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1.1.The concept and importance of mathematical economics

• Before directly swimming in to the discussion of the

theme and role of mathematical economics, let me cite

Chapter 1 the speech of Nobel Prize winner economist Robert

Lucas Jr. in some length from his professional memoir.

INTRODUCTION • “Like so many others in my cohort, I internalized its

[Samuelson’s Foundations of Economic Analyses] view
by: TZ.z that if I couldn’t formulate a problem in economic
theory mathematically, I didn’t know what I was doing.
I came to the position that mathematical analysis is not
one of many ways of doing economic theory: it is the
only way. Economic theory is mathematical analysis.
Everything else is Just pictures and talk…”

Cont… Cont…
• mathematical economics is of paramount • The difference, hence, lies in the ways they
importance for economic analyses. undertake.
• Mathematical economics is not a distinct • In mathematical economics, economists make use
specialization of economics; rather, it is an of mathematical symbols in the statement of the
approach to economic reasoning. problem and draw upon known mathematical
• The ultimate objective of mathematical and theorems to aid in reasoning.
literary economics is to come up with some how • In mathematical economics, the assumptions and
valid generalizations about cause effect conclusions are stated in mathematical symbols
relationship that prevails among economic than words and in equations rather than in
variables. sentences.

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Cont… Cont…
• At this juncture, you may ask your self “If the two • An economist without the tools of mathematics
approaches‟ ends are the same-establish valid
hypotheses, then why do economists choose is like a blind person swimming in the middle
mathematical approaches with which many literary of an ocean.
people are in phobia?”
• The choice between literary approach and mathematics • Till this person gives up, he will continue to
approach to economic reasoning is like the choice struggle till he reaches an island; but, his
between horse cart and plane for travel from jijjiga to
Addis. blindness has left him as incapable to identify
• The time and cost savings associated with plane or cars whether swimming to the north, south, east or
has driven out the horse cart from the market of travel
from Mekelle to Addis. west is the shortest distance to an island.

Cont… Cont…
• But an economist equipped with the tools of • Specifically mathematical approach has the
mathematics is like a normal person with following advantages:
• The language used is more precise and concise;
motorboat or ship depending upon his personal • There are wealth of mathematical assumptions that make
inclination to each. things simple and life less costly
• By forcing us to state explicitly all our assumptions as a
• As a result, most economic researchers are prerequisite to the use of mathematical theorems, it keeps us
from the pitfall of an unintentional adoption of unwanted
extensively using the tools of mathematics to implicit assumptions
economic reasoning. • It helps us to understand relationships among more than two
economic variables simply and neatly with which the
geometric and literary approaches are at high probability of
risk of committing mistakes.

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1.2. Review of Economic Model and Analysis Cont…

• As you have covered in the course introduction to • The main aim behind building economic models is to
economics, an economic theory is necessarily generalization describe how the economy works and to obtain some
or abstraction from the real world. how valid predictions about economic variables.
• The complexity of the real economy does not make it Different models are built for different purposes. Some
possible for us to understand all the interrelationships at of the models are designed to investigate the
once; nor, for that matter, are all these interrelationships of equilibrium value of the variable as an ultimate end
equal importance for the understanding of the particular while some to investigate the movement of a variable
economic phenomenon under study. (s) over time.
• Due to this we need simplified analytical framework which • Thus, in economics, we have three types of analyses:
is called an economic model.
– Static (equilibrium) analysis
• If our model is mathematical, it will usually consist of a set
of equations designed to describe the structure of the model. – Comparative static analysis
– Dynamic analysis

Cont… 1.3. The Concept and Type of Functions

• static/equilibrium analysis is the study about • Function, as you might remember it, is a unique
equilibrium. That is, it studies the mathematical rule that relates one or more
variables to determine another variable.
determination of equilibrium values.
• It is a special type of relation in which an
• Comparative static studies on the comparison independent variable (domain) can never be tied
of two or more equilibrium values. This may with more than one dependent variable (range).
involve rate of changes and growth rates. • It is a relationship between numbers in which to
• dynamic analysis involves the time path of each element in the input (domain), there
corresponds exactly one element in the output
different relevant economic variables. (range).

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Cont… Cont…
• There are four methods of representing 1. Representing functions using vein diagram
functions. These are:
– Vein diagram
– Set of order pairs
– Equations (commonly used in economic
researches)
– Graphs(commonly used in economic education)

Cont…
2. Representing functions using set of ordered 3. Representing functions using equations
pairs.
• A= { (1,2),(2,3) ,(2,4),(3,6),(4,0)}
• B= {(0,1),(1,2) ,(4,8),(7,10),(8,10)}
• In this example, A is not a function since
domain „2‟ is mapped to more than one
element in the range but B is a function.

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Cont… 1.3 Types of functions

• 4. Representing functions using graphs • Generally there are two major types of
functions; i.e.
• Algebraic functions
• Non algebraic function
• Algebraic functions
• Vertical line test states that if a vertical line • Before generalizing what an algebraic function
crosses the graph of a function more than once, it is (are), let‟s see each type of algebraic
is not a function. But, if it crosses only once, it is
a function. functions.

Cont… Cont…
b. Rational functions: A rational function is a
function which is the ratio of two polynomial
functions. That is,

c. The third type of algebraic function is a

function which is the square root of polynomial
function.

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Cont… 1. Exponential function

• Non algebraic functions/Transcendental functions.
• There are four types of non-algebraic functions
that are commonly used in economics; i.e.
– Exponential function
– Logarithmic function
– Trigonometric function and
– Incommensurable power functions
• In this course you will be introduced with the first
two non-algebraic functions and the rest are left
for further studies.

Cont… Cont…
• Example

• Graph of exponential function

• Note: Every exponential function passes
through (0, 1)

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2. logarithmic functions
• logarithmic functions is a kind of function
which is written in this form

• a>0,x>0,y is an element of real number.

Multivariate function Implicit and inverse function

• A multivariable function is just a function • An implicit function is a function that is defined by an
implicit equation, that relates one of the variables,
whose input and/or output is made up of considered as the value of the function, with the others
multiple numbers. In contrast, a function with considered as the arguments.
single-number inputs and a single-number • In mathematics, an implicit equation is a relation of
outputs is called a single-variable function. the form , where R is a function of
several variables (often a polynomial).

• For example, the equation of the unit

circle defines y as an implicit function of x if −1 ≤ x ≤
1, and y is restricted to nonnegative values.

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Monotonic and homogeneous

Cont…
function
• In calculus, a function f defined on a subset of
the real numbers with real values is
called monotonic if and only if it is either
entirely non-increasing, or entirely non-
decreasing.
• a function that increases monotonically does
not exclusively have to increase, it simply
must not decrease.

Cont… Homogeneous function

• Homogeneous function: is a function with
multiplicative scaling behaving. If each
variable in the equation is multiplied with a
constant then, the entire function is also
multiplied with the exponent of a constant.

• Example: f(x,y) = 𝑥 2 -2xy is it homogeneous?

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Limits and its application Cont…

The function is un defined when x=-2

• But to what value f(x) gets closer when x is close

but not equal to –2? Here we are introducing the
concept of limit. By evaluating the function at • It is apparent that as the value of x approaches –2 from both
values of x at both side of and close to X=–2 but sides, the value of the function approaches –5. In general, if
f(x) approaches some finite number as x approaches a, then we
not at –2, we can see to what value the function
can say that:
approaches. Let‟s now inspect the function to the
left and the right of X=-2.
• Where: L is finite number Lim - is limit of
• x :x is closer and closer but not equal to a

Cont… Cont…
• N.B: Two basic facts regarding limits must be kept in mind.
– The limit of a function as x approaches „a‟- is independent of
the value of the function at „a‟. Even though exists Examples
the value of the function
• May be undefined
• May be defined and different from the limit
– The limit is said to exist only if the following conditions are
satisfied:
A. The limit L must be a finite number
B. The limit as x approaches „a‟ from
the left written as must equal to

the limit as x approaches a from the right written as

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Properties of limits/the limit

Cont…
theorems
• If K and C are constants, n is a positive integer
and and then

Cont… Cont…

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More on Indeterminate Limits Cont…

• h-method
• We put “a+h” in place of x and simplify such
that h gets cancelled from denominator and
numerator. Putting h=0, we get the limit of f(x)
as x a.

Limits at infinity Cont…

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Cont… Cont…

Cont… Cont…

• H

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Application of limit Cont…

• Example:The ECC is embarking on an extensive
advertising campaign to market its new detergent.
In the past, advertising has been very successful
in increasing public awareness and sales of ECC‟s • Example 2: Suppose that for a certain
products. A senior advertising executive has corporation the monthly profit (in thousands of
estimated that, for the new product, profit (P) is
related to advertising expenditure (x) according to dollars) at time t (in months) is estimated by:
the formula:

• Then what is the maximum possible profit this • Predict the long-range profit as t ∞
firm can earn?

Continuity Cont…
• A given function is said to be continuous over
a given rage [at a point] if it is defined for all
real numbers within that range [at that point].
Graphically speaking, continuity occurs if we
can‟t draw graph of a function with out lifting
our pen/pencil. Any function is said to be
continuous at a point such as X=C if the
following conditions are satisfied. That is

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Cont… Cont…

Thus f(x) is continuous at x=2

Cont… Cont…

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Increments, tangent lines and

Cont… rates of change
• We will now use the concept of limit to solve
some of the problems of calculus. Before
pursuing with these problems, we digress for a
moment to introduce the concept of increments.
Let f(x) =y
• If x changes from X1 to X2, then y changes from
f(X1) to f(X2). Mathematically, the change in x
and the corresponding change in y, called
increments in x and y, respectively, are denoted
by x or ∆x, and y or ∆y.

Cont… Cont…

Slope and tangent lines

• The concept of coordinate geometry tells us
that a tangent to a circle is a line that passes
through one and only one point on the circle.
But, how do we define and find a tangent line
to graph of a function at a point?

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Average and Instantaneous

Cont…
rates of change

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