5.9.
VECTOR SPACES 79
Example 5.9.6 Consider the following vectors in Rn . ei = (0, · · · , 0, 1, 0, · · · , 0)′ ,
where 1 is in the ith position, i = 1, · · · , n. The set En = {e1 , e2 , · · · , en }
forms a basis for Rn which is called the standard basis.
Let V be a vector space and B = {u1 , u2 , · · · , uk } a basis for V . Since
B generates V , for any u ∈ V , there exists the real numbers x1 , x2 , · · · , xn
such that u = x1 u1 + · · · + xn un . The column vector x = (x1 , x2 , · · · , xn )′
is called the vector of coordinates of u with respect to B.
Example 5.9.7 Consider the vector space Rn with the standard basis En .
For any u = (u1 , · · · , un )′ , we can represent u as u = u1 e1 + · · · + un en ;
therefore, (u1 , · · · , un )′ is the vector of coordinates of u with respect to En .
Example 5.9.8 Consider the vector space R2 . Let us find the coordinate
vector of (−1, 2)′ with respect to the basis B = (1, 1)′ , (2, −3)′ (i.e., find
(−1, 2)′B ). We have to solve for a, b such that (−1, 2)′ = a(1, 1)′ + b(2, −3)′ .
Solving the system a + 2b = −1 and a − 3b = 2, we find a = 1
5
and b = − 35 .
Thus, (−1, 2)′B = ( 15 , − 35 )′ .
The dimension of a vector space V dim(V ) is the number of elements
in any basis for V .
Example 5.9.9 The dimension of the vector space Rn with the standard
basis En is n.
Let U and V be two vector spaces. A linear transformation of U into V
is a mapping T : U → V such that for any u, v ∈ U and any a, b ∈ R, we
have
T (au + bv) = aT (u) + bT (v).
Example 5.9.10 Let A be a m × n real matrix. The mapping T : Rn → Rm
defined by T (u) = Au is a linear transformation.
80CHAPTER 5. LINEAR MODELS AND MATRIX ALGEBRA (CONTINUED)
Properties:
Let U and V be two vector spaces, B = (b1 , · · · , bn ) a basis for U and
C = (c1 , · · · , cm ) a basis for V .
1. Any linear transformation T can be represented by an m ×
n matrix AT whose ith column is the coordinate vector of
T (bi ) relative to C.
2. If x = (x1 , · · · , xn )′ is the coordinate vector of u ∈ U relative
to B and y = (y1 , · · · , ym )′ is the coordinate vector of T (u)
relative to C, then T defines the following transformation
of coordinates:
y = AT x for any u ∈ U.
The matrix AT is called the matrix representation of T relative to bases
B and C.
Remark 5.9.1 Any linear transformation is uniquely determined by a trans-
formation of coordinates.
Example 5.9.11 Consider the linear transformation T : R3 → R2 , T ((x, y, z)′ ) =
(x − 2y, x + z)′ and bases B = {(1, 1, 1)′ , (1, 1, 0)′ , (1, 0, 0)′ } for R3 and
C = {(1, 1)′ , (1, 0)′ } for R2 . How can we find the matrix representation
of T relative to bases B and C?
We have
T ((1, 1, 1)′ ) = (−1, 2), T ((1, 1, 0)′ ) = (−1, 1), T ((1, 0, 0)′ ) = (1, 1).
The columns of AT are formed by the coordinate vectors of T ((1, 1, 1)′ ),
T ((1, 1, 0)′ ), T ((1, 0, 0)′ ) relative to C. Applying the procedure developed
5.9. VECTOR SPACES 81
in Example 5.9.8, we find
2 1 1
AT = .
−3 −2 0
Let V be a vector space of dimension n, B and C be two bases for V ,
and I : V → V be the identity transformation ((I(v) = v for all v ∈ V ). The
change-of-basis matrix D relative to B, C is the matrix representation of
I to B, C.
Example 5.9.12 For u ∈ V , let x = (x1 , · · · , xn )′ be the coordinate vector of
u relative to B and y = (y1 , · · · , yn )′ is the coordinate vector of u relative
to C. If D is the change-of-basis matrix relative to B, C then y = Cx. The
change-of-basis matrix relative to C, B is D −1 .
Example 5.9.13 Given the following bases for R2 : B = {(1, 1)′ , (1, 0)′ } and
C = {(0, 1)′ , (1, 1)′ }, find the change-of-basis matrix D relative to B, C.
The columns of D are the coordinate vectors of (1, 1)′ , (1, 0)′ relative to C.
Following Example 5.9.8, we find
0 −1
D= .
1 1
82CHAPTER 5. LINEAR MODELS AND MATRIX ALGEBRA (CONTINUED)
Chapter 6
Comparative Statics and the
Concept of Derivative
6.1 The Nature of Comparative Statics
Comparative statics is concerned with the comparison of different equilib-
rium states that are associated with different sets of values of parameters
and exogenous variables. When the value of some parameter or exoge-
nous variable that is associated with an initial equilibrium changes, we
will have a new equilibrium. Then the question posed in the comparative-
static analysis is: How would the new equilibrium compare with the old?
It should be noted that in the comparative-statics analysis we don’t
concern with the process of adjustment of the variables; we merely com-
pare the initial (prechange) equilibrium state with the new (postchange)
equilibrium state. We also preclude the possibility of instability of equilib-
rium for we assume the equilibrium to be attainable.
It should be clear that the problem under consideration is essentially
one of finding a rate of change: the rate of change of the equilibrium value
of an endogenous variable with respect to the change in a particular pa-
83
84CHAPTER 6. COMPARATIVE STATICS AND THE CONCEPT OF DERIVATIVE
rameter or exogenous variable. For this reason, the mathematical concept
of derivative takes on preponderant significance in comparative statics.
6.2 Rate of Change and the Derivative
We want to study the rate of change of any variable y in response to a
change in another variable x, where the two variables are related to each
other by the function
y = f (x).
Applied in the comparative static context, the variable y will represent
the equilibrium value of an endogenous variable, and x will be some pa-
rameter.
The Difference Quotient
We use the symbol ∆ to denote the change from one point, say x0 , to
another point, say x1 . Thus ∆x = x1 − x0 . When x changes from an initial
value x0 to a new value x0 +∆x, the value of the function y = f (x) changes
from f (x0 ) to f (x0 + ∆x). The change in y per unit of change in x can be
represented by the difference quotient.
∆y f (x0 + ∆x) − f (x0 )
= .
∆x ∆x
Example 6.2.1 y = f (x) = 3x2 − 4.
Then f (x0 ) = 3x20 − 4, f (x0 + ∆x) = 3(x0 + ∆x)2 − 4,