then A is said to be invertible and B is called the inverse matrix of A,

denoted by A−1 .
Example
# " " #
1 2 −2 1
Let a matrix A = . Verify that is the inverse of A.
3 4 3/2 −1/2

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 Chapter 6. Matrices 6.3. Inverse Matrix

How to find an inverse matrix?

1. Write an augmented matrix consisting of A on the left side and the
identity matrix on the right side
 
a11 a12 . . . a1n | 1 0 . . . 0
a21 a22 . . . a2n | 0 1 . . . 0
 
 . 
 .
 .


an1 an2 . . . ann | 0 0 . . . 1
2. Then we attempt to transform the augmented matrix by row
equivalent operations called Gaussian elimination method to one of
the form  
1 0 . . . 0 | b11 b12 . . . b1n
0 1 . . . 0 | b21 b22 . . . b2n 
 
. 
.
.


0 0 ... 1 | bn1 bn2 . . . bnn
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 Chapter 6. Matrices 6.3. Inverse Matrix

Gaussian elimination method

1. Interchange any two rows

 
3x + 4y = −5 x + 2y = 1
⇔
x + 2y = 1 3x + 4y = −5

2. Multiply each entry in a row by the same nonzero constant

 
x + 2y = 1 2x + 4y = 2
⇔
3x + 4y = −5 3x + 4y = −5

3. 
Add a nonzero multiple ofone row to another row.
x + 2y = 1 x + 2y = 1
⇔
3x + 4y = −5 0x − 2y = −8

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 Chapter 6. Matrices 6.3. Inverse Matrix

Example



x + 3y + 2z =9

x − y + 3z = 16


3x − 4y + 2z

= 28

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 Chapter 6. Matrices 6.3. Inverse Matrix

How to check a matrix invertible or not? one of the ways is finding its
determinant. If the determinant of a matrix is non-zero then the matrix is
invertible.
Matrix of order 2 × 2
 
a b 
 = ad − cb
 

c d 
Matrix of 3 × 3:  
a11 a12 a13 

a21 a22 a23  =
 
 
a31 a32 a33 
     
a
 22 a23 
a a23  a
 21 a22 
 
 21
a11   - a12   + a13  
a32 a33  a31 a33  a31 a32 

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 Chapter 6. Matrices 6.3. Inverse Matrix

The n × n order Determinants

Now the determinant of matrix of order n × n is defined inductively as
follows

For a square matrix A = [aij ]. The cofactor Aij of an element aij is

Aij = (−1)i+j Mij ,

where Mij is the determinant of the matrix formed by deleting the ith
row and the jth column of A.

The determinant of A of n × n is defined by

n
X
|A| = aij Aij ,
j=1

where i ∈ 1, n.
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 Chapter 6. Matrices 6.3. Inverse Matrix

Steps to find determinant of a square matrix

For any square matrix A of order n × n(n > 1), we define the determinant
of A, denoted |A|, as follows:
1. Choose any row or column

2. Multiply each element in that row or column by its cofactor and add
the results
Note that

The determinant of a 1 × 1 matrix is simply the element of the matrix.

The value of a determinant will be the same no matter which row or column
is chosen.

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 Chapter 6. Matrices 6.4. Cramer’s rule

Solving systems of linear equations using determinants

Cramer’s rule for 2 × 2 systems

The solution of the system


a x + b y = c
1 1 1
a x + b y = c
2 2 2

Dx Dy
is given by x = ;y=
D D
     
a b1  c b  a c 
 1  1 1  1 1
where D =  ; Dx =   Dy =  ; and D 6= 0
a2 b2  c2 b2  a2 c2 

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 Chapter 6. Matrices 6.4. Cramer’s rule

Cramer’s rule for 3 × 3 systems

The solution of the system


 a x + b1 y + c1 z = d1
 1


a2 x + b2 y + c2 z = d2


a3 x + b3 y + c3 z = d3


Dx Dy Dz
is given by x = ;y= ;z=
D D D
     
a1 b1 c1  d1 b1 c1  a1 d1 c1 
     
where D = a2 b2 c2 ; Dx = d2 b2 c2  Dy = a2 d2 c2 ;
     
     
a3 b3 c3  d3 b3 c3  a3 d3 c3 
 
a1 b1 d1 
 
Dz = a2 b2 d2 ; and D 6= 0
 
 
a3 b3 d3 
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 Chapter 6. Matrices 6.4. Cramer’s rule

As for n × n systems, we do the same. Cramer’s rule in general case

gives

D1 D2 Dn
x1 = , x2 = , . . . , xn =
D D D

provided that D 6= 0.

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 Chapter 7. Linear Programming

Outline of the chapter: In this chapter, we will introduce basically linear

programmings and methods for solving them.
What is a linear programming

Standard form of a linear programming

Geometric method for solving a linear programming of 2 variables

Simplex method for solving a linear programming

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 Chapter 7. Linear Programming 7.1. What is a linear programming?

Example
A manufacturer produces three models of bicycles. The time (in hours)
required for assembling, painting, and packaging each model is as follows:

The total time available for assembling, painting, and packaging is 36

hours, 60 hours and 66 hours, respectively. The profit per unit for each
model is $3 (Model A), $4 (Model B), and $5 (Model C). How many of
each type should be produced to obtain a maximum profit?

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 Chapter 7. Linear Programming 7.2. Standard form of a linear programming

Standard form of a linear programming

A linear programming is a problem to maximize or minimize a linear

function Z = c1 x1 + c2 x2 + · · · + cn xn subject to the following conditions



 a11 x1 + a12 x2 + · · · + a1n xn ≤ b1


a21 x1 + a22 x2 + · · · + a2n xn

≤ b2
..



 .

a x + a x + · · · + a x ≤ b

m1 1 m2 2 mn n m

where aij are constants, bi are non-negative constants, cj are constants for
all 1 ≤ i ≤ m, 1 ≤ j ≤ n, and x1 , x2 , . . . , xn ≥ 0.

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 Chapter 7. Linear Programming 7.3. Geometric method

Geometric method for linear programming of 2 variables

Sketch the constraint set on the xy plane.

Compare the value of Z at corners of the constraint set: the biggest

value is the optimal value of the max problem and the smallest value
is the optimal value of the min problem.

Example



x +y ≤2

max Z = 5x + 4y subject to 2x + 3y ≤ 6


x, y ≥ 0.


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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

Consider, for instance, the max problem of the function

Z = c1 x1 + c2 x2 + c3 x3 subject to



 a11 x1 + a12 x2 + a13 x3 ≤ b1


≤ b2

 a x + a22 x2 + a23 x3
 21 1


a31 x1 + a32 x2 + a33 x3 ≤ b3


a41 x1 + a42 x2 + a43 x3 ≤ b4






x1 , x2 , x3 ≥ 0.


Note that b1 , b2 , b3 and b4 are supposed to be non-negative constants.

In 1947, George B. Dantzig created a simplex algorithm to solve linear programmings for planning and decision-making in

large-scale enterprises. The algorithm’s success led to a vast array of specializations and generalizations that have dominated

practical operations research for half a century later.

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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

The latter system can be written as Z − c1 x1 − c2 x2 − c3 x3 = 0 subject to




a11 x1 + a12 x2 + a13 x3 +s1 = b1



a x + a x + a x
21 1 22 2 23 3 +s2 = b2


a31 x1 + a32 x2 + a33 x3 +s3 = b3


a41 x1 + a42 x2 + a43 x3

+s4 = b4 ,
where s1 , s2 , s3 and s4 are non-negative and called the slack variables. So
now we have a departing simplex table as follows.

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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

Steps to find the optimal solution of the max problem:

S1. If all indicators are non-negative then STOP and Z has a maximum
with the current list of basic variables.

S2. If there is any negative indicator then choose a column w.r.t. the
biggest negative indicator as a pivot column.

S3. Divide each entry in R by the corresponding positive entry (Z and

negative entry are not included) in the pivot column and choose a
pivot row which has the smallest positive quotient.

S4. Create a new simplex table in which the common entry of the pivot
column and the pivot row above is transformed into 1 and other
entries in the pivot column zeros by using the elementary row
operations [executing with pivot row only!]

S5. Turn back to S1.

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 Chapter 7. Linear Programming 7.4. Simplex method for max problem

Project 2: Using Excel to solve linear programming problems

Exercises : 15, 16, 17, 18, and 19 on page 322 using solver in Excel.

Due date: 10 May 2020

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