Course Code & Title : Mathematical Economics

Semester: VI
Course Type : Core Elective paper III
Credits: 5
Course Content:
Unit 1:
Scope and methods of Mathematical Economics – Laws of
demand, Demand schedule(Individual and Market) - Demand
function - Factors influencing the demand - Exception to the law
of demand – Elasticity of demand with respect to price and income
- Factors affecting the elasticity of demand - Partial elasticity of
demand with respect to price - Simple problems in elasticity of
demand.
Unit 2:
Supply - Factors affecting the supply of a commodity - Relation
between demand and supply – Utility - Concept of utility - Concept
of human wants - Maximization of utility -Marginal and total utility
- Law of diminishing marginal utility - Indifference curves and map
- Properties of indifference curve - Price line.
Unit 3:
Cost Analysis – Different types of cost - Total, average and
marginal cost functions -Relation between average and marginal
costs - Problems related to total, average and marginal costs –
Revenue - Total, average and marginal revenue functions and their
relationship - Simple problems related to maximization of total
revenue
Unit 4:
Market Structure – Definition of Market - Perfect competition - Pure
competition - Monopolistic competition and duopolistic
competition (Only concept) – Profit maximization – Profit function
- Cournot solution to monopoly problem for maximization problem
- Joint monopoly and discriminating monopoly -
Problems related to profit maximization under monopoly. Duopoly -
Conjectural variation and reaction curves - Simple maximization
problem under duopoly.
Unit 5:
Theoretical Production functions – Mathematical definition of
production function-Constant product curves (Isoquant) - Average and
marginal productivity – Homogenous production functions – Properties
 of linearly homogeneous production function – Cobb-Douglas
production function – C. E. S. production function.
Book for study:
1.Mehta and Madhnani (2001): Mathematics for Economists,
Sultan Chand,
2.R.G.D.Allen(1976) Mathematical Analysis for
Economists,Macmillian
Books for Reference:
1) Varma and Agarwal (1998): Managerial
Economics, Sultan Chand and Company, New
Delhi.
2) R.G.D. Allen Mathematics for Economics.
3) Varshney and Maheswari Managerial Economics
4) K.P. M.Sundaram Busniess Economics
5) Dr. S. Shankarn Managerial Economics.

INTRODUCTION TO MATHEMATICAL
 ECONOMICS

Mathematical Economics: Meaning and Importance, scope of

mathematical economics Mathematical Representation of Economic
Models, Economic functions: Demand function, Supply function,
Utility function, Consumption function, Production function, Cost
function, Revenue function, Profit function, Saving function,
Investment function
1.1 MATHEMATICAL ECONOMICS
Mathematical economics is a branch of economics that engages
mathematical tools and methods to analyse economic theories.
Mathematical economics is best defined as a sub-field of economics
that examines the mathematical aspects of economies and economic
theories. Or put into other words, mathematics such as calculus, matrix
algebra, and differential equations are applied to illustrate economic
theories and analyse economic hypotheses.
It may be interesting to begin the study of mathematical economics
with an enquiry into the history of mathematical economics. It is
generally believed that the use of mathematics asa tool of economics
dates from the pioneering work of Cournot (1838). However there
were many others who used mathematics in the analysis of economic
ideas before Cournot. We shall make a quick survey of the most
important contributors.
Sir William Petty is often regarded as the first economic statistician.
In his Discourses on Political Arithmetic (1690), he declared that he
wanted to reduce political and economic matters to terms of number,
weight, and measure. The first person to apply mathematics to
economics with any success was an Italian,Giovanni Ceva who in 1711
wrote a tract in which mathematical formulas were generously used. He
is generally regarded as the first known writer to apply mathematical
method to economic problems. The Swiss mathematician Daniel
Bernoulli in 1738 forthe first time used calculus in his analysis of a
probability that would result from games of chance rather than from
economic problems.
Among the early French writers who made some use of mathematics
was Francois de Forbonnais who used mathematical symbols,
especially for explaining the rate of exchange between two countries
and how an equilibrium is finally established between them. He is best
known for his severe attack on Physiocracy.
While this is a long list to those who showed curiosity in the use of
mathematics in economics, interestingly J. B. Say showed littleor no
interest in the use of mathematics. He did not favour the use of
mathematics for explaining economic principles. A German who is
reasonably well known, especially in location theory, is Johann
Heinrich von Thunen. His first work, The Isolated State (1826), was
an attempt to explain how transportation costs influence the location
of agriculture and even the methods of cultivation.
The French engineer, A. J. E. Dupuit, used mathematical symbolsto
express his concepts of supply and demand. Even though he had no
systematic theory he did develop the concepts of utility and
diminishing utility, which were clearly stated and presented in
graphical form.
He viewed the price of a good as dependent on the price of other
goods. Another Lausanne economist, Vilfredo Pareto, ranks withthe
best in mathematical virtuosity. The Pareto optimum and the
indifference curve analysis (along with Edgeworth in England) were
clearly conceived in the mathematical frame work.
A much more profound understanding of the analytical power of
mathematics was shown by Leon Walras. He is generally regarded as
the founder of the mathematical school of economics.He set out to
translate pure theory into pure mathematics. After the pioneering
work of Jevons (1871) and Walras (1874), the useof mathematics in
economics progressed at very slow pace for a number of years. The
first of the latter group is F. Y. Edgeworth. His contribution to ma

thematical economics is found mainly in the 1881 publication in

which he dealt with the theory of probability and statistical theory.
F. Y. Edgeworth’s contribution to mathematical economics is found
Mathematical Economics 4
mainly in the 1881 publication in which he dealt with the theory of
probability, statistical theory and the law of error. The indifference
analysis was first propounded by Edgeworth in 1881and restated in
1906 by Pareto and in 1915 by the Russian economist Slutsky, who
used elaborate mathematical treatment ofthe topic. Alfred Marshall
made extensive use of mathematics in his Principles of Economics
(1890). His interest in mathematics dates from his early schooldays
when his first love was for mathematics, not the classics.” In the
Principles he used mathematical techniques very effectively.
Another economist whose influence spans many years is the
American, Irving Fisher. Fisher belongs to other groups as well as to
the mathematical moderns. His life's work reveals him as a
statistician, econometrician, mathematician, pure theorist, teacher,
social crusader, inventor, businessman, and scientist. His
contribution to statistical method, The Making of Index Numbers,was
great. The well-known Fisher formula, M V + M' V' = P T, is an
evidence of his contribution to quantitative economics.
A strong inducement to formulate economic models in mathematical
terms has been the post-World War II developmentof the electronic
computer. In the broad area of economics there has been a
remarkable use of mathematical techniques. Economics, like several
other disciplines, has always used quantification to some degree.
Common terms such as wealth, income, margins, factor returns,
diminishing returns, trade balances, balance of payments, and the
many other familiar concepts have a quantitative connotation. All
economic data havein some fashion been reduced to numbers which
became generally known as economic statistics.
The most noteworthy developments, however, have come in the
decades since about 1930. It was approximately this time that marked
the ebb of neoclassicism, the rise of institutionalism, and the
introduction of aggregate economics. Over a period of years scholars
have developed new techniques designed to help in the explanation
of economic behavior under different market situations using
mathematics. Now we discuss some of the economic theories and the
Mathematical Economics 5
techniques of modern analysis. They are given largely on a
chronological basis, and their significance is developed in the
discussion.
The Theory of Games: The pioneering work was done by John von
Neumann in 1928. The theory became popular with the publication
of Theory of Games and Economic Behaviour in 1944. Basically,
The Game Theory holds that the actions of players in gambling
games are similar to situations that prevail ineconomic, political, and
social life. The theory of games has manyelements in common with
real-life situations. Decisions must be made on the basis of available
facts, and chances must be taken to win. Strategic moves must be
concealed (or anticipated) by the contestants based on past
knowledge and future estimates. Success or failure rests, in large
measure, on the accuracy of the analysis of the elements. The theory
of games introduced an interesting and challenging concept.
Economists have made someuse of it, and it has also been fitted into
other social sciences, notably sociology and political science.
Linear Programming: Linear programming is a specific class of
mathematical problems in which a linear function is maximized (or
minimized) subject to given linear constraints. The founders of the
subject are generally regarded as George B. Dantzig, who devised the
simplex method in 1947, and John von Neumann, who established
the theory of duality that same year. The scope of linear programming
is very broad. It brings together both theoretical and practical
problems in which some quantity is to bemaximized or minimized.
The data could be almost any fact suchas profit, costs, output, and
distance to or from given points, time, and so on. It also makes
allowance for given technology and restraints that may occur in
factor markets or in finance. Linear programming has been proven
very useful in many areas. It is in common use in agriculture, where
chemical combinations of proper foods for plants and animals have
been worked out, and in the manufacture of many processed
agricultural products. It is necessary in modem materials scheduling,
in shipping, and in final production. The Nobel Prize in economics
wasMathematical
awardedEconomics
in 1975 to the mathematician Leonid Kantorovich 6
(USSR) and the economist Tjalling Koopmans (USA) for their
contributions to the theory of optimal allocation of resources, in
which linear programming played a key role.
Input-Output Analysis: In terms of techniques, input-output analysis
is a rather special case of linear programming. It was
devised originally by Leontief and, in a sense, was a World War II-
inspired analysis. Basically it was designed for presenting a general
equilibrium theory suited for empirical study. The problem is to
determine the interrelationship of sector inputs and outputs on other
sectors or on all sectors which use the product. The rational for the
term IOA can be explained like this. There isa close interdependence
between different sectors of a modern economy. This
interdependence arises out of the fact that the output of any given
industry is utilized as an input by the other industries and often by
the same industry itself. Thus the IOA analyses the interdependence
between different sectors of an economy. The basis of IOA is the
input - output table which can be expressed in the form of matrices.
Mathematical Economics: Meaning and Importance
Mathematical economics is the application of mathematical methods
to represent economic theories and analyse problems posed in
economics. It allows formulation and derivation of key relationships
in a theory with clarity, generality, rigor, and simplicity. By
convention, the methods refer to those beyond simple geometry, such
as differential and integral calculus, difference and differential
equations, matrix algebra, and mathematical programming and other
computational methods.
Mathematics allows economists to form meaningful, testable
propositions about many wide-ranging and complex subjects which
could not be adequately expressed informally. Further, thelanguage
of mathematics allows economists to make clear, specific, positive
claims about controversial or contentious subjects that would be
impossible without mathematics. Much of economic theory is
currently presented in terms of mathematical economic models, a set
of Mathematical
stylized and simplified mathematical relationships that clarify
Economics 7
assumptions and implications.
Paul Samuelson argued that mathematics is a language. In
economics, the language of mathematics is sometimes necessary for
representing substantive problems. Moreover, mathematical
economics has led to conceptual advances in economics.
Advantages of Mathematical economics
(1) The ‘language’ used is more concise and precise (2) a numberof
mathematical theorems help us to prove or disprove economic
concepts (3) helps us in giving focus to the assumptions used in
economics (4) it make the analysis more rigours (5) it allows us to
treat the general n-variable case, otherwise the number of variables
in economic analysis will be very limited.
However, you should also understand that there are economists who
criticise that a mathematically derived theory is unrealistic. This
certainly means the untimely use of mathematics may be worthless.
Perhaps Alfred Marshall is the best person to quote onthe cautions on
using mathematics in economics. Though Marshall made extensive
use of mathematics in his Principles of Economics, he was not
convinced that economics so written would be read or understood. In
1898 he wrote, “The most helpful applications of mathematics to
economics are those which are short and simple, which employ few
symbols; and which aim at throwing a bright light on some small part
of the great economicmovement rather than at representing its endless

complexity.” Heheld to a rule “to use mathematics as a shorthand

language ratherthan an engine of inquiry.”
Mathematical Representation of Economic Methods or models
Economic models generally consist of a set of mathematical
equations that describe a theory of economic behaviour. The aim of
model builders is to include enough equations to provide usefulclues
about how rational agents behave or how an economy
Mathematical Economics 8
works. An economic model is a simplified description of reality,
designed to yield hypotheses about economic behaviour that can be
tested. An important feature of an economic model is that it is
necessarily subjective in design because there are no objective
measures of economic outcomes. Different economists will make
different judgments about what is needed to explain their
interpretations of reality.
There are two broad classes of economic models - theoretical and
empirical. Theoretical models seek to derive verifiable implications
about economic behaviour under the assumption thatagents maximize
specific objectives subject to constraints that arewell defined in the
model. They provide qualitative answers to specific questions - such
as the implications of asymmetric information (when person on one
side of a transaction knows more than the other person) or how best to
handle market failures.
In contrast, empirical models aim to verify the qualitative predictions
of theoretical models and convert these predictions to precise,
numerical outcomes. The validity of a model may be judged on
several criteria. Its predictive power, the consistency and realism of
its assumptions, the extent of information it provides, its generality
(that is, the range of cases to which it applies) and its simplicity.

SCOPE OF MATHEMATICAL ECONOMICS

From the point of view of a firm, Mathematical economics, may be
defined as economics applied to “problems of choice” or alternatives
and allocation of scarce resources by the firms. Thus Mathematical
economics is the study of allocation of resources available to a firm
or a unit of management among the activities of that unit.
Mathematical economics is concerned with the application of
economic concepts and analysis to the problem of formulating
rational Mathematical decisions. There are four groups of problem in
Mathematical Economics 9
both decisions-making and forward planning.
Resource Allocation: Scare resources have to be used with utmost
efficiency to get optimal results. These include production
programming and problem of transportation etc. How does resource
allocation take place within a firm? Naturally, a manager decides
how to allocate resources to their respective uses within the firm,
while as stated above, the resource allocation decision outside the
firm is primarily done through the market. Thus, one important
insight you can draw about the firm is that within it resources are
guided by the manager in a manner that achieves the objectives of
the firm.
Inventory and queuing problem: Inventory problems involve
decisions about holding of optimal levels of stocks of raw materials
and finished goods over a period. These decisions are taken by
considering demand and supply conditions. Queuing problems
involve decisions about installation of additional machines or hiring
of extra labour in order to balance the business lost by not
undertaking these activities.
Pricing Problem: Fixing prices for the products of the firm is an
important decision-making process. Pricing problems involve
decisions regarding various methods of prices to be adopted.

Investment Problem: Forward planning involves investment

problems. These are problems of allocating scarce resources over
time. For example, investing in new plants, how much to invest,
sources of funds, etc. Study of managerial economics essentially
involves the analysis of certain major subjects like:
The business firm and its objectives
Demand analysis, estimation and forecasting
Mathematical Economics 10
Production and Cost analysis
Pricing theory and policies
Profit analysis with special reference to break-even point
Capital budgeting for investment decisions
Competition
Demand analysis and forecasting help a manager in the earliest stage in
choosing the product and in planning output levels. A study of demand
elasticity goes a long way in helping the firm to fix prices for its
products. The theory of cost also forms an essential part of this subject.
Estimation is necessary for making output variations with fixed plants
or for the purpose of new investments in the same line of production or
in a different venture. The firm works for profits and optimal or near
maximum profits depend upon accurate price decisions. Theories
regarding price determination under various market conditions enable
the firm to solve the price fixation problems. Control of costs, proper
pricing policies, break-even analysis, alternative profit policies are
some of the important techniques in profit planning for the firm which
has to work under conditions of uncertainty. Thus managerial
economics tries to find out which course is likely to be the best for the
firm under a given set of conditions.
ECONOMIC FUNCTION
A variable represents a concept or an item whose magnitude can be
represented by a number, i.e. measured quantitatively. Variables are
called variables because they vary, i.e. they can have a variety of
values. Thus a variable can be considered as a quantity which
assumes a variety of values in a particular problem. Many items in
economics can take on different values. Mathematics usually uses
letters from the end of the alphabet to represent variables. Economics
however often uses the first letterof the item which varies to represent
variables. Thus p is used forthe variable price and q is used for the
variable quantity.
Mathematical Economics 11
An expression such as 4x3 is a variable. It can assume different values
because x can assume different values. In this expression x is the
variable and 4 is the coefficient of x. Coefficient means 4 works
together with x. Expressions such as 4x3 which consists of a
coefficient times a variable raised to a power are called monomials.
A monomial is an algebraic expression that is either a numeral, a
variable, or the product of numerals and variables. (Monomial comes
from the Greek word, monos, which means one.) Real numbers such
as 5 which are not multiplied by a variable are also called monomials.
Monomials may also have more than one variable. 4x3y2 is such an
example. In this expression both x and y are variables and 4 is their
coefficient.
The following are examples of monomials: x, 4x2, −6xy2z, 7
One or more monomials can be combined by addition or subtraction
to form what are called polynomials. (Polynomial comes from the
Greek word, poly, which means many.) A polynomial has two or
more terms i.e. two or more monomials. Ifthere are only two terms in
the polynomial, the polynomial is called a binomial.

The expression 4x3y2 − 2xy2 +3 is a polynomial with three terms.

These terms are 4x3y2, −2xy2, and 3. The coefficients of the terms are
4, −2, and 3.

The degree of a term or monomial is the sum of the exponents of the

variables. The degree of a polynomial is the degree of the term of
highest degree. In the above example the degrees of the terms are 5,
3, and 0. The degree of the polynomial is 5.
Remember that variables are items which can assume different
values. A function tries to explain one variable in terms ofanother.
Mathematical Economics 12
Independent variables are those which do not depend on other
variables.
Dependent variables are those which are changed by the independent
variables. The change is caused by the independent variable. The
independent variable is often designated by x. The dependent
variable is often designated by y. We say y is a function of x. This
means y depends on or is determined by x. Mathematically we write
y = f(x). It means that mathematically y depends on x. If we know
the value of x, then we can find the value of y.
A function is a mathematical relationship in which the values of a
single dependent variable are determined by the values of one or
more independent variables. Function means the dependent variable
is determined by the independent variable(s). A function tries to
define these relationships. It tries to give the relationship a
mathematical form. An equation is a mathematical way of looking at
the relationship between concepts or items. These concepts or items
are represented by what are called variables. Economists are
interested in examining types of relationships. For example an
economist may look at the amount of money a personearns and the
amount that person chooses to spend. This is a consumption
relationship or function. As another example an economist may look
at the amount of money a business firm has and the amount it chooses
to spend on new equipment. This is an investment relationship or
investment function. Functions with asingle independent variable are
called univariate functions. Thereis a one to one correspondence.
Functions with more than one
Independent variable are called multivariate functions.
Example of use of functions in solving problems:
y = f(x) = 3x + 4
This is a function that says that, y, a dependent variable, depends on
x, an independent variable. The independent variable, x, can have
Mathematical Economics 13
different values. When x changes y also changes.

Find f(0). This means find the value of y when x equals 0. f(0) =3
times 0 plus 4
f(0) = 3(0) + 4 = 4
Find f(1). This means find the value of y when x equals 1. f(1) = 3
times 1 plus 4
f(1) = 3(1) + 4 = 7
Find f(-1). This means find the value of y when x equals -1.

f(-1) = 3 times (-1) plus 4, f(1) = 3(-1) + 4 = 1

Demand function
Demand function express the relationship between the price of the
commodity (independent variable) and quantity of the commodity
demanded (dependent variable).It indicate how much quantity of a
commodity will be purchased at its different prices. Hence, dx
represent the quantity demanded of a commodity and isthe price of

that commodity. Then,

Demand function dx= f (Px )
The basic determinants of demand function
Qx= f ( Px,Pr , Y, T, W, E)
Where Qx: quantity demanded of a commodity X, Px: price of
commodity X, Pr: price of related good, Y: consumer’s income, T:
Consumer/s tastes and preferences, W: Consumer’s wealth, E:
Consumer’s expectations.
Example: Qd = p 2 − 20p + 125
This is a function that describes the demand for an item where pis
Mathematical Economics 14
the dollar price per item. It says that demand depends on price.
Find the demand when one item costs Rs. 2
d(2) = 22 − 20(2) + 125 = 89 ff d
Find the demand when one item costs Rs. 5
d(5) = 52 − 20(5) + 125 = 50
Notice that the demand decreases as the price increases which youknow
is the law of demand.
Supply function
The functional relationship between the quantity of commodities
supplied and various determinants is known as supply function. Itis
the mathematical expression of the relationship between supply and
factors that affect the ability and willingness of the producer to offer
the product. Mathematically, a supply function can be expressed as
Supply Sx= f (Px)

There are a number of factors and circumstances which can influence

a producer’s willingness to supply the commodity in themarket. These
factors are price of the commodity, price of the related goods, price
of the factors of production, goal of producers, state of technology,
miscellaneous factors (we can include factors such as means of
transportation and communication, natural factors, taxation policy,
expectations, agreement among the producers, etc.) Incorporating all
suchfactors we may write the basic form of a supply function as;
Qs=f (Gf,P,I,T,Pr,E,GP)
Where Qs: quantity supplied, Gf: Goal of the firm, P: Product’s own
price, I: Prices of inputs, T: Technology, Pr: Prices of relatedgoods, E:
Expectation of producer’s, Gp: government policy.
Mathematical Economics 15
 Example: Given a supply function Qs = −20 + 3P and demand
function Qd = 220 – 5P, Find the equilibrium price and quantity.
Equilibrium in any market means equality of demand and supply.
Hence, at equilibrium −20 + 3P = 220 – 5P.
Solving the above we get, Equilibrium price P = 30, Equilibrium
quantity Qs = Qd = 70
Utility function
Utility function is a mathematical function which ranks alternatives
according to their utility to an individual. The utility function
measures welfare or satisfaction of a consumer as a function of
consumption of real goods, such as food, clothing and composite
goods rather than nominal goods measured in nominal terms. Thus the
utility function shows the relation between utility derived from the
quantity of different commodity consumed. A utility function for a
consumer consuming three different goods may be represented:
U = f (X₁, X₂, X₃………)
Example: Given the utility unction of a consumer U = 2x2 +5,
find the marginal utility. Marginal utility is given by the first
order derivative of the total utility function.
𝒅𝑼 = 4x
𝒅𝒙

Consumption Function
The consumption function refers to the relationship between income
and consumption. It is a functional relationship between
consumption and income. Symbolically, the relationship is
represented as C= f(Y), where С is consumption, Y is income. Thus
the consumption function indicates a functional relationshipbetween
С and Y, where С is the dependant variable and Y is theindependent
variable, i.e., С is determined by Y. In fact, propensity to consume or
consumption function is a sketch of the various amounts of
Mathematical Economics 16
consumption expenditure corresponding to different levels of
income.
In the Keynesian framework, the consumption function or propensity
to consume, refers to a functional relationship betweentwo aggregates,
i.e., total consumption and gross national income. The Keynesian
Consumption function C = a +bYd, expresses the level of consumer
spending depending on three factors as explained below.
Yd = disposable income (income after government intervention
– e.g. benefits, and taxes)
a = autonomous consumption (This is the level of consumption
which does not depend on income. The argument is that even withzero
income we still need to buy some food to eat, through borrowing or
using our savings.)
b = marginal propensity to consume (also known as induced
consumption).

The average propensity to consume is the ratio of consumption

expenditure to any particular level of income. It is found by dividing
consumption expenditure by income, or APC = C/Y. It is expressed
as the percentage or proportion of income consumed. The marginal
propensity to consume is the ratio of thechange in consumption to the
change in income. It can be found by dividing change in consumption
by a change in income, or by finding the first derivative of the utility
function. The MPC is constant at all levels of income.
The MPC is the rate of change in the APC. When income increases,
the MPC falls but more than the APC. Contrariwise, when income
falls, the MPC rises and the APC also rises but at a slower rate than
the former. Such changes are only possible during cyclical
fluctuations whereas in the short-run there is change in the MPC and
MPC<APC.
Saving function
Mathematical Economics 17
 The relationship between disposable income and saving is called the
savings function. The saving function can represented in a general
form as S=f(Y) where S is saving, and Y is income, f is the notation
for a generic, unspecified functional form. Because saving is the
difference between disposable income andconsumption, the saving
function is a complementary relation to the consumption function. It
is assumed that whatever is not consumed is saved.
So MPC + MPS = 1.
Given a saving function S = 70 + 0.8Y, find MPS and
MPCMPS = 0.8, MPC = 1 – MPS = 0.2.

Production function
In a crude sense, production is the transformation of inputs into
output. In another way, production is the creation of utility. Production
is possible only if inputs are available and used. There are different
types of inputs and economists classify them into land, labour, capital
and organization. In modern era, the meaning of these terms is
redefined. Today, land covers all natural resources, labour covers
human resources, capital is replaced by the term technology and
finally, instead of organization, we use the term management.

We explain production as the transformation of inputs into output.In a

general form a production function can be written as

Q= f(x1, x2, x3,……xn)

Where Q represents the quantity produced, x1……xn are inputs.The
general mathematical
Mathematical Economics form of Production function is: 18
 Q = f (L,K,R,S,v,e)
Where Q stands for the quantity of output, L is the labour, K is
capital, R is raw material, S is the Land, v is the return to scale and e
is efficiency parameters.
Example: Q = 42KL – 3K2 – 2L2, Q = K0.4L0.5
Cost Function
Cost function expresses the relationship between cost and its
determinants such as the level of output (Q), plant size (S), inputprices
(P), technology (T), and managerial efficiency
(E) etc. Mathematically it can be expressed as
C = f (Q, S, P, T, E), where C is the unit cost or total cost
Revenue Function
If R is the total revenue of a firm, X is the quantity demanded or sold
and P is the price per unit of output, we write the revenue function.
Revenue function expresses revenue earned as a function of the price
of good and quantity of goods sold. The revenue function is usually
taken to be linear. R = P × X
Where R = revenue, P = price, X = quantity

If there are n products and P₁, P₂…..Pn are the prices and X₁,
X₂……Xn units of these products are sold then

R = P₁X₁+P₂X₂ +………+PnXn
Eg: TR = 50 – 6Q²
Example: Given P = Q2 + 6Q + 5, compute the TR function.
TR = PQ = (Q2 + 6Q + 5)Q = Q3 + 6Q2 + 5Q. (Here quantity is
assumed as Q)
Profit Function
Mathematical Economics 19
Profit function as the difference between the total revenue andthe
total cost. If x is the quantity produced by a firm, R is the total
revenue and C being the total cost then profit (π).
P(x) = R(x) – C(x) or Π = TR – TC
Example: Given a TR = 100Q – 5Q2 and TC = Q3 – 2Q2 + 50Q,
find the profit function
Π = TR – TC = (100Q – 5Q2) – (Q3 – 2Q2 + 50Q)
= 100Q – 5Q2 – Q3 + 2Q2 – 50Q = –Q3 – 3Q2 + 50Q

Investment function
The investment function explains how the changes in national
income induce changes in investment patterns in the national
economy. It shows the functional relation between investment and
the rate if interest or income. So, the investment function can be
written as,
I = f (i),
where, I is the investment and ‘ i is the rate of interest.

Mathematical Economics 20
Mathematical Economics 21