UNIVERSITY OF LAGOS

FACULTY OF SOCIAL SCIENCES

DEPARTMENT OF ECONOMICS
FIRST SEMESTER 2019/2020 ACADEMIC SESSION
ECN 133: INTRODUCTORY MATHEMATICS FOR ECONOMISTS (3 UNITS)
Course Lecturers: Dr. T. A. Egunjobi, Dr. Adegboye and Dr. Osobase, A
Course Objectives:
At the end of the course, every student should be able to:
• Explain the relationship between mathematics and economics in solving everyday
economic problems and business situations
• Explain mathematical operations involving the use of Numbers
• Analyse the use of Economic applications to Set theory
• Explain the conversion of algebra functions into Graphical form
• Explain the Application of equations to Economic analysis
• Apply Differentiation in solving Economic problems as relevant in the business world
• Solve and apply the use of calculus in explaining economic concepts

5. Graphs
• Meaning and Uses of Graphs
• Graphs of Linear Functions
• Graphs of Non- Linear Functions
• Economic Applications of Graph
6. Equations
• Meaning and Types of Equations (Linear, Quadratic and Simultaneous)
• Functions
• Application of Equations and Functions to Economic Analysis
7. Matrix Algebra
• Addition subtraction and Multiplication of Matrices
• Scalar and Vector Multiplication
• Laws in Matrix Algebra
• Identity and Null Matrices
• Application of Equations and Functions to Economic Analysis
8. Sequences and Series
• Meaning of Sequences and Series
• Linear and Exponential Sequence
• Arithmetic Progression
• Geometric Progression

Recommended Texts
Fabayo, J.A.(1996). Mathematical Analysis in Economics. Ife: Obafemi Awolowo University
Press
Dowling E.T. (2001). Introduction to Mathematical Economics Schaum’s Outlines. Mc
GrawHill, Third Edition.
Obiwuru, T. (2007). Basic Mathematics. Second Edition. Abuja: Panaf Press

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5.1 Graphs
• Meaning and Uses of Graphs
Graphs are visual representations of data that use symbols, lines, bars, or other graphical
elements to convey information. In various fields, including mathematics, science, economics,
and social sciences, graphs serve as effective tools for organizing, analyzing, and presenting
complex data.
Graphs are visual representations of data. Graphs are a common method to visually illustrate
relationships in the data. A graph is a mathematical diagram which shows the relationship
between two or more sets of numbers or measurements. An economics graph is a visual
illustration of numerical data in economics.
Economists plot graphs on two axes: the vertical axis, also known as the y-axis, and the
horizontal axis, also known as the x-axis.

The primary purpose of using graphs is to make data more accessible, understandable, and
interpretable.
Types of Economics Graphs
However, there are three main types of economics graphs, and they include line, bar, and pie
graphs. We'll discuss them here.
I. The first and most used type of economics graph is the line graph. Line graphs show the
relationship between two economic variables plotted on the horizontal and vertical axes.

Let's look at the following example. Line graphs show relationships between variables in
economics.
Kent buys 3 apples for N5 per apple and 5 apples for N2 per apple.
From the simple example above, we can see that the price of apples and the quantity of apples
are interacting with each other. So, how do we show you a picture of this? We use the line graph
as shown in Figure 1.
To interpret a graph, we look at each point and trace its corresponding points on the vertical and
horizontal axes.

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Figure 2 shows that the quantity increases when the price decreases. This indicates that Kent is
willing to buy more apples when the price goes down. This is a demand curve showing the
negative relationship between price and quantity!

The second type of economics graph is the bar graph. This one just compares quantities. Bar
graphs compare quantities using the height of the bars. For example, you would see the numbers,
1013, 1035, and 1033, representing the number of fish in ponds A, B, and C respectively. The bar
graph helps you get the whole picture and shows the differences between the three ponds based
on the height of the bars. Look at Figure 2.

The third type of economics graph is the pie graph, which is also used to compare quantities. Pie
graphs compare quantities as fractions of a single whole or total. However, this compares
quantities as fractions of a single whole.
Let's say there is a small market with 5 blue shirt sellers, 3 green shirt sellers, and 2 pink shirt
sellers, making a total of 10 shirt sellers. Look at Figure 3 as an example of a pie graph.

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Uses of Graphs:
1. Relationships or connections - graphs in economics illustrate the relationship between
two variables, typically, using a line graph. Generally, cost or price is plotted on the
vertical axis whereas quantity is plotted on the horizontal axis. A graph showing price and
quantity shows the relationship between the price of a good and the quantity of the same
good at different points in time. Therefore, economics graphs may also show time
progress through shifts in equilibrium over time. Look at Figure 4.

2. Data Sets - graphs in economics shows the relationship between two related concepts. A
typical example would be demand and supply. These concepts use the same variables of
price and quantity, therefore, they can be plotted on the same graphs to show how they
interact with each other. The point where both demand and supply lines intersect is the
equilibrium point. Look at Figure 5.
Figure 5. Demand and Supply Graph,

3. Changes or shifts - graphs in economics also show when a concept completely changes.
This is illustrated in the graph as a complete change of position of the line. A shift to the
right typically shows an upward change whereas a shift to the left typically shows a
downward change. Figure 6 shows a demand curve can shift to the right or left.
Figure 6. Demand Curve Shift,

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 4. Data Visualization:
o Graphs provide a visual representation of data, making it easier for individuals to
comprehend complex information at a glance. They are instrumental in presenting
trends, patterns, and relationships in data sets.
5. Communication:
o Graphs serve as a universal language that transcends linguistic and cultural
barriers. They facilitate effective communication of data and findings to diverse
audiences, including experts, policymakers, and the general public.
6. Analysis and Interpretation:
o Graphical representations help in analyzing and interpreting data by highlighting
trends, outliers, and correlations. Researchers and analysts can quickly identify
key insights and draw meaningful conclusions from the visual representation of
data.
7. Comparison:
o Graphs enable easy comparison of different data sets, variables, or scenarios. Bar
graphs, line graphs, and pie charts are commonly used to compare quantities,
percentages, or distribution patterns.
8. Prediction:
o Trends and patterns observed in graphs can assist in predicting future outcomes or
behaviors. Predictive modeling often involves analyzing historical data
represented graphically to make informed projections.
9. Decision Making:
o Graphs are essential for decision-making processes. Managers, policymakers, and
individuals can use graphs to evaluate alternatives, identify trends, and choose the
most effective course of action based on visual data analysis.
10. Monitoring Progress:
o Graphs are useful for tracking progress over time. Performance indicators, project
milestones, and key metrics can be displayed graphically, allowing for continuous
monitoring and assessment.
11. Education:
o Graphs are widely used in educational settings to enhance learning experiences.
Teachers use visual aids like charts and diagrams to explain concepts, illustrate
relationships, and engage students in the learning process.
12. Scientific Research:
o In scientific research, graphs play a crucial role in presenting experimental results,
data distributions, and statistical analyses. Scientists use graphs to communicate
their findings effectively to peers and the broader scientific community.
13. Problem Solving:
o Graphs aid in problem-solving by providing a clear and structured representation
of information. Whether it's solving mathematical equations or addressing
complex real-world problems, graphical representations make it easier to
understand and solve challenges.
In summary, graphs are versatile tools with broad applications across different fields. They
simplify data representation, enhance communication, and support various aspects of analysis
and decision-making processes. Whether used in business, academia, or research, graphs
contribute significantly to a clearer and more comprehensive understanding of data.

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5.2 Graphs of Linear Functions
a linear function is defined as a function that has either one or two variables without exponents.
It is a function that graphs to the straight line. In case, if the function contains more variables,
then the variables should be constant, or it might be the known variables for the function to
remain it in the same linear function condition. A linear function is a function which forms a
straight line in a graph. It is generally a polynomial function whose degree is utmost 1 or 0.
Although the linear functions are also represented in terms of calculus as well as linear algebra.
The only difference is the function notation. Knowing an ordered pair written in function
notation is necessary too. f(a) is called a function, where a is an independent variable in which
the function is dependent.
Linear functions are the simplest way to define relationships between variables in economics. It
has many important applications.
Linear functions are those whose graph is a straight line.
A linear function has the following form
y = f(x) = a + bx
A linear function has one independent variable and one dependent variable. The independent
variable is x and the dependent variable is y.
a is the constant term or the y intercept. It is the value of the dependent variable when x = 0.
b is the coefficient of the independent variable. It is also known as the slope and gives the rate of
change of the dependent variable.
If you plot this equation on a graph, it will form a straight line. ‘a’ is the intercept on the Y-axis
(that is the point on the Y-axis where the line meets the Y-axis) and ‘b’ is the slope. They are the
parameters that describe the linear relationship between x and y.
Here y is the dependent variable and x is the independent variable. A linear relationship is where
the change in y is always b times the change in x, irrespective of the level of x. Thus the
marginal effect of x on x on y, the slope, is constant. That is why the graph is a straight line as it
has a constant slope. The slope, as stated above, is the ratio of the change in y to the change in x.
It thus gives us a measure of the change in y relative to the change in x. If the slope is positive, x
and y have a positive relationship i.e. of x increases, y increases as well and vice versa. If the
slope is negative, x and y are negatively related, i.e. they when x increases, y decreases and vice
versa.

For example, let’s consider the relationship between expenditure on holidays and vacations in a
linear form.

Expenditure on holidays and vacations=102 + 0.13 disposable income.

Thus when disposable income (after-tax income) increases by 1 Naira, expenditure on holidays
and vacations increases by 0.13 Naira. The intercept in this equation denotes the expenditure
when disposable income is zero. Here it is 102 rs. This is obviously incorrect, a family with no
income will not spend on holidays. This is the drawback of a linear relationship, and hence we
require non-linear equations/functions to model an economic relationship better at lower levels
of income.

Here 0.13 is also the Marginal propensity to consume (spending on holidays and vacations)
(MPC), that is the change in consumption caused by a change in income. As you can see, it

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remains constant irrespective of the level of income, which is also not true in real life. Different
levels of income have different MPCs, as the share of spending on holidays and vacations in
one’s change in income would be different for households with different level of income and
hence the relative change in both quantities would be different as well.

Linear Function Characteristics

Let’s move on to see how we can use function notation to graph 2 points on the grid.
• Relation: It is a group of ordered pairs.
• Variable: A symbol that shows a quantity in a math expression.
• Linear function: If each term is either a constant or It is the product of a constant and also
(the first power of) a single variable, then it is called as an algebraic equation.
• Function: A function is a relation between a set of inputs and a set of permissible outputs.
It has a property that each input is related to exactly one output.
• Steepness: The rate at which a function deviates from a reference
• Direction: Increasing, decreasing, horizontal or vertical.

Graphing a linear function

To graph a linear function:
1. Find 2 points which satisfy the equation
2. Plot them
3. Connect the points with a straight line
OR
Graphing a linear equation involves three simple steps:
1. Firstly, we need to find the two points which satisfy the equation, y = px+q.
2. Now plot these points in the graph or X-Y plane.
3. Join the two points in the plane with the help of a straight line.

Example:
y = 25 + 5x, let x = 1, then y = 25 + 5(1) = 30
let x = 3, then y = 25 + 5(3) = 40

A simple example of a linear equation

A company has fixed costs of $7,000 for plant and equipment and variable costs of $600 for each
unit of output.
What is total cost at varying levels of output?

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let x = units of output
let C = total cost
C = fixed cost plus variable cost = 7,000 + 600 x
output total cost
15 units C = 7,000 + 15(600) = 16,000
30 units C = 7,000 + 30(600) = 25,000

Combinations of Linear Equations

Linear equations can be added together, multiplied or divided.
A simple example of addition of linear equations
C(x) is a cost function
C(x) = fixed cost + variable cost
R(x) is a revenue function
R(x) = selling price (number of items sold)
profit equals revenue less cost
P(x) is a profit function
P(x) = R(x) - C(x)
x = the number of items produced and sold

Data:
A company receives $45 for each unit of output sold. It has a variable cost of $25 per item and a
fixed cost of $1600.
What is its profit if it sells (a) 75 items, (b)150 items, and (c) 200 items?
R(x) = 45x C(x) = 1600 + 25x
P(x) = 45x -(1600 + 25x)
= 20x – 1600
let x = 75 P(75) = 20(75) - 1600 = -100 a loss
let x = 150 P(150) = 20(150) - 1600 = 1400
let x = 200 P(200) = 20(200) - 1600 = 2400

5.3 Graphs of Non- Linear Functions

A function which is not linear is called nonlinear function. In other words, a function which does
not form a straight line in a graph. The examples of such functions are exponential function,
parabolic function, inverse functions, quadratic function, etc. All these functions do not satisfy
the linear equation y = m x + c. The expression for all these functions is different.

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Although the slope of a linear function is the same no matter where on the line it is measured, the
slope of a non-linear function is different at each point on the line. Thus there is no single slope
for a non-linear function. However the slope can be determined at any point on the line. The
techniques of differential calculus are used to determine the slopes of non-linear functions.

Three non-linear functions commonly used in economics are:

i. the exponential function
ii. the quadratic function
iii. the logarithmic function

It can be said that a nonlinear function is a function whose graph is NOT a straight line. Its graph
can be any curve other than a straight line. For example, if there are 100 fishes in a pond initially
and they become double every week, then this situation can be modeled by the function f(x) =
100 (2)x, where x is the number of weeks and f(x) is the number of fishes. Let us make a table
and graph this function making use of the table.

x y
0 100
1 200
2 400
3 800

Let's graph the table now.

The above graph is NOT a line and hence it represents a nonlinear function. From the above
graph, we can say that the slope is not uniform on a nonlinear function. A nonlinear function can
be described using a table of values, an equation, or a graph. Let us see each of them now. Some
of the examples of non linear functions include quadratic functions, cubic functions, polynomial
functions.

Nonlinear Function Table

The steps to determine whether a table of values determine a linear function are:
1. Find the differences between every two consecutive x values.
2. Find the differences between every two consecutive y values.
3. Find the corresponding ratios of differences of y and differences of x.
4. If all the ratios are NOT same, then only the function is linear.

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Consider the following table of values.
X y
3 15
5 23
9 33
11 41
13 43
Let us determine whether this table denotes a nonlinear function by using the steps mentioned
above.

Since all the ratios of differences of y to the differences of x are NOT same, the function
is a nonlinear function.

Nonlinear Function Equation

A linear function is of the form f(x) = ax + b. Since a nonlinear function is a function that is not a
linear, its equation can be anything that is NOT of the form f(x) = ax+b. Some examples of
nonlinear functions are:
f(x) = x2 is nonlinear as it is a quadratic function.
f(x) = 2x is nonlinear as it is an exponential function.
f(x) = x3 - 3x is nonlinear as it is a cubic function.

Non-linear Graphs
Since a function that is NOT linear is being called as a nonlinear function, any function whose
graph is NOT a straight line should represent a nonlinear function. In the following figure, all
graphs represent nonlinear functions as they are NOT straight lines.

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Linear and Nonlinear Functions
Here are the differences between linear and nonlinear functions.
Linear Functions Nonlinear Functions
A linear function is a function whose graph is A nonlinear function is a function whose graph is
a line. NOT a line.
Its equation can be in any form except of the form
Its equation is of the form f(x) = ax + b.
f(x) = ax + b.
Its slope is constant for any two points on the The slope of every two points on the graph is
curve. NOT the same.
In the table of a linear function, the ratio of In the table of a nonlinear function, the ratio of
difference of y and difference of x is a difference of y and difference of x is NOT a
constant. constant.

5.4 Economic Applications of Graph

Graphs are valuable tools in economics for visually representing and analyzing various economic
concepts and relationships. Here are several economic applications of graphs:
1. Supply and Demand Curves:
o Graphs are frequently used to illustrate the fundamental economic concept of
supply and demand. The intersection of the supply and demand curves determines
the equilibrium price and quantity in a market.
2. Production Possibility Frontier (PPF):
o PPF graphs depict the maximum possible combinations of two goods that an
economy can produce, given its resources and technology. It highlights the
concept of trade-offs and opportunity costs.
3. Cost Curves in Microeconomics:

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 o Cost curves, such as average total cost, marginal cost, and average variable cost,
are commonly represented on graphs. These curves help firms analyze their
production costs and make optimal output decisions.
4. Market Structures:
o Graphs are used to illustrate the characteristics of different market structures, such
as perfect competition, monopoly, monopolistic competition, and oligopoly. For
example, a monopoly graph would show a single firm as the sole producer in the
market.
5. Income and Wealth Distribution:
o Lorenz curves and Gini coefficients are graphical tools used to represent income
and wealth distribution within a population. These curves provide insights into the
level of economic inequality.
6. Elasticity of Demand and Supply:
o Elasticity measures how responsive the quantity demanded or supplied is to
changes in price. Graphs are used to depict elastic and inelastic demand and
supply curves, helping to understand the sensitivity of buyers and sellers to price
changes.
7. Business Cycle:
o Time-series graphs are used to illustrate the fluctuations in an economy over time,
representing the phases of the business cycle, including expansion, peak,
contraction, and trough.
8. Investment and Savings:
o Graphs can be employed to illustrate the relationship between investment and
savings in the economy, showing how changes in one affect the other. This is
crucial for understanding the dynamics of economic growth.
9. Foreign Exchange Market:
o Exchange rate graphs depict the value of one currency relative to another over
time. These graphs are essential for understanding currency movements and their
impact on international trade and capital flows.
10. Environmental Economics:
o Environmental economists use graphs to illustrate the trade-offs between
economic activities and environmental sustainability. The Environmental Kuznets
Curve, for example, shows the relationship between economic development and
environmental degradation.
In summary, graphs are powerful tools in economics that facilitate a clear and concise
representation of economic phenomena. They aid economists, policymakers, and students in
understanding complex relationships and making informed decisions based on visual analysis.
Reference
https://www.vskills.in/certification/blog/linear-functions-in-economics/

Topic 6: Equations
• Meaning and Types of Equations (Linear, Quadratic and Simultaneous)
In mathematics, an equation is a statement asserting the equality of two expressions. Equations
typically consist of variables, constants, and mathematical operations, and they express a
relationship between different mathematical quantities. The solutions to an equation are the
values of the variables that make the equation true.

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Equations are fundamental in mathematics and have wide-ranging applications in various fields,
including physics, engineering, economics, and computer science. They are used to model
relationships, solve problems, and make predictions.
Types of Equations:
1. Linear Equations:
o Linear equations are of the form ax + b=0, where a and b are constants, and x is
the variable raised to the first power. These equations represent straight lines
when graphed.
2. Quadratic Equations:
o Quadratic equations have the form ax 2+bx+c=0, where a, b, and c are constants,
and x is the variable raised to the second power. The solutions to quadratic
equations are often found using the quadratic formula.
3. Cubic Equations:
o Cubic equations involve the variable raised to the third power, and they have the
form ax3+bx2+cx+d=0. Solutions to cubic equations can be found using various
methods, including factoring or using special formulas.
4. Quartic Equations:
o Quartic equations involve the variable raised to the fourth power and are of the
form ax4+bx3+cx2+dx+e=0. Like cubic equations, quartic equations can be solved
using different methods.
5. Exponential Equations:
o Exponential equations involve variables in the exponent, such as a⋅bx=c, where a,
b, and c are constants. Logarithmic methods are often employed to solve
exponential equations.
6. Logarithmic Equations:
o Logarithmic equations involve the variable within a logarithmic function, like log b
(x)=c, where b, c, and x are constants. Solving logarithmic equations often
requires using properties of logarithms.
7. Trigonometric Equations:
o Trigonometric equations involve trigonometric functions, such as Sin(x)=a or
Cos(x)=b. Solutions are often found by identifying specific values of the angle xx
within a given range.
8. Systems of Equations:
o Systems of equations involve multiple equations with common variables. These
can be linear or nonlinear and may have unique solutions, no solution, or
infinitely many solutions.
9. Differential Equations:
o Differential equations involve derivatives and express relationships between a
function and its derivatives. They are commonly used in physics and engineering
to model rates of change.
10. Simultaneous Equations:
o Simultaneous equations involve multiple equations with the same set of variables.
Solving these equations involves finding values for the variables that satisfy all
the given equations simultaneously.
In economics, equations are used to model relationships between different economic variables
and to analyze the behavior of economic systems. These equations help economists formulate
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and test theories, make predictions, and understand the dynamics of economic phenomena. Here
are some common types of equations used in economics:
1. Supply and Demand Equations:
o Meaning: Equations that represent the relationship between the quantity of a
good or service demanded or supplied and various factors such as price, income,
and the prices of related goods.
o Example: Qd=a−b⋅P+c⋅Y, where Qd is quantity demanded, P is price, and Y is
income.
2. Production Function:
o Meaning: Equations that describe the relationship between the quantity of inputs
used in production and the resulting output.
o Example: Q=f(L,K), where Q is output, L is labor, and K is capital.
3. Cost Functions:
o Meaning: Equations that relate the costs of production to the level of output and
input prices.
o Example: C=w⋅L+r⋅K, where C is total cost, w is the wage rate, L is labor, r is
the rental rate, and K is capital.
4. Demand Elasticity Equations:
o Meaning: Equations that measure the responsiveness of quantity demanded or
supplied to changes in price, income, or other factors.
o Example: Ed=%ΔQd/%ΔP, where Ed is the price elasticity of demand.
5. Investment Equations:
o Meaning: Equations that represent the relationship between investment and
factors such as interest rates, expected returns, and economic conditions.
o Example: I=I0−r⋅I, where I is investment, I 0 is autonomous investment, r is the
sensitivity to interest rates, and i is the interest rate.
6. Phillips Curve:
o Meaning: Equations that describe the inverse relationship between inflation and
unemployment in the short run.
o Example: π = πe − β⋅(u−u∗), where π is inflation, πe is expected inflation, β is the
coefficient, u is unemployment, and u∗ is the natural rate of unemployment.
7. Consumption Function:
o Meaning: Equations that depict the relationship between consumption and factors
such as income, wealth, and interest rates.
o Example: C=C0+c⋅Y, where C is consumption, C0 is autonomous consumption,
cc is the marginal propensity to consume, and Y is income.
8. Fiscal Policy Equations:
o Meaning: Equations that represent the impact of fiscal policy measures, such as
government spending and taxation, on economic variables like output and
employment.
o Example: Y=C+I+G+(X−M), where Y is output, C is consumption, I is
investment, G is government spending, X is exports, and M is imports.
These equations are integral to economic modeling and analysis, providing a quantitative
framework for understanding economic relationships and making predictions about economic
behavior. They are often used in conjunction with statistical methods to estimate parameters and

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test hypotheses. Understanding the types of equations is crucial in various mathematical and
economic applications, allowing economists, mathematicians, scientists, and engineers to model
and solve problems in their respective fields.
6.3 Functions
In economics, a function refers to a mathematical relationship that describes how one variable
depends on one or more other variables. Functions play a crucial role in modeling economic
relationships, analyzing economic behavior, and making predictions about economic outcomes.
Here are some key meanings and applications of functions in economics:
dict, and understand economic behavior. Here are some common types of functions in economics
and their meanings:
1. Production Function:
o Meaning: Describes the relationship between inputs (such as labor and capital)
and the output of goods and services in a production process.
o Example: Q=f(L,K), where Q is output, L is labor, and K is capital.
2. Consumption Function:
o Meaning: Represents the relationship between consumer spending and factors
like income, wealth, and interest rates.
o Example: C=C0+c⋅Y where C is consumption, C0 is autonomous consumption, c
is the marginal propensity to consume, and Y is income.
3. Investment Function:
o Meaning: Illustrates the relationship between the level of investment and factors
like interest rates, expected returns, and economic conditions.
o Example: I=I0−r⋅i, where I is investment, I 0 is autonomous investment, r is the
sensitivity to interest rates, and i is the interest rate.
4. Demand Function:
o Meaning: Describes how the quantity demanded of a good or service varies with
its price, consumer income, and the prices of related goods.
o Example: Qd=a−b⋅P+c⋅YQ, where Qd is quantity demanded, P is price, and Y is
income.
5. Supply Function:
o Meaning: Depicts the relationship between the quantity of a good or service that
producers are willing to supply and factors like production costs, input prices, and
technology.
o Example: Qs=d+e⋅P−f⋅W, where Qs is quantity supplied, P is price, and W is
input cost.
6. Cost Functions:
o Meaning: Represents the relationship between the costs of production and the
level of output, considering factors such as labor, capital, and raw materials.
o Example: C=w⋅L+r⋅K, where C is total cost, w is the wage rate, L is labor, r is the
rental rate, and K is capital.
7. Utility Function:
o Meaning: Describes how consumers allocate their resources to maximize
satisfaction or utility, considering preferences and budget constraints.
o Example: U=U(X,Y), where U is utility, and X and Y are quantities of different
goods.
8. Phillips Curve:
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 o Meaning: Describes the trade-off between inflation and unemployment in the
short run.
o Example: π = πe −β⋅(u−u∗), where π is inflation, πeπe is expected inflation, β is
the coefficient, u is unemployment, and u∗ is the natural rate of unemployment.

These functions serve as essential tools in economic analysis, helping economists to formalize
relationships, make predictions, and guide policy decisions. Each function represents a specific
aspect of economic behavior and provides a mathematical framework for understanding and
interpreting economic phenomena.

6.4 Application of Equations and Functions to Economic Analysis

Equations and functions play a crucial role in economic analysis by providing a quantitative
framework for modeling, analyzing, and understanding economic relationships. Here are several
applications of equations and functions in economic analysis:
1. Supply and Demand Analysis:
o Equation Application: Qd=a−b⋅P+c⋅Y, Qs=d+e⋅P−f⋅W
o Function Application: These equations model the demand and supply curves,
helping economists analyze the effects of price changes and shifts in income or
production costs on market equilibrium.
2. Production and Cost Analysis:
o Equation Application: Q=f(L,K), C=w⋅L+r⋅K
o Function Application: These equations model the production function and cost
function, assisting firms in determining the optimal levels of input usage and
understanding the cost structure.
3. Consumption and Saving Behavior:
o Equation Application: C=C0+c⋅Y, S=Y−C
o Function Application: These equations represent the consumption function and
savings function, helping economists analyze how changes in income influence
consumer spending and saving patterns.
4. Investment Decision-Making:
o Equation Application: I=I0−r⋅i
o Function Application: This equation models the investment function, allowing
economists to analyze how changes in interest rates impact investment decisions.
5. Tax Incidence and Revenue Analysis:
o Equation Application: T=t⋅Y, where T is tax revenue, t is the tax rate, and Y is
income.
o Function Application: This equation models the relationship between tax
revenue and income, helping policymakers analyze the impact of changes in tax
rates on government revenue.
6. Elasticity Analysis:
o Equation Application: Ed=%ΔQd/%ΔP
o Function Application: This equation measures the price elasticity of demand,
allowing economists to assess how responsive quantity demanded is to changes in
price.
7. Phillips Curve Analysis:
o Equation Application: π = πe−β⋅(u−u∗)

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 o Function Application: This equation represents the Phillips Curve, which helps
economists analyze the trade-off between inflation and unemployment in the short
run.
8. Monetary Policy and Interest Rate Impact:
o Equation Application: I=I0−r⋅i
o Function Application: This equation models the sensitivity of investment to
interest rates, enabling economists to analyze the impact of monetary policy on
investment levels.

o Equation Application: E=P∗/P, where E is the exchange rate, P∗ is the foreign

9. Exchange Rate Determination:

price level, and P is the domestic price level.

o Function Application: This equation helps economists analyze factors
influencing exchange rates, including inflation differentials.
10. Forecasting and Prediction:
o Equation and Function Application: Various economic models use equations
and functions to make predictions about future economic variables, helping
policymakers, businesses, and investors plan for the future.
In summary, equations and functions are fundamental tools in economic analysis, allowing
economists to formalize relationships, conduct quantitative analyses, and make informed
predictions. They provide a structured and mathematical framework for understanding and
interpreting economic phenomena, guiding both academic research and practical decision-
making in the field of economics.

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