Maths for

Economics
Second Edition

Geoff Renshaw
with contributions from Norman Ireland

OXPORD
UNIVERSITY PRESS

Brief contents
Detailed contents
About the author
About the book
How to use the book
Chapter map
Guided tour of the textbook features
Guided tour of the Online Resource Centre
Acknowledgements

ix
xiv
xv
xvii
xviii
xx
xxii
xxiv

Part One Foundations

1 Arithmetic
2 Algebra

3
43

Linear equations

Quadratic equations

109

63

Some further equations and techniques

134

Part Two Optimization with one independent variable

6

Derivatives and differentiation

165

Derivatives in action

184

Economic applications of functions and derivatives

213

Elasticity

256

Part Three Mathematics of finance and growth

10 Compound growth and present discounted value

297

11 The exponential function and logarithms

328

12 Continuous growth and the natural exponential function

342

13

Derivatives of exponential and logarithmic functions and their

applications

368

Part Four Optimization with two or more independent variables

14

Functions of two or more independent variables

389

15

Maximum and minimum values, the total differential, and applications

441

16 Constrained maximum and minimum values

17

Returns to scale and homogeneous functions; partial elasticities;

growth accounting; logarithmic scales

479
519

Pa it Five Some further topics

CO

o
o

en

18

Integration

551

19

Matrix algebra

577

Difference and differential equations

597

20
W21

Extensions and future directions (on the Online Resource Centre)

Appendix: Answers to chapter 1 self-test

Glossary
Index

623
624
632

Detailed contents
About the author
About the book
How to use the book
Chapter map
Guided tour of the textbook features
Guided tour of the Online Resource Centre
Acknowledgements

xiv

XV

3.1

xvii
xviii
XX

xxii
xxiv

ijjgfl Part One Foundations

1 Arithmetic
1.1

Introduction

3
3

Linear equations

63

Introduction

63

3.2 How we can manipulate equations

64

3.3 Variables and parameters

69

3.4

Linear and non-linear equations

72

3.6 Graphs of linear functions

73

3.7 The slope and intercept of a linear function

75

3.8 Graphical solution of linear equations

80

3.9 Simultaneous linear equations

81

3.10 Graphical solution of simultaneous linear

equations

1.2 Addition and subtraction with positive

and negative numbers

3.11

1.3 Multiplication and division with positive

3.12 Three linear equations with three unknowns

and negative numbers

1.4 Brackets and when we need them

7
10

69

3.5 Linear functions

3.13

Existence of a solution to a pair of linear

simultaneous equations
Economic applications

84
87
90
91

3.14 Demand and supply for a good

91

1.5

Factorization

13

3.15 The inverse demand and supply functions

94

1.6

Fractions

14

3.16 Comparative statics

1.7

Addition and subtraction of fractions

16

3.17 Macroeconomic equilibrium

1.8

Multiplication and division of fractions

20

1.9

Decimal numbers

24

97
102

Quadratic equations

109

1.10 Adding, subtracting, multiplying, and

dividing decimal numbers

4.1

Introduction

109

26

4.2

Quadratic expressions

110

1.11 Fractions, proportions, and ratios

27

4.3

Factorizing quadratic expressions

112

1.12 Percentages

28

4.4

Quadratic equations

114

1.13 Index numbers

33

4.5

1.14 Powers and roots

1.15 Standard index form

35

The formula for solving any quadratic

equation

116

4.6

1.16 Some additional symbols

41

Cases where a quadratic expression

cannot be factorized

117

4.7

The case of the perfect square

118

4.8

Quadratic functions

120

4.9

The inverse quadratic function

122

SELF-TEST EXERCISE
2 Algebra
2.1

Introduction

2.2

Rules of algebra
2.3 Addition and subtraction of algebraic
2.4

expressions
Multiplication and division of algebraic

expressions
2.5 Brackets and when we need them
2.6 Fractions

40

42

43
43

4.10 Graphical solution of quadratic equations

123

44

4.11 Simultaneous quadratic equations

126

44

4.12 Graphical solution of simultaneous

quadratic equations

127

4.13 Economic application 1: supply and demand

128

4.14 Economic application 2: costs and revenue

131

45
47
49

5 Some further equations and

2.7

Addition and subtraction of fractions

50

techniques

134

2.8

Multiplication and division of fractions

52

5.1

Introduction

134

2.9

Powers and roots

55

5.2

The cubic function

135

2.10 Extending the idea of powers

56

5.3

Graphical solution of cubic equations

138

2.11 Negative and fractional powers

57

5.4

Application of the cubic function in

economics

141

2.12 The sign of a"

59

2.13 Necessary and sufficient conditions

60

5.5

The rectangular hyperbola

142

APPENDIX: The Greek alphabet

62

5.6

Limits and continuity

143

5.7 Application of the rectangular hyperbola

in economics

146

5.8 The circle and the ellipse

149

8.8 The market demand function

5.9 Application of circle and ellipse in

o
a

LU

economics

151

5.10 Inequalities

152

5.11 Examples of inequality problems

156

5.12 Applications of inequalities in economics

159

LU
O

Part Two Optimization with one

independent variable
6 Derivatives and differentiation

165

6.1 Introduction

165

6.2 The difference quotient

166

6.3 Calculating the difference quotient

167

6.4 The slope of a curved line

168

6.5 Finding the slope of the tangent

170

6.6 Generalization to any function of x

172

6.7 Rules for evaluating the derivative of

a function

173

6.8 Summary of rules of differentiation

182

7 Derivatives in action

8.9 Total revenue with monopoly

229
231

8.10

Marginal revenue with monopoly

232

8.11

Demand, total and marginal revenue

functions with monopoly

234

8.12

Demand, total and marginal revenue

with perfect competition

235

8.13 Worked examples on demand, marginal

and total revenue

236

8.14 Profit maximization

239

8.15 Profit maximization with monopoly

240

8.16 Profit maximization using marginal cost

and marginal revenue

242

8.17

Profit maximization with perfect

competition

244

8.18 Comparing the equilibria under monopoly

and perfect competition

246

8.19 Two common fallacies concerning profit

maximization

248

8.20 The second order condition for profit

maximization
APPENDIX 8.1: The relationship between
total cost, average cost, and marginal cost

253

APPENDIX 8.2: The relationship between

price, total revenue, and marginal revenue

254

248

184

7.1 Introduction

184

7.2 Increasing and decreasing functions

185

9.1

187

9.2 Absolute, proportionate, and percentage

changes

187

9.3 The arc elasticity of supply

259
260

7.3 Optimization: finding maximum and

minimum values
7.4 A maximum value of a function

9 Elasticity
Introduction

188

9.4 Elastic and inelastic supply

7.6 A minimum value of a function

189

9.5

7.7 The second derivative

191

9.6 Diagrammatic treatment

7.8 A rule for maximum and minimum

values

191

7.9 Worked examples of maximum and

minimum values

192

7.5 The derivative as a function of x

Elasticity as a rate of proportionate change

256
256
257

260
261

9.7 Shortcomings of arc elasticity

263

9.8 The point elasticity of supply

263

9.9

Reconciling the arc and point supply

elasticities

265

7.10 Points of inflection

195

9.10 Worked examples on supply elasticity

7.11 A rule for points of inflection

198

9.11 The arc elasticity of demand

268

7.12 More about points of inflection

199

9.12

270

7.13 Convex and concave functions

206

9.13 An alternative definition of demand elasticity

272

7.14 An alternative notation for derivatives

209

9.14 The point elasticity of demand

273

7.15 The differential and linear approximation

210

9.15

8 Economic applications of functions

and derivatives

Elastic and inelastic demand

Reconciling the arc and point demand

elasticities

9.16 Worked examples on demand elasticity

213

9.17

Marginal revenue and the elasticity of

demand

265

274
275

8.1 Introduction

213

8.2 The firm's total cost function

214

8.3 The firm's average cost function

216

8.4 Marginal cost

218

9.19 Worked examples on demand elasticity

and marginal revenue

284

220

9.20 Other elasticities in economics

288

222

9.21 The firm's total cost function

288

9.22 The aggregate consumption function

290

9.23 Generalizing the concept of elasticity

292

8.5 The relationship between marginal and

average cost
8.6 Worked examples of cost functions
8.7 Demand, total revenue, and marginal
revenue

229

9.18 The elasticity of demand under perfect

competition

279
282

13.3 The derivative of the natural logarithmic

function

PartThree Mathematics of finance

and growth

13.5 Discrete growth

297

13.6 Continuous growth

10.1 Introduction

297

10.2 Arithmetic and geometric series

298

13.7 Instantaneous and nominal growth rates

compared

10.3 An economic application

300

13.8 Semi-log graphs and the growth rate again

10.4 Simple and compound interest

304

13.10 Logarithmic scales and elasticity

10.5 Applications of the compound growth

formula

13.9 An important special case

370

371
371
374
377
378
379
381

307

10.6 Discrete versus continuous growth

309

10.7 When interest is added more than once

per year

309

10.8 Present discounted value

314

10.9 Present value and economic behaviour

316

Part Four Optimization with two or

more independent variables
14 Functions of two or more
independent variables

10.10 Present value of a series of future receipts

316

10.11 Present value of an infinite series

319

14.1 Introduction

389

10.12 Market value of a perpetual bond

320

14.2 Functions with two independent variables

390

10.13 Calculating loan repayments

322

14.3 Examples of functions with two

independent variables

393

11 The exponential function and

logarithms
11.1 Introduction

328
328

11.2 The exponential function y= 10*

11.3 The function inverse t o / = 10

11.4 Properties of logarithms

330
331
333

11.5 Using your calculator to find common

logarithms

333

11.6 The graph o f / = log 10 x

334

11.7 Rules for manipulating logs

335

11.8 Using logs to solve problems

337

11.9 Some more exponential functions

338

12 Continuous g r o w t h and t h e natural

exponential function

389

14.4 Partial derivatives

398

14.5 Evaluation of first order partial derivatives

401

14.6 Second order partial derivatives

403

14.7 Economic applications 1: the production

function

411

14.8 The shape of the production function

411

14.9 The Cobb-Douglas production function

420

14.10 Alternatives to the Cobb-Douglas form

425

14.11 Economic applications 2: the utility function

428

14.12 The shape of the utility function

429

14.13 The Cobb-Douglas utility function

APPENDIX 14.1: A variant of the partial
derivatives of the Cobb-Douglas function

434
439

342
15 M a x i m u m and m i n i m u m values, t h e
t o t a l differential, and applications

12.1 Introduction

342

12.2 Limitations of discrete compound growth

343

12.3 Continuous growth: the simplest case

343

15.1 Introduction

441

12.4 Continuous growth: the general case

346

15.2 Maximum and minimum values

442

347

15.3 Saddle points

448

349

15.4 The total differential of z = f(x, y)

452

351

15.5 Differentiating a function of a function

457

15.6 Marginal revenue as a total derivative

458
460

12.5 The graph of y = ae

re

12.6 Natural logarithms

12.7 Rules for manipulating natural logs
12.8 Natural exponentials and logs on your
calculator

351

15.7 Differentiating an implicit function

12.9 Continuous growth applications

441

353

15.8 Finding the slope of an iso-zsection

463

12.10 Continuous discounting and present value

358

15.9 A shift from one iso-z section to another

463

12.11 Graphs with semi-log scale

361

15.10 Economic applications 1: the production

function

465

15.11 Isoquants of the Cobb-Douglas production

function

468

13 Derivatives of exponential and

logarithmic functions and their
applications

368

15.12 Economic applications 2: the utility function

470

13.1 Introduction

368

15.13 The Cobb-Douglas utility function

472

13.2 The derivative of the natural exponential

function

369

15.14 Economic application 3: macroeconomic

equilibrium

473

Lib I

10 Compound growth and present

discounted value

13.4 The rate of proportionate change, or rate

of growth

>
m
a
o

IT

CO

a3a

15.15 The Keynesian multiplier

473

18.2 The definite integral

15.16 The IS curve and its slope

474

18.3 The indefinite integral

554

15.17 Comparative statics: shifts in the IS curve

475

18.4 Rules for finding the indefinite integral

555

18.5 Finding a definite integral

562

18.6 Economic applications 1: deriving the

total cost function from the marginal
cost function

565
567

16 Constrained maximum and

minimum values

552

16.1 Introduction

479
479

16.2 The problem, with a graphical solution

480

16.3 Solution by implicit differentiation

16.4 Solution by direct substitution

482

18.7 Economic applications 2: deriving total

revenue from the marginal revenue function

485

18.8 Economic applications 3: consumers' surplus 569

16.5 The Lagrange multiplier method

16.6 Economic applications 1: cost minimization

486

16.7 Economic applications 2: profit maximization

16.8 A worked example

496

16.9 Some problems with profit maximization

16.10 Profit maximization by a monopolist

490

502
508

17 Returns to scale and homogeneous

functions; partial elasticities; growth
519
accounting; logarithmic scales
Introduction

570
572

501

16.11 Economic applications 3: utility maximization

510
by the consumer
512
16.12 -Deriving the consumer's demand functions

17.1

18.9 Economic applications 4: producers' surplus

18.10 Economic applications 5: present value of a
continuous stream of income

519

19 Matrix algebra

577

19.1 Introduction

577

19.2 Definitions and notation

578

19.3 Transpose of a matrix

19.4 Addition/subtraction of two matrices

579
579

19.5 Multiplication of two matrices

580

19.6 Vector multiplication

582

19.7 Scalar multiplication

583

19.8 Matrix algebra as a compact notation

583

19.9 The determinant of a square matrix

584

17.2 The production function and returns to scale

520

19.10 The inverse of a square matrix

587

17.3 Homogeneous functions

522

17.4 Properties of homogeneous functions

525

19.11 Using matrix inversion to solve linear

simultaneous equations

589

17.5 Partial elasticities

531

19.12 Cramer's rule

590

17.6 Partial elasticities of demand

532

19.13 A macroeconomic application

592

17.7 The proportionate differential of a function

534

19.14 Conclusions

594

17.8 Growth accounting

537

17.9 Elasticity and logs

539

20 Difference and differential equations

597

17.10 Partial elasticities and logarithmic scales

540

20.1 Introduction

597

17.11 The proportionate differential and logs

542

20.2 Difference equations

598

17.12 Log linearity with several variables

544

20.3 Qualitative analysis

20.4 The cobweb model of supply and demand

601

20.5 Conclusions on the cobweb model

610

20.6 Differential equations

612

20.7 Qualitative analysis

615

551

20.8 Dynamic stability of a market

616

551

20.9 Conclusions on market stabilitv

620

Part Five Some further topics

18 Integration
18.1 Introduction

605

W21 Extensions and future directions

(on the Online Resource Centre)

APPENDIX 21.3: The firm's maximum profit

function with two products

21.1 Introduction

APPENDIX 21.4: Removing the imaginary number

21.2 Functions and analysis

21.3 Comparative statics
21.4 Second order difference equations
APPENDIX 21.1: Proof of Taylor's theorem

Appendix: Answers to chapter 1 self-test

623

APPENDIX 21.2: Using Taylor's formula to relate

production function forms

Glossary
Index

624
632