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In a linear function, 𝒃 also tells us how much the dependent variable (𝑪) will increase (or
decrease), when the independent variable (𝑪) changes by 1 unit. Let’s try to understand this
using a numerical example: 𝐶 = 𝑓(𝑄) = 50 + 7𝑄
Here, 𝒃 = +𝟕 This means if 𝑸 increases by 1 unit, then 𝑪 increases by 7 units ($). In other
words, if output increases by 1 unit, then the total cost increases by $ 7. Here, the linear function
tells us that whenever the output (𝑄) increases by 1 unit the total cost always increases by $ 7.
This is an example of a linear relationship (where the dependent variable always changes by the
same amount for any given change of the independent variable). Linear functions can be used to
model (represent) or analyze linear relationships.
Another Business Example:
𝑄𝑑 = 𝑓(𝑃) = 10 − 𝟐𝑃 → this is a demand function where 𝑄𝑑 represents the quantity
demanded and 𝑃 is the price of the product. Here, 𝒃 = −𝟐 which tells us 𝑃 and 𝑄𝑑 are
negatively related (if 𝑃 increases, then 𝑄𝑑 will decrease). It also tells us, if 𝑷 increases by 1
unit, then 𝑸𝒅 decreases by 2 units. In other words, if price of the product increases by $ 1,
amount purchased by buyers will decrease by 2 units.
When sketching linear functions if 𝑏 > 0 , we get an upward sloping straight line; if 𝑏 < 0 , we
get a downward sloping straight line. Here, 𝑏 = −2 therefore we get a downward sloping
straight line. Here, 𝑎 = 10. When sketching linear functions, 𝑎 tells us at where the straight line
will meet (intercept) the 𝑦 axis. Since, 𝑎 = 10 this means the line will intercept the 𝑦 axis at 10,
as shown below. Also, when sketching graphs the dependent variable (here, 𝑄𝑑 ) is represented
on the 𝑦 axis and the indepependent variable (here, 𝑃) on the 𝑥 axis.
𝑄𝑑

Note: Here, P and 𝑄𝑑 cannot be

negative. So, we do not need the
dotted (broken) parts of the graph.

Domain and Range of Functions:

The domain of a function is the set of values that the independent variable can take in a given
situation. The range is the set of values that the dependent variable can take in a situation.
For example, in the graph above the independent variable (𝑃) is between 0 and 5. Therefore, in
this case the domain = { 𝑃 | 0 < 𝑃 ≤ 5 } . It is also written as, 𝑃 ∈ ( 0, 5 ]
Similarly, in the graph above we can see the dependent variable can be between 0 and 5.
Therefore, range = { 𝑄𝑑 | 0 ≤ 𝑄𝑑 < 10}. Also written as, 𝑄𝑑 ∈ [ 0, 10 )
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So far we have discussed linear functions. Now, let’s discuss non-linear functions. As the name
suggests, non-linear functions will give us graphs that are not straight lines. We are going to get
graphs that have curves as below. For example: 𝑦 = 𝑓(𝑥) = −2 + 𝑥 2 gives the following graph

The graph can be easily sketched.

Here, -2 is the y-intercept (if, 𝑥 = 0,
𝑦 = −2). So the graph meets y-axis at
-2. And we know, +𝑥 2 always gives a
U shaped curve.

Now, let’s sketch the graph of 𝑦 = 5 − 𝑥 2 . Here, the y-intercept is 5 and we know the graph of
– 𝑥 2 is bell shaped, ∩. So we get the following graph
y

Remember: We can use the dotted part of the above graph to model (represent) a PPF, and we
can also use it to model (represent) a demand curve (since it is downward sloping).
When should we use it?
When 𝑦 does not change at a constant rate. Here, at first 𝑦 decreases my small amounts and later
it decreases by larger amounts; hence, it is a non-linear relationship.
In non-linear relationships, the dependent variable does not change at a constant rate.
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Let’s look at a new family of graphs (non-linear functions): 𝑦 = 𝑥 0.7 , 𝑦 = 𝑥 0.5 , 𝑦 = 𝑥 0.3
Note: In this family of graphs the exponent (power) is less than 1 and greater than zero. In this
case we get the following non-linear shape:

Here, 𝑦 increases more initially, then

it increases less. We can use this to
model (represent) the “law of
diminishing returns” - which says: as
we add more labour, the output will
increase more initially and later it will
increase less.

Let’s assume, the output (Q) of a

business firm only depends upon
labour (L). Then, 𝑄 = 𝑓(𝐿). To model
this situation we can use a graph
similar to the one on the left.

In the last example we assumed, the output of a business depends only upon labour. However,
this assumption is a little unrealistic. Output (Q) should depend both on labour (L) and machines
(K) (since, most production processes uses both).
Therefore, it is more appropriate to write: 𝑄 = 𝑓(𝐿, 𝐾) this is called the production function
Note: The above symbol tells us output depends upon both labour and machines. There are two
independent variables here. Functions of more than one independent variable are called
multivariate functions.
Examples of Business and Economic Models containing Functions:
1) The Partial Market Equilibrium Model:
In this model we are assuming, the quantity demanded of a product (𝑄𝑑 ) linearly depends only
upon the price of the product (𝑃).
Therefore we can write: 𝑄𝑑 = 𝑓(𝑃) = 𝒂 + 𝒃𝑷
Remember 𝒂 is the demand when 𝑃 = 0. If 𝑃 = 0 there should be a positive demand for the
product. Therefore, 𝑎 > 0 is the appropriate restriction in this case.
When analyzing 𝒃 we need to consider how 𝑃 and 𝑄𝑑 are related. They are negatively related,
therefore 𝒃 should be negative here (to represent the negative relation). 𝑏 < 0 is the correct
restriction in this case.
Now let’s model the supply (𝑄𝑠 ) in the market. We are assuming, the supply also linearly
depends only on the price. Therefore, we can write: 𝑄𝑠 = 𝑔(𝑃) = 𝑐 + 𝑑𝑃
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When analyzing 𝒄 , we need to think about the graph. We always want the supply curve to
intercept (meet) the 𝑦 −axis below 0. Therefore, 𝒄 < 0
Why should the supply curve intercept the y-axis below zero? Answer: Sellers will only supply a
product if the price is above a certain positive level (here, P1). This is clear in the graph below:

In reality, sellers will only supply if the

price is above a certain level (here,
𝑃1 ). Otherwise, they will not supply
(as there will be loss). To represent
this idea in our model, we must start
the supply curve below 0.

𝑃1

Using the model above, we can also find the

equilibrium price and quantity. Remember: at equilibrium 𝑄𝑑 = 𝑄𝑠 (1)
Here, 𝑄𝑑 = 𝑎 + 𝑏𝑝 (2) and 𝑄𝑠 = 𝑐 + 𝑑𝑝 (3)
Substituting (2) and (3) in (1):
𝑎 + 𝑏𝑃 = 𝑐 + 𝑑𝑃 → 𝑏𝑃 − 𝑑𝑃 = 𝑐 − 𝑎 → 𝑃(𝑏 − 𝑑) = 𝑐 − 𝑎
𝑐−𝑎
→ 𝑃∗ = (this is the equilibrium price)
𝑏−𝑑

To find the equilibrium quantity (Q*) , we can substitute the value of P* in 𝑄𝑑 or 𝑄𝑠

𝑐−𝑎 𝑎(𝑏−𝑑)+𝑏(𝑐−𝑎) 𝑎𝑏−𝑎𝑑+𝑏𝑐−𝑎𝑏 𝑏𝑐−𝑎𝑑
Substituting in 𝑄𝑑 → 𝑄 ∗ = 𝑎 + 𝑏 (𝑏−𝑑) = = =
𝑏−𝑑 𝑏−𝑑 𝑏−𝑑

Note: In this math we are using letters (or parameters1) instead of numbers. Therefore, we get the
solutions in letters (or parameters) as well.
The next example is a numerical one (containing numbers).

1
Many times, we use letters (a , b, c …) to denote the constants in the function, e.g. 𝐶 = 𝑎 + 𝑏𝑄. This is called the
parametric form of a function. If we use numbers, then they are called numerical forms, e.g. 𝐶 = 150 + 7𝑄
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Given, the following demand and supply functions:

𝑄𝑑 = 4 − 𝑃2
𝑄𝑠 = 4𝑃 − 1
Sketch the demand and supply functions. Find the equilibrium price and quantity.

Note: Here, the demand function is non-linear (U

shaped).
As you can see: initially the 𝑄𝑑 falls less but later
it falls more.

Remember: The equilibrium price and quantity

occurs at 𝑄𝑑 = 𝑄𝑠
Substituting given functions in 𝑄𝑑 = 𝑄𝑠
→ 4 − 𝑃2 = 4𝑃 − 1
→ 𝑃2 + 4𝑃 − 5 = 0
→ 𝑃2 + 5𝑃 − 𝑃 − 5 = 0
→ 𝑃(𝑃 + 5) − 1(𝑃 + 5) = 0
→ (𝑃 + 5)(𝑃 − 1) = 0
𝑃 = −5, 1 (price cannot be negative)
𝑃∗ = 1 Substitute this in 𝑄𝑑 or 𝑄𝑠
𝑄 ∗ = 4(1) − 1 = 3
Therefore, the equilibrium price is BDT 1
Equilibrium quantity is 3 units.
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In the last two examples, we assumed that the 𝑄𝑑 (Quantity demanded) depends only upon the
price (𝑃) of the product. This is the idea of a partial market equilibrium model (last two
examples) – which is not very realistic.
General Market Equilibrium Model:
In reality, the 𝑄𝑑 of a product will also depend upon the price of related products (substitutes and
complements). For example, the 𝑸𝒅 of tea would depend upon the price of tea and the price of
coffee. The general market model takes into account the price of related products.

𝑸𝒅 𝒕𝒆𝒂 = 𝒇(𝑷𝒕𝒆𝒂 , 𝑷𝒄𝒐𝒇𝒇𝒆𝒆 ) = 𝒂𝟎 + 𝒂𝟏 𝑷𝒕𝒆𝒂 + 𝒂𝟐 𝑷𝒄𝒐𝒇𝒇𝒆𝒆

Similarly, 𝑄𝑑 𝑐𝑜𝑓𝑓𝑒𝑒 = 𝑔(𝑃𝑐𝑜𝑓𝑓𝑒𝑒 , 𝑃𝑡𝑒𝑎 ) = 𝑏0 + 𝑏1 𝑃𝑐𝑜𝑓𝑓𝑒𝑒 + 𝑏2 𝑃𝑡𝑒𝑎

Let us analyze the parameters above { 𝑎0 , 𝑎1 , 𝑎2 , 𝑏0 , 𝑏1 , 𝑏2 }

Remember: when analyzing 𝑎0 and 𝑏0 , assume the independent variables are zero.
𝑄𝑑 𝑡𝑒𝑎 = 𝑓(0 , 0) = 𝑎0 → therefore, 𝑎0 is the demand of tea when price of tea and coffee is
zero. There should be some positive demand for tea when price of both tea and coffee is zero
(some people prefer tea to coffee). Therefore, 𝑎0 > 0
𝑄𝑑𝑐𝑜𝑓𝑓𝑒𝑒 = 𝑔(0 , 0) = 𝑏0 → therefore, 𝑏0 is the demand for coffee when price of both tea
and coffee is zero. There should be some positive demand for coffee when price of both tea and
coffee is zero (some people prefer coffee to tea). Therefore, 𝑏0 > 0
When analyzing 𝑎1 , we have to consider how 𝑃𝑡𝑒𝑎 and 𝑄𝑑 𝑡𝑒𝑎 are related. They are negatively
related. Therefore, 𝑎1 < 0
Similarly, when analyzing 𝑏1 , we have to consider how 𝑃𝑐𝑜𝑓𝑓𝑒𝑒 and 𝑄𝑑 𝑐𝑜𝑓𝑓𝑒𝑒 are related. They
are negatively related. Therefore, 𝑏1 < 0
When analyzing 𝑎2 , we have to consider how 𝑃𝑐𝑜𝑓𝑓𝑒𝑒 and 𝑄𝑑 𝑡𝑒𝑎 are related. They are positively
related (if price of coffee increases, buyers will buy more tea). Therefore, 𝑎2 > 0
When analyzing 𝑏2 , we have to consider how 𝑃𝑡𝑒𝑎 and 𝑄𝑑 𝑐𝑜𝑓𝑓𝑒𝑒 are related. They are positively
related (if price of tea increases, buyers will buy more coffee). Therefore, 𝑏2 > 0
**Note: When analyzing the parameter that is attached with an independent variable, we have to
consider how the independent variable is related to the dependent variable**
Note: The parameter that is attached with the independent variable is also called the coefficient