LECTURE 2

Module: 4ECON005C
Exploring Economics

ESSENTIAL MATHEMATICAL TOOLS Module Leader:

Oybek Yuldashev
LECTURE OUTLINE
Basics Functions & Relations Graphs

• Types of functions • Learning how to depict

• Constants, coefficients and functions
variables
• Properties of functions
• Types of graphs
• Real-numbered system

• Equations and identities

BASICS
VARIABLES, CONSTANTS & COEFFICIENTS
Definitions
• A variable is something whose magnitude can
change, i.e., something that can take on
different values. Variables are usually
represented by various symbols.
• Endogenous (dependent) variables are
variables whose solution values researchers
seek from the model
• Exogenous (independent) variables are
variables whose values are assumed to be
determined by forces external to the model.
• A constant is a magnitude that does not
change. When a constant is joined to a
variable, it is often referred to as coefficient
or parameter of that variable
Examples and notes
• Economic variables: price (P) , profit (π) ,
revenue (R), cost (c) , national income (Y) ,
consumption (C), investment (I), imports (M),
exports (X), etc.
• Note 1. When we write, say, p = 100 or Y =
500, we are "freezing“ these variables at
specific values (in appropriately chosen units).
• Note 2. A variable that is exogenous in one
model may well be endogenous in the other
model.
• Note 3. Coefficient may be symbolic rather
than numerical. Example: 7P, 5Y , aQ
BASICS
REAL-NUMBERED SYSTEM
Definitions Examples and notes

Throughout this course we will deal mostly with

what is called "real numbers":
• Example: 1, 2, 3, -1, -2, -3, ...
• Positive and negative integers
1 1 2 1 1 2
• Example: 2 , 3 , 5 , − 2 , − 3 , − 5, ...
• Positive and negative fractions
• Example: All integers and fractions
• Rational numbers
3 5
• Example: 5, 6, 7
• Irrational numbers (numbers that cannot be
expressed as a ratios of a pair of integers)
BASICS
EQUATIONS AND IDENTITIES
Definitions Examples

• A definitional equation (or identity) sets up
an identity between two alternative
expressions.
• A behavioral equation specifies the manner
in which a variable behaves in response to
changes in other variables.
• Sign ‘≡’ is read as "identical or identically
equal to". Example: π ≡ R - C
• Sign ‘=‘ is read as "equal to or depends on".
Example: C = 75 + 0.6Y or C = a + bY
• Example: Qd = Qs

• An equilibrium condition/equation has

relevance only if the model involves the notion
of equilibrium. If so, the equilibrium condition
is an equation that describes the prerequisite
for the attainment of equilibrium.
FUNCTIONS & RELATIONS
WHAT IS A FUNCTION/RELATION?
Definitions Examples

• A function (aka, transformation or mapping) • "to obtain the value of y multiply x by 2“, i.e
y = 2x
is a rule that describes a relationship between
variables or numbers. For instance, for each • "to obtain the value of y multiply z by 5 and
variable or number x, a function assigns a add 7“, i.e y = 5z + 7
unique number y according to some rule.
• "to obtain the value of y raise w to the 9th
1
x power and subtract ½”, i.e. 𝑦 = 𝑤 9 −
w 2

y
FUNCTIONS & RELATIONS
A FUNCTION/RELATION IN ECONOMICS
Definitions
• In economics functions are usually used to
denote the dependency of the value of one
variable or number on the values of the other
numbers or variables.
• Since sometimes the exact algebraic
relationship between variables is unknown, we
simply state that the value of some variable y
is a function (or depends) on the values of
variables x, z, w and so on.
y = f (x, z,w)
Examples and notes
• Note1. The expression is read as "y equals f of
x, and NOT f times x".
• "the demand for butter depends on the price
of butter, price of margarine, and advertising
expenses": 𝑞𝑑 = 𝑓(𝑝𝑏 , 𝑝𝑚 , 𝐴)
• "the consumption depends on income and the
interest rate": 𝐶 = 𝐶(𝑌, 𝑟)
• Note 2. In all cases, left-hand side variables
are endogenous or dependent variables and
the one on the right-hand side are exogenous
or independent variables.
FUNCTIONS & RELATIONS
TYPES OF FUNCTIONS
Definitions Examples

• A polynomial function (as a quadratic, a • Constant function – y = a0, n = 0

cubic, a quartic, and so on) involves only non-
negative integer powers of independent
variable. • Linear function – y = a0+ a0x, n = 1
General definition of a polynomial:
• A polynomial of degree n is a function of the • Quadratic function – y = a0+ a1x + a2x2 , n= 2
form:
𝑓 𝑥 = 𝑎0 + 𝑎1 𝑥 + 𝑎2 𝑥 2 + ⋯ + 𝑎𝑛 𝑥 𝑛
where each term contains coefficient as well as a • Cubic function – y = a0+ a1x + a2x2 + a3x3 , n= 3
nonnegative-integer power of the variable x.
• The degree of a polynomial is the highest
power of x in its expression.
GRAPHS
WHAT IS A GRAPH?
Definitions Example of Cartesian plane

• A graph is a visual representation of a

function or relation between numbers or
variables.

• Throughout this module we will visually

represent our functions on Cartesian or
coordinate plane below.
GRAPHS
HOW TO DRAW A GRAPH?
Exercise
• Draw a graph of the given function 𝑦 =
𝑓 𝑥 = 5 + 𝑥2
• Note 1. A turning point of a function is a
point where the graph of the function
changes from sloping downwards to
sloping upwards, or vice versa. Generally
speaking, curves of degree n can have
up to (n – 1) turning points.
Solution
• Start from a point x = 0 and find value
of y. This gives a first point or ordered
pair on Cartesian plane - 𝑥1 , 𝑦1 =
(0, 5)
• In a similar fashion, impute the other
values of x into the function and find the
other ordered pairs or points
• Note 1. If the value of a function
depends on more than two variables
(that is, x, z, w) its graph is impossible to
visualize and/or represent.
 GRAPHS
CONSTANT AND LINEAR FUNCTIONS
Definitions Example of linear and constant functions

• the graph of a constant function is always a straight Linear

horizontal line. Constant
• the graph of a linear function will appear as a
straight line.
Important note!
• When x = 0, the linear function yields 𝑦 = 𝑎0 , thus the
ordered pair (0, 𝑎0 ) is on the line. This gives us the so-
called "y-intercept" (or vertical intercept), because it Constant:
is at this point that the vertical axis intersects the line.
y = 5, y = 2, y = -1
• The other coefficient, 𝑎0 , measures the slope (the
steepness of incline) of our line. Linear:
• When 𝑎0 > 0 our line is upward-sloping. When 𝑎0 < y = 2x+1, y = -5+4x, y = -x-3
0 our line is downward-sloping.
 GRAPHS
QUADRATIC FUNCTIONS
Examples of positive quadratic functions Examples of negative quadratic functions

• 𝑦 = 𝑓 𝑥 = 𝑥 2 - blue • 𝑦 = 𝑓 𝑥 = −𝑥 2 - blue
• 𝑦 = 𝑓 𝑥 = 2𝑥 2 - red • 𝑦 = 𝑓 𝑥 = −2𝑥 2 - red
• 𝑦 = 𝑓 𝑥 = 5𝑥 2 - green • 𝑦 = 𝑓 𝑥 = −5𝑥 2 - green
 GRAPHS
QUADRATIC FUNCTIONS
What happens to quadratic
function if we vary the coefficient
of x?
• 𝑦 = 𝑓 𝑥 = 𝑥 2 + 𝑥 - blue
• 𝑦 = 𝑓 𝑥 = 𝑥 2 + 4𝑥 - red
• 𝑦 = 𝑓 𝑥 = 𝑥 2 + 6𝑥 - green
What happens if the coefficient
of x is negative and increasing
or decreasing in absolute value?
• 𝑦 = 𝑓 𝑥 = 𝑥 2 − 𝑥 - blue
• 𝑦 = 𝑓 𝑥 = 𝑥 2 − 4𝑥 - red
• 𝑦 = 𝑓 𝑥 = 𝑥 2 − 6𝑥 - green
What happens to the graph of
quadratic function if we vary its
constant term?
• 𝑦 = 𝑥 2 + 𝑥 + 5 - blue
• 𝑦 = 𝑥 2 + 𝑥 + 1 - red
• 𝑦 = 𝑥 2 + 𝑥 − 1 - green
GRAPHS
RATIONAL FUNCTIONS
Definitions Example of rectangular hyperbola
• Note 1. The rectangular hyperbola drawn from
𝑥−1
• A function such as 𝑦 = in which y xy = a never meets the axes, even if extended
𝑥 2 +2𝑥+4
indefinitely upward and to the right. Rather,
is expressed as a ratio of two the curve approaches the axes asymptotically:
polynomials in the variable x, is known as as y becomes very large, the curve will come
a rational function very closer to the y axis but never actually
reach it, and similarly for the x-axis. plots as a
• A special rational function that has rectangular hyperbola.
interesting applications in economics is
the function 𝑦 = 𝑎𝑥 ↔ 𝑥𝑦 = 𝑎 which
plots as a rectangular hyperbola.
GRAPHS
SOME USEFUL PROPERTIES OF FUNCTIONS
Definitions
• A continuous function is one that can be
drawn without lifting a pencil or a pen from
the paper (no jumps in continuous function).
• A smooth function is one that has no "kinks"
or corners.
• A monotonic function is one that always
increases or decreases.
➢ A positive monotonic function is one that
always increases as x increases.
➢ A negative monotonic function is one that
always decreases as x decreases.
Definitions
• A function has the property that for each value of x
there is a unique value of y associated with it and
that a monotonic function is one that always
increasing or decreasing. This implies that for a
monotonic function there will be a unique value of x
associated with each value of y. We call the function
that relates x to y in this way an inverse function.
• Hence, given y as a function of x, the inverse
function is found by solving for x as a function of y.
• Example: 𝑦 = 2𝑥 → 𝑥 = 2 𝑦
1
RULES TO REMEMBER!
• Rule 4:
• Rule 1:
1
𝑛
𝑥𝑚 × 𝑥𝑛 = 𝑥 𝑚+𝑛 𝑥𝑛 = 𝑥

• Rule 2: • Rule 5:
𝑥𝑚 𝑥𝑚 𝑛 = 𝑥 𝑚𝑛
𝑚−𝑛
= 𝑥
𝑥𝑛
• Rule 6:
• Rule 3: 𝑥0 = 1
1
𝑥 −𝑛 = with 𝑥 ≠ 0 • Rule 7:
𝑥𝑛
𝑥 𝑚 × 𝑦 𝑚 = 𝑥𝑦 𝑚
SUGGESTED READING
For this lecture Alternative

• Chiang, A. (1984) "Fundamental Methods • Standard high school mathematics books

of Mathematical Economics". 3rd edition.
Chapters 1 & 2