Mathematical Economics

(ECON 352)

Chapter 1: Introduction to Mathematical

Economics

Mesfin Abraham (MA in Development Policy)

Arsi University
2019 (2012 E.C.)
 Instructor Information

 Name: Mesfin Abraham

 Education:
 BA in Economics (2001, Wollega University, Nekemte, Oromia,
Ethiopia)
 MA in Development Policy (2013, Soul, South Korea)
 Work Experience:
 2001 – 2002: GA I, Madda Walabu University
 2002 - 2003: GA II. Madda Walabu University
 2003 – 2004: Assistant Lecturer, Madda Walabu University
 2006 – 2009: Lecturer, Madda Walabu University
 2009 - 2012: Lecturer and Department Head, Madda Walabu University.
 Present, Lecturer, Arsi University

 Contact Information:
 Email: [email protected]
 Phone number: 0912668603

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

 Course Information:
 The course is all about application of Mathematical tools
Economics
 Extension of Linear Algebra and Calculus for Economics
 3 Credit Hour Course
 Schedule:
 Sunday 2:30-5:20 (R-6)
 Course Website:
 https://sites.google.com/site/mesfinabrahamsessions/courses/ma
thematical-economics
 or search Mesfin Abraham sessions on Google and click on the
course)

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

Course Contents
 The course is organized in four chapters.
 Chapter 1: Introduction to mathematical Economics
 Mathematical economics vs non mathematical economics
 Review on Deferential and Integral Calculus

 Basic rules of differential calculus

 Basic rules of integral calculus

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description
Course Contents
 The course is organized in four chapters.
 Chapter 2: Derivatives in Use
 Elasticities
 Higher-Order Derivatives
 Concavity and convexity
 Linear and polynomial approximations
 Estimation of functions
 Intermediate value theorem and Newton method
 Multivariate Calculus
 Partial derivatives
 Second and cross partial derivatives (Young's theorem)
 The multivariate chain rule
 Homogeneous functions and Euler's theorem
 Total differentials and implicit differentiation

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

Course Contents
 The course is organized in four chapters.
 Chapter 3: Unconstrained Optimization
 Functions of one variable
 Function of several independent variables
 Implicit functions and the unconstrained envelope
theory.

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

Course Contents
 The course is organized in four chapters.
 Chapter 4: Constrained Optimization
 One variable constrained optimization with non- negative
constraint
 Two variables problems with equality constrains
 Inequality constraints and the theorem of Kuhn-Tucker
 The General Case: Mixed constraint

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

Course Contents
 The course is organized in four chapters.
 Chapter 5: Comparative Statistics Analysis
 The nature of comparative static Analysis
 Differentiating systems of Equations
 The Jacobean and independence of non–linear functions
 Jacobean and Hessian Determinants
 Comparative Static of General Function Models
 Limitation of Comparative Static Analysis

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

Course Contents
 The course is organized in four chapters.
 Chapter 6: Dynamic Optimization
 Discrete time Optimization
 Continuous Time Optimization
 Optimalcontrol theory
 Economic Applications

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

Course Contents
 The course is organized in four chapters.
 Chapter 7: Differential Equation
 Definition and type of differential equations
 Solution of a differential equation
 First order linear differential equations
 Exact Differential equations
 Second order linear differential equations
 Economic Applications of differential equations

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Description

Course Contents
 The course is organized in four chapters.
 Chapter 8: Difference Equation
 Definitions and concepts
 First order difference equation
 Second order difference equations
 Economic Applications
 The cobweb Model
 The Dynamic stability of equilibrium

 Market model with inventory

 Dynamic Multiplier

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Course Policy

 Handouts will be provided

 Attendance is mandatory
 Late coming is not tolerated
 Meeting deadlines
 Plagiarism is strictly punished
 Cheating

 Duplication of assignments

 Grades are earned

 Earn your grades

 Act and study for A grade and you will get it

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Reading List and References
Textbook:
 Chiang, Alpha C. (1984), Fundamental Methods of Mathematical
Economics, McGraw-Hill.
Other Books
 Allen, R.G.D. (1982), Mathematical Analysis for Economists,
Macmillan, London
 Kapoor, V. K. (2002), Introductory Mathematics for Business and
Economics.
 Dowling, E.T., (1980), Mathematics for Economists (Schaum's Outline
Series), McGraw-Hill
 Sydsaeter, K. and Hammond P. (2002). Essential Mathematics for
economic analysis, prentice–Hall.
 Sydsaeter K. Stron A,, and Berck P. (2000), Economists Mathematical
manual, third edition Springer .
 Yamane, T. (1978), Mathematics for economists: An Elementary survey,
2nd edition , Prentice –Hall.

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Introduction to Mathematical Economics

What is mathematical Economics?

 Mathematical economics is not a distinct branch of
economics
 Rather it is an approach to economic analysis where
 Mathematical symbols are used in the statement of the problem
 Mathematical theorems are drawn to aid in reasoning.
 The approach is applied in different branches of economics

Micro or macro theory, public finance, urban economics, …

 In broad terms it extends to include geometry matrix algebra,
differential and integral calculus, differential equations, difference
equations, …

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Mathematical versus nonmathematical Economics

 Mathematical economics is just an approach to

economic analysis.
 As a result, there is no fundamental difference between
non mathematical and mathematical approach to economics
 Any theoretical analysis aims to derive a set of
conclusions or theorems from a given set of
assumptions or postulates via a process of reasoning.
 In this sense "mathematical economics" and non
mathematical economics are similar.

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Mathematical versus nonmathematical Economics

Mathematical Economics Non mathematical economics

 Uses mathematical symbols  Uses words and sentences
and equations
 Employs literary logic
 Mathematical theorems aid in
the reasoning process.
 Symbols and words are really
equivalents.
 Symbols are more
convenient to use in
deductive reasoning
 They are more conducive to
conciseness and preciseness
of statement

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Advantages of Mathematical Economics

 4 advantages of using mathematics are:

 The "language" of mathematics is
 More concise (compact)
 4 + 3+2 =9
 Four plus three plus two is equal to 9
 More precise
 Words might have different meanings (I saw a saw sawing a saw)
 Mathematical notations are well defined (∋, ∄, ≥, ≡,×, ± ⋯)

 A wealth of mathematical theorems to use exist

 It keeps us from adoption of unwanted implicit assumptions
by forcing us to state explicitly all our assumption;
 It allows us to treat the general n-variable case.
 As opposed to using two-dimensional geometry alone.

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Mathematical Economics & Econometrics

Econometrics
 The "metric" part implies that econometrics is concerned
mainly with the measurement of economic data.
 It deals with the study of empirical observations using
statistical methods of estimation and hypothesis testing.
Mathematical economics
 On the other hand, refers to the application of mathematics
to the purely theoretical aspects of economic analysis.
 With little or no concern about such statistical problems as the
errors of measurement of the variables under study.
 It is basic
 To have a meaningful statistical and econometric study, a good
knowledge in a mathematical formulation is indispensable.

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
Review of Differential and
Integral Calculus

Differential Calculus
 Differential Calculus

 The study of how quickly quantities change over time is an

important topic in economics.
 We need information about rates of change
 To compute the future position of a planet
 To predict the growth in population of a biological species,
 To estimate the future demand for a commodity

 The concept used to describe the rate of change of a

function is the derivative.
 Itis the central concept in mathematical analysis.
 Gives rise to the topic of differential calculus

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 The Derivative

 Given a function y = ƒ(x)

 x is the independent variables
 y is the dependent variables

 The derivative of the function y with respect to x measures

the average rate of change of y when x changes by a small
unit, dx.
 If ∆𝑥 is an increment in the value of x and ∆𝑦 is an
increment in the value of y, then
∆𝑦
∆𝑥
 It is t𝑕𝑒 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑐𝑕𝑎𝑛𝑔𝑒 or
 the rate of change of y with respect to the given change in x.

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

1. Constant function rule

 Given a function y = ƒ(x) = k, where k is constant
 The derivative of y w.r.t x is zero, that is
𝑑𝑦 ′
𝑑(𝑘)
=𝑓 𝑥 = =0
𝑑𝑥 𝑑𝑥
 The derivative of a constant function is zero.

 Example 1: Given y=f(x)=4, then find dy/dx

 Solution:
𝑑𝑦 ′
𝑑(4)
=𝑓 𝑥 = =0
𝑑𝑥 𝑑𝑥

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

2. Linear function rule

 Given a function y = ƒ(x) = ax+b, where a & b are
constants, the derivative of y w.r.t x is a, that is
𝑑𝑦 ′
𝑑(𝑎𝑥 + 𝑏)
=𝑓 𝑥 = =𝑎
𝑑𝑥 𝑑𝑥
 Example 1: Given y=f(x)=4x+3, then find dy/dx
 Solution:
𝑑𝑦 ′
𝑑(4𝑥 + 3)
=𝑓 𝑥 = =4
𝑑𝑥 𝑑𝑥
 Example 2:Givem y=f(x)=5x, then find dy/dx
 Solution:
𝑑𝑦 ′
𝑑(5𝑥)
=𝑓 𝑥 = =5
𝑑𝑥 𝑑𝑥

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

3. Power function rule

 Given a function y = ƒ(x) = 𝑥 𝑛 , where 𝑥 ≠ 0 and n is any
real number, the derivative of y w.r.t x is given as
𝑑𝑦
= 𝑓 ′ 𝑥 = 𝑛𝑥 𝑛−1
𝑑𝑥
 Example 1: Given y=f(x)=2𝑥 5 , then find dy/dx
 Solution:
𝑑𝑦
= 𝑓 ′ 𝑥 = 2 × 5𝑥 5−1 = 10𝑥 4
𝑑𝑥
 Example 2:Given y=f(x)= 3 𝑥 , then find dy/dx
 Solution: note that 3 𝑥 = 𝑥 1/3
1
𝑑𝑦 1 𝑑(𝑥 3 ) 1 1 −2 1
′
=𝑓 𝑥 = = 𝑥 3 −1 = 𝑥 3= 3
𝑑𝑥 𝑑𝑥 3 3 3 𝑥2
Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

4. Sum and Difference Rule

 Given a function y = ƒ(x) = g(x) ± 𝑕(𝑥), the derivative of y w.r.t x is
𝑑𝑦
= 𝑓 ′ 𝑥 = 𝑔′ 𝑥 ± 𝑕′(𝑥)
𝑑𝑥
 Example 1: Given y=f(x)=g x + 𝑕 𝑥 , 𝑔 𝑥 = 2𝑥 + 3 & 𝑕 𝑥 = 5𝑥 2 + 2𝑥 ,
then find dy/dx
 Solution:
g ′ x = 2 and h′ x = 10x + 2
𝑑𝑦
= 𝑓 ′ 𝑥 = 𝑔′ 𝑥 + 𝑕′ 𝑥 = 2 + 10𝑥 + 2 = 10𝑥 + 4
𝑑𝑥
 Example 2: Find dy/dx from example 1 if y=f(x)=g x − 𝑕 𝑥
 Solution:
g ′ x = 2 and 𝑕′ x = 10x + 2
𝑑𝑦
= 𝑓 ′ 𝑥 = 𝑔′ 𝑥 − 𝑕′ 𝑥 = 2 − 10𝑥 + 2 = −10𝑥
𝑑𝑥

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

5. Product Rule
 Given a function y = ƒ(x) = g(x) × 𝑕(𝑥), the derivative of y w.r.t
x is
𝑑𝑦
= 𝑓 ′ 𝑥 = 𝑔′ 𝑥 𝑕 𝑥 + 𝑕′ 𝑥 𝑔(𝑥)
𝑑𝑥
 Example 1: Given y=f(x)= g x 𝑕 𝑥 𝑎𝑛𝑑 𝑔 𝑥 = 2𝑥 + 3 & 𝑕 𝑥 =
5𝑥 2 + 2𝑥, then find dy/dx
 Solution:
g ′ x = 2 and 𝑕′ x = 10x + 2
𝑑𝑦
= 𝑓 ′ 𝑥 = 𝑔′ ′
𝑥 𝑕 𝑥 +𝑕 𝑥 𝑔 𝑥
𝑑𝑥
2
= 2 5𝑥 + 2𝑥 + 10𝑥 + 2 2𝑥 + 3
𝑓 ′ 𝑥 = 10𝑥 2 + 4x + 20𝑥 2 + 30𝑥 + 4𝑥 + 6 = 30𝑥 2 + 38𝑥 + 6

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

6. Quotient Rule
𝑔(𝑥)
 Given a function y = ƒ(x) = the derivative of y w.r.t x is
𝑕(𝑥)
𝑕𝑔′ 𝑥
𝑥 − 𝑕 ′ 𝑥 𝑔(𝑥)
𝑓′ 𝑥 =
(𝑕(𝑥))2
 Example 1: Given y=f(x)= g x /𝑕 𝑥 𝑎𝑛𝑑 𝑔 𝑥 = 2𝑥 + 3 & 𝑕 𝑥 =
5𝑥 2 + 2𝑥, then find dy/dx
′
 Solution: we know that g x = 2 and 𝑕′ x = 10x + 2
′ 𝑥 𝑕 𝑥 − 𝑕′ 𝑥 𝑔(𝑥) 2 − 30𝑥 − 6
𝑔 −10𝑥
𝑓′ 𝑥 = =
(𝑕(𝑥))2 (5𝑥 2 + 2𝑥)2
(5𝑥 2 + 2𝑥)2 = (5𝑥 2 + 2𝑥) 5𝑥 2 + 2𝑥 = 25𝑥 4 + 10𝑥 3 + 10𝑥 3 + 4𝑥 2
−10𝑥 2 + 30𝑥 − 6
(5𝑥 2 + 2𝑥)2
𝑓′ 𝑥 =
25𝑥 4 + 20𝑥 3 + 4𝑥 2

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus
7. Chain Rule
 The chain rule enables us to differentiate' functions within functions.
 Given a function y = ƒ (z) and z = g(x), then y= ƒ[g(x)] and dy/dx is
𝑑𝑦 𝑑𝑦 𝑑𝑧
= ×
𝑑𝑥 𝑑𝑧 𝑑𝑥
 Example: Given 𝑦 = 2(2𝑥 3 − 6)2 , find dy/dx
 Solution: we can apply the chain rule as follows:
 Let 𝑦 = 2𝑧 2 and z=2𝑥 3 − 6, find dy/dx?
𝑑𝑦 𝑑𝑦 𝑑𝑧 𝑑𝑦 𝑑𝑧
= × 𝑎𝑛𝑑 = 4𝑧 𝑎𝑛𝑑 = 6𝑥 2
𝑑𝑥 𝑑𝑧 𝑑𝑥 𝑑𝑧 𝑑𝑥
𝑑𝑦
∴ = 4𝑧 × 6𝑥 2 but we know that z=2𝑥 3 − 6
𝑑𝑥
 So that dy/dx=4(2𝑥 3 − 6) 6𝑥 2 =24𝑥 2 (2𝑥 3 − 6)=48𝑥 5 − 144𝑥 2
 Note that dy/dx must explicitly state dy as a function of x.

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

8. Logarithmic Function rule

 The derivative of a logarithmic function 𝑦 = ln 𝑡 is
𝑑𝑦 𝑑 ln 𝑡 1
= =
𝑑𝑡 𝑑𝑡 𝑡
 The derivative of the more general logarithmic function 𝑦 = ln 𝑓(𝑡)
is
𝑑𝑦 𝑑 ln 𝑓(𝑡) 𝑓 ′ (𝑡)
= =
𝑑𝑡 𝑑𝑡 𝑓(𝑡)
 Example: find the derivatives of (a) 𝑦 = ln 𝑎𝑡 (b) y=ln 𝑡 𝑐 , a & c are
constants
𝑑𝑦 𝑓′(𝑡) 𝑎 1
 Solution 𝑎 : 𝑓 𝑡 = 𝑎𝑡 𝑠𝑢𝑐𝑕 𝑡𝑕𝑎𝑡 = = =
𝑑𝑡 𝑓 𝑡 𝑎𝑡 𝑡
𝑑𝑦 𝑓′(𝑡) 𝑐𝑡 𝑐−1 𝑐
 Solution 𝑏 : 𝑓 𝑡 = 𝑡𝑐 𝑠𝑢𝑐𝑕 𝑡𝑕𝑎𝑡 = = =
𝑑𝑡 𝑓 𝑡 𝑡𝑐 𝑡

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Differential Calculus

8. Exponential Function rule

 The derivative of exponential function 𝑦 = 𝑒 𝑡 is
𝑑𝑦 𝑑𝑒 𝑡
= = 𝑒𝑡
𝑑𝑡 𝑑𝑡
 The derivative of the more general logarithmic function
𝑦 = 𝑒 𝑓(𝑡) is
𝑑𝑦 𝑑𝑒 𝑓(𝑡)
= = 𝑓′(𝑡)𝑒 𝑓(𝑡)
𝑑𝑡 𝑑𝑡
 Example: find the derivatives of (a) 𝑦 = 𝑒 𝑟𝑡 (b) y=𝑒 −𝑡
𝑑𝑦
 Solution 𝑎 : 𝑓 𝑡 = 𝑟𝑡 𝑠𝑢𝑐𝑕 𝑡𝑕𝑎𝑡 = 𝑟𝑒 𝑟𝑡
𝑑𝑡
𝑑𝑦
 Solution 𝑏 : 𝑓 𝑡 = 𝑒 −𝑡 𝑠𝑢𝑐𝑕 𝑡𝑕𝑎𝑡 = −𝑒 −𝑡
𝑑𝑡
Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
Integral Calculus
 Nature of Integration

 Integration is the reverse of differentiation

 If differentiation of a given primitive function F(x) yields the
derivative 𝑓(𝑥), we can "integrate” 𝑓(𝑥) to find F(x), an integral (or
antiderivative) of f(x).
 The two can be likened to family tree:
 Integration involves the tracing of the parentage of the function f(x)
 Differentiation seeks out the progeny of the function F(x).
 Because if F(x) is an integral of f(x), then so also must be F(x)
plus any constant, thus
 The primitive function F(x) invariably produces a unique derivative f(x)
 The derived function f(x) traceable to an infinite number of possible
parents through integration
 Standard notation of integration

𝑓 𝑥 𝑑𝑥

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Integral Calculus

 1. Power Rule:
1
𝑥 𝑛 𝑑𝑥 = 𝑥 𝑛+1 + 𝑐, (n ≠ −1)
𝑛+1
 Exercise: find integral of (a) 𝑥 3 (b) 𝑥 (c) 1

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Integral Calculus

 2. Exponential Function Rule

𝑒 𝑥 𝑑𝑥 = 𝑒 𝑥 + 𝑐

𝑓′(𝑥)𝑒 𝑓(𝑥) 𝑑𝑥 = 𝑒 𝑓(𝑥) + 𝑐

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Integral Calculus

 3. Logarithmic Function Rule

1
𝑑𝑥 = ln 𝑥 + 𝑐
𝑥
𝑓′(𝑥)
𝑑𝑥 = ln 𝑓(𝑥) + 𝑐
𝑓(𝑥)
14𝑥
 Exercise: Find 2𝑒 2𝑥 + 𝑑𝑥
7𝑥 2 +5
 Solution: Apply the exponential and logarithmic rules

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Integral Calculus

 4. Integral of a Sum

[𝑓 𝑥 + 𝑔 𝑥 ]𝑑𝑥 = 𝑓 𝑥 𝑑𝑥 + 𝑔 𝑥 𝑑𝑥

 Exercise: Find [𝑥 3 + 𝑥 + 1]𝑑𝑥

 Solution: Apply the power and integral of a sum rules

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Integral Calculus

 5. Integral of a Multiple

𝑘𝑓 𝑥 𝑑𝑥 = 𝑘 𝑓 𝑥 𝑑𝑥

 Where k is a constant
 Exercise: Find (a) 2𝑥 2 𝑑𝑥

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics
 Basic Rules of Integral Calculus

 6. Integration by Substitution
 7. Integration by parts
 8. Definite integrals

Mathematical Economics
Chapter 1: Introduction to Mathematical Economics