Contents
Mathematics for Finance & Economics — Comprehensive Undergraduate Notes 1
Chapter 1: Functions and Graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Chapter 2: Limits and Continuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Chapter 3: Differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Chapter 4: Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Chapter 5: Matrices and Determinants . . . . . . . . . . . . . . . . . . . . . . . . . 5
Chapter 6: Sequences, Series, and the Mathematics of Finance . . . . . . . . . . . . 5
Chapter 7: Probability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Chapter 8: Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Quick-Reference Formula Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Mathematics for Finance & Economics — Comprehensive
Undergraduate Notes
Quantitative methods commonly required in undergraduate business, economics, and finance
programs, with worked examples throughout.
Chapter 1: Functions and Graphs
1.1 What a function is
A function f maps each input x to exactly one output y = f(x). In economics, functions describe
relationships: demand as a function of price, cost as a function of quantity, utility as a function
of consumption.
1.2 Linear functions
y = mx + c, where m is the slope (rate of change) and c is the y-intercept.
Worked example: A firm’s total cost function is TC = 500 + 20Q (fixed cost Rs 500, variable
cost Rs 20/unit). At Q = 50 units, TC = 500 + 1000 = Rs 1,500. The slope, 20, is the marginal
cost — constant for a linear cost function.
1.3 Quadratic functions
y = ax² + bx + c. Graphs as a parabola — opens upward if a > 0, downward if a < 0. The vertex
(turning point) occurs at x = −b/2a, found by setting the derivative to zero (Chapter 3) or by
completing the square.
Worked example: A firm’s profit function is π = −2Q² + 80Q − 300. Vertex at Q = −80/(2×−2)
= 20. Maximum profit at Q = 20: π = −2(400) + 1600 − 300 = Rs 500.
1.4 Exponential and logarithmic functions
Exponential: y = a·b^x, used to model compound growth (compound interest, population
growth). Logarithm: the inverse of exponentiation — if y = b^x, then x = log_b(y). The
natural logarithm (base e ≈ 2.71828) is written ln(x).
Key log rules: ln(xy) = ln(x) + ln(y); ln(x/y) = ln(x) − ln(y); ln(x^n) = n·ln(x).
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Worked example (compound interest): An investment of Rs 1,00,000 grows at 10% annu-
ally: A = 1,00,000 × (1.10)^n. To find how long it takes to double, solve 2 = (1.10)^n → n
= ln(2)/ln(1.10) ≈ 7.27 years (the intuition behind the “Rule of 72”: 72/10 ≈ 7.2 years, a
widely used quick approximation).
1.5 Inverse functions
If y = f(x) is one-to-one (each output corresponds to exactly one input), its inverse f⁻¹(y) =
x reverses the mapping. Example: if demand is P = 100 − 2Q (inverse demand, price as a
function of quantity), then Q = 50 − 0.5P (demand as a function of price) is its inverse — the
same relationship, expressed the other way round, useful depending on which variable is being
solved for.
Chapter 2: Limits and Continuity
2.1 The idea of a limit
lim(x→a) f(x) = L means f(x) gets arbitrarily close to L as x gets arbitrarily close to a, whether
or not f(a) is actually defined. Limits are the formal foundation on which differentiation and
integration are built.
Worked example: f(x) = (x² − 4)/(x − 2) is undefined at x = 2 (0/0 form), but factoring gives
f(x) = (x−2)(x+2)/(x−2) = x + 2 for x ≠ 2. So lim(x→2) f(x) = 2 + 2 = 4, even though f(2) itself
doesn’t exist.
2.2 Rules for evaluating limits
lim[f(x) + g(x)] = lim f(x) + lim g(x); lim[f(x)·g(x)] = lim f(x) · lim g(x); lim[f(x)/g(x)] = lim
f(x)/lim g(x), provided lim g(x) ≠ 0.
2.3 Continuity
A function is continuous at x = a if: (1) f(a) is defined, (2) lim(x→a) f(x) exists, and (3) lim(x→a)
f(x) = f(a). Intuitively, a continuous function’s graph can be drawn without lifting the pen.
Most standard economic functions (demand curves, cost functions) are treated as continuous
to allow the use of calculus, even though real-world quantities are technically often discrete
(whole units).
Chapter 3: Differentiation
3.1 The derivative
The derivative f’(x), or dy/dx, measures the instantaneous rate of change of y with respect
to x — geometrically, the slope of the tangent line to the curve at a point. In economics,
derivatives are the mathematical basis of every “marginal” concept: marginal cost, marginal
revenue, marginal utility.
Formal definition: f’(x) = lim(h→0) [f(x+h) − f(x)] / h.
3.2 Basic differentiation rules
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Rule Function Derivative
Constant f(x) = c f’(x) = 0
Power rule f(x) = xⁿ f’(x) = n·xⁿ⁻¹
Constant multiple f(x) = c·g(x) f’(x) = c·g’(x)
Sum/difference f(x) = g(x) ± h(x) f’(x) = g’(x) ± h’(x)
Product rule f(x) = g(x)·h(x) f’(x) = g’(x)h(x) + g(x)h’(x)
Quotient rule f(x) = g(x)/h(x) f’(x) = [g’(x)h(x) − g(x)h’(x)]
/ [h(x)]²
Chain rule f(x) = g(h(x)) f’(x) = g’(h(x))·h’(x)
Exponential f(x) = eˣ f’(x) = eˣ
Natural log f(x) = ln(x) f’(x) = 1/x
Worked example (power rule): TC = 500 + 20Q + 0.5Q². Marginal Cost MC = d(TC)/dQ = 20 +
Q. At Q = 30, MC = Rs 50.
Worked example (product rule): Total Revenue TR = P·Q where P = 100 − 2Q (so TR = (100 −
2Q)·Q = 100Q − 2Q²). Marginal Revenue MR = d(TR)/dQ = 100 − 4Q. At Q = 10, MR = Rs 60.
3.3 Second derivatives and concavity
The second derivative f’‘(x) measures how the rate of change itself is changing — the curvature
of the function. If f’‘(x) > 0, the function is convex (curving upward, like a cost curve with
increasing marginal cost); if f’’(x) < 0, it is concave (curving downward, like a typical utility or
production function showing diminishing returns).
3.4 Optimization using calculus
To find a maximum or minimum of a function: 1. Find the first derivative and set it to zero: f’(x)
= 0. Solve for x — these are the critical points. 2. Check the second derivative: if f’‘(x) < 0
at that point, it’s a maximum; if f’’(x) > 0, it’s a minimum.
Worked example (profit maximization): Total Revenue TR = 100Q − 2Q². Total Cost TC = 20Q
+ 0.5Q². Profit π = TR − TC = 100Q − 2Q² − 20Q − 0.5Q² = 80Q − 2.5Q².
dπ/dQ = 80 − 5Q. Set to zero: 80 − 5Q = 0 → Q = 16.
Second derivative: d²π/dQ² = −5 < 0, confirming a maximum.
Maximum profit: π = 80(16) − 2.5(16²) = 1280 − 640 = Rs 640.
Note the equivalent economic rule: profit is maximized where MR = MC. Here MR = d(TR)/dQ
= 100 − 4Q, and MC = d(TC)/dQ = 20 + Q. Setting MR = MC: 100 − 4Q = 20 + Q → 80 = 5Q
→ Q = 16, matching the result above — calculus optimization and the “MR = MC” rule from
economics are the same mathematics, viewed two ways.
3.5 Partial derivatives
For functions of more than one variable, e.g., utility U(x, y) depending on two goods, the partial
derivative ∂U/∂x measures the rate of change of U with respect to x, holding y constant. This
is exactly how marginal utility of one good is defined while consumption of other goods is held
fixed.
Worked example: U(x, y) = x^0.5 · y^0.5. ∂U/∂x = 0.5·x⁻⁰·⁵·y^0.5 (holding y constant). This
is the marginal utility of good x.
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3.6 Applications: elasticity via calculus
Point price elasticity of demand can be written using calculus as: PED = (dQ/dP) × (P/Q).
Worked example: Q = 200 − 4P. dQ/dP = −4. At P = 30, Q = 200 − 120 = 80. PED = −4 ×
(30/80) = −1.5 (elastic).
Chapter 4: Integration
4.1 The idea of integration
Integration is the reverse process of differentiation — given a marginal/rate function, integra-
tion recovers the total/aggregate function. Geometrically, a definite integral computes the
area under a curve between two points.
4.2 Basic integration rules
Rule Function Integral
Power rule f(x) = xⁿ (n ≠ −1) ∫f(x)dx = xⁿ⁺¹/(n+1) + C
Constant multiple f(x) = c·g(x) ∫f(x)dx = c·∫g(x)dx
Sum/difference f(x) = g(x) ± h(x) ∫f(x)dx = ∫g(x)dx ± ∫h(x)dx
Exponential f(x) = eˣ ∫f(x)dx = eˣ + C
1/x f(x) = 1/x ∫f(x)dx = ln
(C is the “constant of integration” — since differentiation of any constant is zero, integration
can’t recover it, so it must be added back and determined separately if a specific starting
condition is known.)
Worked example (recovering total cost from marginal cost): MC = 20 + Q. TC = ∫(20 + Q)dQ
= 20Q + Q²/2 + C. If fixed cost (TC at Q=0) is Rs 500, then C = 500, so TC = 500 + 20Q +
0.5Q² — recovering the total cost function from Chapter 3.2’s marginal cost.
4.3 Definite integrals and area under a curve
∫[a to b] f(x)dx = F(b) − F(a), where F(x) is the antiderivative (integral) of f(x). This computes
the net signed area under f(x) between x = a and x = b.
4.4 Application: consumer surplus and producer surplus
Consumer surplus is the area between the demand curve and the market price, up to the
equilibrium quantity — representing the extra value consumers receive beyond what they ac-
tually paid. Producer surplus is the area between the market price and the supply curve —
the extra revenue producers receive beyond their minimum acceptable price.
Worked example: Demand: P = 100 − 2Q. Equilibrium at P = 40, Q = 30. Consumer surplus
= the definite integral of (100 − 2Q) with respect to Q, from Q = 0 to Q = 30, minus (40 × 30)
= (100Q − Q²), evaluated from 0 to 30, minus 1200 = (3000 − 900) − 1200 = 2100 − 1200 =
Rs 900.
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Chapter 5: Matrices and Determinants
5.1 What a matrix is
A rectangular array of numbers arranged in rows and columns, used to organize and solve
systems of linear equations compactly — common in input-output economic models and in
solving multiple simultaneous market equilibrium conditions.
5.2 Matrix operations
Addition/subtraction: element-by-element, only for matrices of the same dimensions.
Multiplication: for matrices A (m×n) and B (n×p), the product AB is (m×p), where each ele-
ment is the sum of products of the corresponding row of A and column of B. Matrix multiplication
is not commutative: AB ≠ BA in general.
Worked example: A = [[1, 2], [3, 4]], B = [[5, 6], [7, 8]].
AB = [[1×5+2×7, 1×6+2×8], [3×5+4×7, 3×6+4×8]] = [[19, 22], [43, 50]].
5.3 Determinants
For a 2×2 matrix A = [[a, b], [c, d]], det(A) = ad − bc. The determinant indicates whether
a matrix is invertible: a matrix has an inverse if and only if its determinant is non-zero (a
“singular” matrix, det = 0, has no inverse — meaning the system of equations it represents
has no unique solution).
Worked example: A = [[4, 3], [2, 1]]. det(A) = (4×1) − (3×2) = 4 − 6 = −2 (non-zero, so A is
invertible).
5.4 Solving systems of linear equations using matrices
A system such as 2x + 3y = 12 and x − y = 1 can be written in matrix form AX = B, where A
= [[2,3],[1,−1]], X = [[x],[y]], B = [[12],[1]]. Solving X = A⁻¹B gives the solution.
Worked example (using substitution to verify): From x − y = 1, x = y + 1. Substitute into the
first equation: 2(y+1) + 3y = 12 → 2y + 2 + 3y = 12 → 5y = 10 → y = 2, x = 3. Solution: x =
3, y = 2.
5.5 Application: the input-output model (Leontief model)
In economics, a Leontief input-output matrix shows how much of each industry’s output is
required as an input to every other industry. Solving X = AX + D (where X is total output, A is
the technical coefficient matrix, D is final demand) for X = (I − A)⁻¹D lets economists calculate
the total output every industry must produce to meet a target level of final demand, accounting
for the ripple effects across interlinked industries.
Chapter 6: Sequences, Series, and the Mathematics of Finance
6.1 Arithmetic sequences
A sequence where each term increases by a constant difference d: aₙ = a₁ + (n−1)d. Sum of
first n terms: Sₙ = n/2 × [2a₁ + (n−1)d].
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6.2 Geometric sequences
A sequence where each term is multiplied by a constant ratio r: aₙ = a₁ × r^(n−1). Sum of
first n terms: Sₙ = a₁ × (1 − rⁿ)/(1 − r), for r ≠ 1.
This is the mathematical foundation of compound interest and annuities — each pe-
riod’s value is the previous period’s value multiplied by a constant growth factor.
6.3 Compound interest
A = P(1 + r/m)^(mt), where P is principal, r is the annual interest rate, m is the number of
compounding periods per year, and t is time in years.
Worked example: Rs 50,000 invested at 8% annual interest, compounded quarterly (m=4), for
5 years: A = 50,000 × (1 + 0.08/4)^(4×5) = 50,000 × (1.02)^20 ≈ Rs 74,297.
6.4 Present value
Present Value (PV) reverses compounding to find today’s worth of a future sum: PV = FV / (1 +
r)^n.
Worked example: What is Rs 1,00,000 receivable in 5 years worth today, at a discount rate of
10%? PV = 1,00,000 / (1.10)^5 = 1,00,000 / 1.6105 ≈ Rs 62,092.
6.5 Annuities (using the geometric series sum formula)
An ordinary annuity is a series of equal periodic payments. The present value of an annuity
of n payments of C each, at rate r per period:
PV = C × [1 − (1+r)⁻ⁿ] / r
Worked example: A loan is to be repaid with 10 annual instalments of Rs 20,000 each, at 9%
annual interest. PV = 20,000 × [1 − (1.09)⁻¹⁰]/0.09 = 20,000 × [1 − 0.4224]/0.09 = 20,000
× 6.418 ≈ Rs 1,28,360 — this is the maximum loan amount that could be issued today for
those repayment terms.
The future value of an annuity (e.g., a SIP or recurring deposit): FV = C × [(1+r)ⁿ − 1] / r.
6.6 Perpetuities
An annuity that continues forever. As n → ∞, (1+r)⁻ⁿ → 0, so the annuity PV formula simplifies
to: PV(perpetuity) = C / r.
Worked example: A preference share pays a fixed dividend of Rs 8/year forever. At a required
return of 10%, its fair value = 8/0.10 = Rs 80.
Chapter 7: Probability
7.1 Basic definitions
Experiment: a process with an uncertain outcome. Sample space (S): the set of all possible
outcomes. Event: any subset of the sample space. Probability of an event E: P(E) = (number
of favourable outcomes)/(total outcomes), for equally likely outcomes, always between 0 and
1.
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7.2 Rules of probability
• Addition rule (mutually exclusive events): P(A or B) = P(A) + P(B).
• Addition rule (general, not mutually exclusive): P(A or B) = P(A) + P(B) − P(A and
B).
• Multiplication rule (independent events): P(A and B) = P(A) × P(B).
• Complement rule: P(not A) = 1 − P(A).
7.3 Conditional probability
P(A | B) = P(A and B) / P(B) — the probability of A occurring, given that B has already occurred.
7.4 Bayes’ theorem
P(A | B) = [P(B | A) × P(A)] / P(B)
Used to update the probability of a hypothesis given new evidence — widely applied in credit
risk modelling and diagnostic testing.
Worked example: A loan default-screening model correctly flags 90% of true defaulters
(P(flag|default) = 0.9) and incorrectly flags 5% of non-defaulters (P(flag|no default) = 0.05). If
the true default rate in the population is 2% (P(default) = 0.02), what is the probability that a
flagged applicant is actually a true defaulter?
P(flag) = P(flag|default)×P(default) + P(flag|no default)×P(no default) = (0.9×0.02) +
(0.05×0.98) = 0.018 + 0.049 = 0.067.
P(default | flag) = (0.9 × 0.02) / 0.067 = 0.018/0.067 ≈ 26.9% — a strikingly low figure despite
the test seeming fairly accurate, illustrating the important “base rate” effect: when the under-
lying event (default) is rare, even a fairly accurate test produces many more false positives
than true positives in absolute terms.
7.5 Expected value
E(X) = Σ [xᵢ × P(xᵢ)] — the probability-weighted average of all possible outcomes.
Worked example: An investment returns Rs 20,000 profit with probability 0.6, or a Rs 10,000
loss with probability 0.4. E(X) = (20,000 × 0.6) + (−10,000 × 0.4) = 12,000 − 4,000 = Rs
8,000 expected value.
Chapter 8: Descriptive Statistics
8.1 Measures of central tendency
• Mean (average): x̄ = Σxᵢ / n. Sensitive to outliers.
• Median: the middle value when data is sorted. Robust to outliers — often a better sum-
mary for skewed data like income or house prices.
• Mode: the most frequently occurring value.
8.2 Measures of dispersion
• Range: maximum − minimum.
• Variance: σ² = Σ(xᵢ − x̄ )² / n (population) or /(n−1) (sample) — the average squared
deviation from the mean.
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• Standard deviation: σ = √variance — the most commonly used measure of volatil-
ity/risk (in finance, this is literally how “risk” is often defined for a return series).
Worked example: Annual returns of a stock over 4 years: 10%, 15%, −5%, 20%. Mean =
(10+15−5+20)/4 = 10%. Deviations: 0, 5, −15, 10. Squared deviations: 0, 25, 225, 100 →
sum = 350. Sample variance = 350/3 ≈ 116.7. Sample standard deviation = √116.7 ≈ 10.8%.
8.3 Correlation
Measures the strength and direction of a linear relationship between two variables, ranging
from −1 (perfect negative) to +1 (perfect positive), with 0 indicating no linear relationship.
Correlation coefficient: r = Σ[(xᵢ−x̄ )(yᵢ−ȳ)] / [√Σ(xᵢ−x̄ )² × √Σ(yᵢ−ȳ)²]
Critical caveat: correlation does not imply causation — two variables can be correlated
because one causes the other, both are caused by a third variable, or purely by coincidence.
8.4 Simple linear regression
Models the relationship between a dependent variable y and an independent variable x as: y
= a + bx + ε, where a is the intercept, b is the slope (how much y changes per unit change in
x), and ε is the error term.
Slope: b = Σ[(xᵢ−x̄ )(yᵢ−ȳ)] / Σ(xᵢ−x̄ )². Intercept: a = ȳ − b·x̄ .
R² (coefficient of determination): the proportion of variation in y explained by x, rang-
ing from 0 to 1. Used constantly in finance to measure how much of a stock’s movement is
explained by the broader market (as in the CAPM beta regression).
Quick-Reference Formula Sheet
Concept Formula
Power rule (derivative) d/dx(xⁿ) = n·xⁿ⁻¹
Product rule (fg)’ = f’g + fg’
Chain rule [g(h(x))]’ = g’(h(x))·h’(x)
Power rule (integral) ∫xⁿdx = xⁿ⁺¹/(n+1) + C
Point elasticity (dQ/dP) × (P/Q)
Determinant (2×2) ad − bc
Compound interest A = P(1 + r/m)^(mt)
Present value PV = FV / (1+r)ⁿ
PV of annuity C × [1 − (1+r)⁻ⁿ] / r
PV of perpetuity C/r
Bayes’ theorem P(A|B) = P(B|A)P(A) / P(B)
Sample standard deviation √[Σ(xᵢ−x̄ )² / (n−1)]
Regression slope Σ(xᵢ−x̄ )(yᵢ−ȳ) / Σ(xᵢ−x̄ )²
This document is educational study material intended to build core quantitative skills used
throughout finance and economics coursework.