BU, CANR, AgEc Dep’t Lecture Notes on Mathematics for Economists / 2015E.

CHAPTER TWO
2. EQUATIONS AND ECONOMIC APPLICATIONS

2.1. Linear function

Q, what is a function?
Function is a unique mathematical rule that relates one or more variables to determine another
variable. It is a special type of relation in which an independent variable (domain) can never be
tied with more than one dependent variable (range). It is a relationship between numbers in
which to each element in the input (domain), there corresponds exactly one element in the output
(range).

Example 2.1: Consider the following tables of cube and square root.

Table 1. y=x
3
Table 2. x= y Or
2
y=± √ x
X Y X Y
-2 -8 0 0
-1 -1 1 -1
0 0 1
1 1 4 2
2 8 -2
9 3
-3
In this example, Table 1 is a function since we don’t have any two range values mapped from a
single domain. But, Table 2 is not a function since at least one independent variable [domain]
value is correspondence more than one range value.

Let D and R be two sets of real numbers. A function f is a rule that matches each number x in D
with exactly one and only one number y or f (x) in R. D is called the domain of f and R is called
the range of f. The letter x is sometimes referred to as independent variable and y dependent
variable.

A function f is a rule which assigns to each value (x), called the argument of the function, one
and only one va

lue [f(x)], referred to as the value of the function at x. The domain of a function refers to the set
of all possible values of x; the range is the set of all possible values for f(x). Functions are

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generally defined by algebraic formulas, as illustrated in Example 2.2. Other letters, such as g, h,
or the Greek letterΦ , are also used to express functions.

Example 2.2: The function f(x) = 8x-5 is the rules that takes a number, multiplies it by 8, and
then subtracts 5 from the product. If a value is given for x, the value is substituted for x in the
formula, and the equation solved for f(x). For example,

If x = 3, f ( x )=8 (3)−5=19
If x = 4, f ( x )=8 (4 )−5=27
Example 2.3:
3 2
Let f ( x )=x −2 x +3 x +100 . Find f (2 ).
Solution
f ( x )=(2)3 −2(2)2 +3(2)+100=106 .
Domain of a Function
The set of values of the independent variables for which a function can be evaluated is called the
domain of the function.

D= { x ε R /∃ y ε R , y =f ( x ) }

Exercise 1:
Find the domain of each of the following functions:
1
a . f ( x )= ;
x−3
x+ 3
b . g( x )= ; 2
x +3 x−10
2.1. Types of function
2.1.1. Linear and Quadratic Function
Linear function
Linear function is a function that changes at a constant rate with respect to its independent
variable. The graph of a linear function is a straight line. The equation of a linear function can be
written in the form
y=mx+b Where 𝑥 and 𝑦 are variables and m and b are constants.
Dependent and Independent Variables

𝑦 = 𝑎𝑥 + 𝑏
Consider the linear function,

The variable on the left hand side, 𝑦, is called the dependent variable as its value depends on the
value of the independent variable. The variable on the right hand side, x, is called the
independent variable.

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For example, given the two variables “number of days of rain per month” and “number of
umbrella sales”, the number of days of rain would be the independent variable, whereas the
number of umbrella sales would be the dependent variable. This is because the number of
umbrella sales will likely depend on how much it has rained, rather than the other way around.

The Slope of a Line

The slope of a line is the amount by which the y coordinate of a point on the line changes when
the x coordinate is increased by 1.
The slope of the nonvertical line passing through the points ( x 1 , y 1 ) and ( x 2 , y 2 ) is given by the
formula
Δy y − y 1
Slope= = 2
Δx x 2 −x1

Horizontal and Vertical Lines

The horizontal line has the equation y = b, where b is a constant. Its slope is equal to zero. The
vertical line has the equation x = c, where c is a constant. Its slope is undefined. See the figure
below.

The Slope-Intercept Form

The Slope-Intercept Form of the Equation of a Line The equation y=mx+b is the equation of
the line whose slope is m and whose y intercept is the point (0, b).

Exercise 2:

Find the slope and y intercept of the line 3 y +2 x=6 and draw the graph.

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2.2. Nonlinear functions

2.2.1. Quadratic Functions
A quadratic function possesses the general form,
y=ax 2 +bx +c
Where 𝑥 and 𝑦 are variables and 𝑎 and 𝑏 and 𝑐 are parameters.

(e.g. 𝑥2 ). Graphically, quadratic functions form a parabola:

The important thing to note about quadratic functions is the presence of a squared variable term

When the coefficient of the squared term is positive, the parabola will be opening up. When the
coefficient of the squared term is negative, the parabola will be upside-down. One way to
remember this more easily is that a positive coefficient results in a smiley face, whereas a
negative coefficient results in a frowny face.
A quadratic equation is one that can be written in the form
y=ax 2 +bx +c=0
Where x is an unknown variable and a, b and c are constant parameters witha≠0 . For example,
y=6 x 2 +2. 5 x+7=0
A quadratic equation that includes terms in both x and x 2 cannot be rearranged to get a single
term in x, so we cannot use the method used to solve linear equations.
There are two possible methods one might try to use to solve for the unknown in a quadratic
equation:
(i) by factorization
(ii) using the quadratic ‘formula’

i) by factorization

are the values of 𝑥 which make the equation equal to 0. They also represent the two places on
A quadratic equation can be factorised in order to find its roots. The roots of a quadratic equation

the function that intersects the 𝑥-axis. Thus, “solving” a quadratic equation means finding its
roots.
Example 2.4: Consider the following quadratic function:
y=x 2 +12 x +32
Step 1: Factorise
Recall that the above quadratic function can be factorised by finding the two values which add to
12 and multiply to get 32. Hence, the above function can be factorised into:
y=( x+ 4 )( x +8 )
Step 2: Find the Roots
Since multiplying anything by 0 results in 0, given the factorised form:
y=( x+4 )( x +8 )
The equation will equal 0 when any of the following two are true,
( x+ 4 )=0

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( x+ 8)=0
That is where, 𝑥 = −4 or 𝑥 = −8.
Hence, the roots of the equation are 𝒙 = −𝟒 and 𝒙 = −𝟖

ii) using the quadratic ‘formula’

The quadratic equation can be used to find the roots of a quadratic function. It is particularly
useful when the roots are not integers and hence factorisation will be difficult.
2
Given a function, y=ax +bx +c
−b±√ b2 −4 ac
x=
2a
Where 𝑎, 𝑏 and 𝑐 are the coefficients of the quadratic function. The term under the square root,
𝑏2− 4𝑎𝑐, is called the discriminant and a function will only have real roots if the discriminant is
2
positive i.e. b −4 ac≥0
For example, y=x +12 x +32
2

−12±√ 122 −4 (1)(32)

x=
2 (1 )
−12±√ 16
x=
2

Hence, the roots of the equation are 𝑥 = 4 and 𝑥 = 8.

x=6±2

2.2.2. Exponential and Logarithmic functions

Exponential function
Exponential function is a function in which a constant base a is raised to a variable exponent x
and is defined as

y=a x a>0 and a≠1

Commonly used to express rates of growth and decay, such as interest compounding and
depreciation, exponential functions have the following general properties.
y=a x , a>0 , and a≠1:
Given
1. The domain of the function is the set of all real numbers; the range of the function is the
set of all positive real numbers, i.e., for all x, even x < 0, y > 0.
2. For a > 1, the function is increasing and convex; for 0 < a <1, the function is decreasing
and convex.
3. At x = 0, y = 1, independently of the base.

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1
y=2−x =( )x
Example 2.5: Given (a) y = 2x and (b) 2 , the above properties of exponential
function can readily be seen from the tables and graphs of the function in figure 2.1 below. More
complicated exponential functions are estimated with the help of the y* key on pocket
calculators.

1
x y=2−x =( )x
a) y=2 b) 2
x y
-3 1/8 x y
-2 1/4 -3 8
-1 1/2 -2 4
0 1 -1 2
1 2 0 1
2 4 1 1
3 8 2 1
3 1

Fig 2.1
Logarithmic functions
x
Interchanging the variables of an exponential function f defined by y=a gives rise to a new
y
function g defined by x=a such that any order pair of numbers in f will also be found in g in
reverse order. For example, if f(2) = 4, then g(4) = 2: if f(3) = 8, then g(8) = 3. The new function
g, the inverse of the exponential function f, is called a logarithmic function with base a. Instead
y
of x=a , the logarithmic function with base a is more commonly written

y=log a x a>0 , a≠1

Loga x is the exponent to which a must be raised to get x. any positive number except 1 may

serve as the base for a logarithmic. The common logarithm of x, written

log a x or simplylog x , is
the exponent to which 10 must be raised to get x. logarithms have the following properties.
Given
y=log x , a>0 , a≠1
a :
1. The domain of the function is the set of all positive real numbers; the range is the set of
all real numbers- the exact opposite of its inverse function, the exponential function.

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2. For base a > 1, f(x) is increasing and concave. For 0 < a <1, f(x) is decreasing and
convex.
3. At x = 1, y = 0, independent of the base.

x
Example 2.6: A graph of two function f and g in which x and y are interchanged, such as y=2
y
and x=2 in Figure 2.2 below, reveals that one function is mirror image of the other along the
45 ο line y = x, such that if f(x) = y, then g(y) = x. Recall that x=2 y is equivalent to and more
commonly expressed as log 2 x .

y
a) y=2x b) y=log 2 x ↔ x=2
X y X y
-3 1/8 1/8 -3
-2 1/4 ¼ -2
-1 1/2 ½ -1
0 1 1 0
1 2 2 1
2 4 4 2
3 8 8 3

Fig 2.2
Example 2.7: Knowing that the common logarithm of x is the power to which 10 must be raised
to get x, it follow that
log 10=1 sin ce 101 =10 log 1=0 sin ce 10 0 =1
log 100=2 sin ce 102 =100 log 0. 1=−1 sin ce 10−1 =0 .1
3 −2
log 1000=3 sin ce 10 =1000 log 0 . 01=−2 sin ce 10 =0. 01

Example 2.8: For numbers that are exact powers of the base, logs are easily calculated without
the aid of calculators.

log 7 49=2 sin ce 7 2= 49 log 2 16= 4 sin ce 24 =16

1 1
log 36 6= sin ce 10 2=100 log 16 2= sin ce 161/ 4 =2
2 4
1 1 1 1
log 3 =−2 sin ce 3−2 = log 2 =−3 sin ce 2−3=
4 9 8 8

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Note: for numbers that are not exact powers of the base, log tables or calculators are needed.

Properties of exponents and logarithms

Assuming a, b>0; a, b ≠ 1; and x and y are any real numbers:

x y x+ y x y xy
1. a . a =a 4. (a ) =a
1 x x x
x
=a−x 5. a . b =(ab )
2. a
ax
()
x
a
ax
=
y
=a x − y 6. b
x b
3. a
For a, x, and y positive real numbers n a real number, and a ≠ 1:
log a xy=log a x + log a y n
1. 3. log a x =n log a x
x n 1
log a =log a x−log a y log a √ x= log a x
2. y 4. n

Example 2.9: The problem below are kept simple and solved by means of logarithms to
illustrate the properties of logarithms.
a ) x =7×2 b ) x=18÷3
log x=log 7+log 2 log x=log18−log 3
log x=0. 8451+0 . 3010 log x=1 .2553−0 . 4771
log x=1 . 1461 log x=0 . 7782
x=14 x=6

c ) x=32 x=√3 8
log x=2 log 3 1
log x= log8
log x=2( 0. 4771 ) 3
log x=0. 9542 1
log x= ( 0 . 9031 )
x=9 3
log x=0 . 3010
x=2

2.2.3. Univariate and Multivariate Functions

Univariate function is a function which has only single independent variable. It is also known as
a function of one independent variable.

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Example: The law of demand is univariate function. Q d =f ( p ) , ceteris paribus

Multivariate function is a function which has two or more independent variable. It is also known
as a function of several independent variables.
Examples: a) Z=f (x , y ) is a function of two independent variables.

b) Q=f ( K , L) production function

c) W =f ( x , y , z ) is a function of three independent variables
d) Qd =f ( P0 , P s , Pc , Y ,T , A , Dt−1, N )

2.2.4. Explicit and Implicit Functions

Explicit function is a function in which the independent and dependent variables are explicitly/
clearly defined. Whenever the cause and effect relationship is clear or when the objective is to
show that relationships, it is important to use explicit function.
Examples: a) y=f ( x ) is an explicit function of one independent variable. Where, y is
dependent variable and x is independent variable.
b) Q s=f ( p) , ceteris paribus
c) Q=f ( K , L) It tells that output (Q) is determined by L & K.
Implicit function is a function in which the independent and dependent variables are not likely
defined. Whenever the cause and effect relationship is not clear or when the objective is not to
show that relationships, it is better to use implicit function.
Examples: a) f ( x , y )=0 is an implicit function of one independent variable.
b) f ( x , y , z )=0 is an implicit function of two independent variables.
c) The budget formula is an implicit function
 It can be written as
M=P X +P Y
x y
Remark: in this case neither X nor Y is cause & effect relationship between them.
Example: y=f ( x )=3 x −2 is an explicit function convert to equivalent implicit function.
y−3 x +2=0

2.3. Economic applications of linear models

Supply and demand analysis (Market Equilibrium)

An important economic application involving intersections of graphs arises in connection with
the law of supply and demand. In this context, we think of the market price (p) of a commodity
as determining the number of units of the commodity that manufacturers are willing to supply as
well as the number of units that consumers are willing to buy. In most cases, manufacturers’s

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supply S(p) increases and consumers’ demand D(p) decreases as the market price (p) increases.
See figure 2.3 below.

Fig 2.3

The point of intersection of the supply and demand curves is called the point of market
equilibrium. The p coordinate of this point (the equilibrium price) is the market price at which
supply equals demand. We can say another way that the market price is a price at which there
will be neither a surplus nor a shortage of the commodity.

Equilibrium in supply and demand analysis occurs when s

Q =Q d . By equating the supply and
demand functions, the equilibrium price and quantity can be determined.

Example 2.10: Given

Q s=−5+ 3 P Qd =10−2 P

In equilibrium,
Q s=Q d

Solving for
Po −5+3 P=10−2 P
5 P=15
P=3
Substituting P=3 in either of the equations,
Q s=−5+ 3 P=−5+3(3 )=4=Qd

Break-Even Analysis
Intersections of graphs arise in business in the context of break-even analysis. In a typical
situation, a manufacturer wishes to determine how many units of a certain commodity have to be
sold for total revenue to equal total cost. Suppose x denotes the number of units manufactured
and sold, and let C(x) and R(x) be the corresponding total cost and total revenue, respectively. A
pair of cost and revenue curves is sketched in Figure 2.4:

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Fig 2.4

Example 2.11:
The Green-Belt Company determines that the cost of manufacturing men’s belts is $ 2 each plus
$ 300 per day in fixed costs. The company sells the belts for $ 3 each. What is the break-even
point?
Solution
The break-even point occurs where revenue sell more than 300 belts each day to make a
and cost are equal. By letting x = the profit.
number of belts manufactured in a day, and
then we obtain revenue function R( x )=3 x
and cost function C ( x )=2 x+300. For
C ( x )=R( x ) , we obtain
3 x=2 x+300
x=300
So, 300 belts must be sold each day for the
company to break even. The company must

Example 2.12:
Suppose that a company has determined that the cost of producing x items is 500 + 140x and that
the price it should charge for one item is P= 200 – x
a. Find the cost function.
b. Find the revenue function.
c. Find the profit function.
d. Find the break-even point

Solution
a. The cost function is given: C=500+140 x
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b. The revenue function is found by multiplying the price for one item by the number of items
2
sold. R( x )=P×x=(200−x ) x=200 x−x
c. Profit is the difference between revenue and cost
P( x )=R ( x )−C ( x )
=(200 x−x 2 )−(500+140 x )
=−x2 +60 x−500

d. To find the break- event, set the revenue equal to the cost and solve for x
R ( x )=C ( x )
200 x −x2 =500+140 x
2
x −60 x +500=0
( x−10 )( x−50)=0
x=10 or x=50

This model shows that a profit occurs if the company produces between 10 and 50 items. We
will discuss calculus techniques for maximizing profit later.

2.4. Functions and curves in Economics

The most common microeconomic functions are demand functions, supply functions, production
function, cost functions, revenue functions, profit functions, pollution functions, and other
natural resource functions. The most common macroeconomic functions are consumption,
saving, investment, and aggregate production functions. There are also, a lot of other economic
functions, but we don’t discuss them here due to time limit we have. For the sake of introduction,
let’s take some examples of economic functions.

Example 2.13:
Given the supply and demand functions

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P=Q 2s +12Q s +32 ,

P=−Q2d −4 Qd +200 ,
Calculate the equilibrium price and quantity.
Solution:. At equilibrium, the quantity supplied is equal to the quantity demanded, so that
Qd =Qs =Q , say.
The supply and demand equations become

P=Q 2 +12Q+32,
P=−Q2−4 Q+200
Equating the expressions on the right-hand sides of these equations, we have
Q2 +12 Q+32=−Q2−4 Q+200

Figure 2.5: The graph of the supply and demand functions in Example 2.13

We can do this since both expressions are equal to P. Rearranging this equation and collecting
like terms yields the quadratic equation

2 Q2 +16 Q−168=0
This equation can be simplified by dividing throughout by 2. We then have the quadratic
equation
Q2 +8Q−84=0

Solving this equation using the formula with a = 1, b = 8, and c = -84 yields

−8±√ 82 −4 (1)(−84 )
Q=
2(1 )

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−8±√ 400
Q=
2
−8±20
Q=
2
−8+ 20 −8−20
Therefore, either , or
Q= =6 Q= =−14
2 2
So the quadratic equation has solutions Q = 6 and Q = −14. The solution Q = −14 can be
discarded because a negative quantity does not make sense.
Therefore, the equilibrium quantity is 6. The corresponding equilibrium price can be determined
by substituting Q = 6 into either the supply or demand equation. If we substitute this value into
the supply equation, we have
P=62 +12×6+32=36 +72+32=140
Therefore, the equilibrium price is 140.
The graphs of the supply and demand functions are shown in Fig. 2.5. There are two points of
intersection. The one for positive Q provides the market equilibrium.

Example 2.14
Draw the graph of the function, C=200+0.6Y, where C is consumer spending and Y is income,
which cannot be negative.

Solution
Before plotting the shape of this function
you need to note that the notation is different
from the previous examples and this time C
is the dependent variable, measured in the
vertical axis, and Y is the independent C
variable, measured on the horizontal axis. C = 200 + 0.6y
When Y = 0, then C = 200, and so the line
cuts the vertical axis at 200. However, when 500
C = 0, then
0=200+0 . 6 Y
−0 . 6 Y =200
200
Y =− 200
0 .6

As negative values of Yare unacceptable, y

just choose another pair of values, e.g. when
0 500
Y = 500 then C = 200+0.6(500) = 200 + 300
= [Link] graph is shown in Figure 2.6.

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Fig 2.6
One function of particular interest in economics is the profit function. We denote this function by
the Greek symbol π. The profit function is defined to be the difference between total revenue,
TR, and the total cost, TC, i.e.,
π=TR−TC
The total revenue received from the sale of Q goods at price P is given by the product of P and
Q, i.e.

TR=P×Q
The total cost function relates the cost of production to the level of output, Q, and is the sum of
the fixed costs, FC, and variable costs, VC × Q, where VC denotes the variable cost per unit of
output. Fixed costs include, for example, the cost of land, rental, equipment, and skilled labour.
Variable costs include, for example, the cost of raw materials, energy, and unskilled labour. The
total cost in producing Q goods is given by
TC=FC +(VC )×Q
Thus the profit function is

π=P×Q−[ FC+(VC )×Q ] =PQ−FC−(VC )×Q

Example 2.15

If fixed costs are 18, variable costs per unit are 4, and the demand function is
P=24−2Q
obtain an expression for π in terms of Q and hence sketch a graph of π against Q.
1. For what values of Q does the firm break even?
2. What is the maximum profit?

2
Table 3. Table of values of the profit function π=−2 Q +20Q−18 for even integer values of Q
for which 0 ≤ Q ≤ 10.

Solution
The total revenue function is given by
TR=P×Q=(24−2Q )Q=24 Q−2Q2 ,

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where we have used the demand function P = 24 − 2Q to eliminate P in the expression defining
TR. We have expressed TR solely in terms of the level of output, Q. The total cost function is
given by
TC=FC+(VC)×Q=18+4 Q ,
Since FC = 18 and VC = 4. We can now obtain an expression for the profit function by
subtracting the expression for TC from the expression for TR, i.e.,
π=TR−TC
=24 Q−2Q 2−(18+4 Q )
=24 Q−2Q 2−18−4 Q
=−2 Q2 +20 Q−18 ,

where we have taken care to change the sign of all terms inside the brackets on their removal.
Since the coefficient of Q2 in the quadratic expression defining π is negative, the graph of the
profit function has a ¿ shape. When Q = 0, π = −18. The profit function is tabulated in Table 3
for 0 ≤ Q ≤ 10. From this information, we are able to sketch the graph of the function. This is
shown in Fig. 2.7.
1. The value of the profit function will be zero (i.e., π = 0) for values of Q that satisfy the
quadratic equation

−2 Q2 +20 Q−18=0
Solving this equation using the formula with a = -2, b = 20, and C -18 yields

−20±√ 202 −4 (−2 )(−18 )

Q=
2(−2)
−20±√ 256
Q=
−4
−20±16
Q=
−4
−20+16 −20−16
Therefore, either , or
Q= =1 Q= =9
−4 −4
The profit is zero when Q = 1and Q = 9. Therefore, the firm breaks even when Q = 1and Q = 9.
For1 <Q< 9, the profit function is positive (see Fig. 2.7) and the firm is in profit. For values of Q
outside this range, i.e.,Q< 1and Q> 9, the profit function is negative and therefore the firm makes
a loss at these levels of output.

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2
Figure 2.7: The graph of the profit function π=−2 Q +20Q−18 .
2. To determine the maximum value of the profit function, we complete the square.

π=−2 [ Q2 −10 Q+9 ]

=−2 [ ( Q−5 )2−25+9 ]
=−2 [ ( Q−5 )2−16 ]
=(−2 )×(Q−5)2 +(−2)×(−16)
=−2(Q−5)2 +32
2
Therefore, the maximum profit is π = 32 since the term (−2)×(Q−5 ) is always negative except
when Q = 5 when it is zero.

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