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MJNV1W03 - Business Mathematics: Session 2 September 13, 2019

The document provides an overview of linear functions that are commonly used in business mathematics including linear demand, supply, total cost, and total revenue functions. It discusses the concept of elasticity and how it can be used to analyze the responsiveness of demand and supply to changes in price. The document also covers translations of linear functions and how they can be used to model things like subsidies or taxes, as well as budget constraints that relate consumer purchases to income and prices.

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Katarina Kim
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0% found this document useful (0 votes)
73 views23 pages

MJNV1W03 - Business Mathematics: Session 2 September 13, 2019

The document provides an overview of linear functions that are commonly used in business mathematics including linear demand, supply, total cost, and total revenue functions. It discusses the concept of elasticity and how it can be used to analyze the responsiveness of demand and supply to changes in price. The document also covers translations of linear functions and how they can be used to model things like subsidies or taxes, as well as budget constraints that relate consumer purchases to income and prices.

Uploaded by

Katarina Kim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MJNV1W03 – Business Mathematics

Session 2
September 13, 2019
Content
Straight Line Applications (Chapter 2)
• The linear demand function
• The linear supply function
• The linear total cost
• The linear total revenue
• Translations of linear functions
• Demand Elasticity
• Supply Elasticity
• Budget constraints
The Linear Demand Function
General Demand function : Qd = f(P, Y, Ps , PC , Ta , A, …)

– Qd is the quantity demanded of good X


– P is the price of good X
– Y is the income of the consumers
– Ps is the price of subtitute goods
– Pc is the price of complementary goods
– Ta is the taste or fashion of the consumer
– A is the level of advertising
– Etc (number of consumers, future expectations about price)
The Linear Demand Function

The simplest model for the demand function: Qd = f(P)

– The law of demand: “when the price of a good increases,


the quantity demanded will decreases, all other variables
remaining constant.”
– Negative relationship between Q (Quantity demanded)
and P (Price)
 Slope is negative!
The Linear Demand Function
Example:
Q  200  2 P  (a )
2 P  200  Q
P  100  0.5Q  (b)

Can you make


the plot from
the equation?
The Linear Supply Function
General Supply function : Qs = f(P, C, Po , Te , N, O, …)

– Qs is the quantity of good X supplied


– P is the price of good X
– C is the cost of production
– Po is the price of other goods
– Te is the available technology
– N is the number of producers in the market
– O is other fators, e.g. Tax/subsidies
– etc
The Linear Supply Function

The simplest model for the supply function: Qs = f(P)

– The law of supply: “when the price of a good


increases, the quantity supplied will also increase, all
other variables remaining constant.”
– Positive relationship between Q (Quantity supplied)
and P (Price)
 Slope is positive!
The Linear Supply Function

Example: Qs=-20+2P

Worked Example 2.7

Independent study:
Worked Example 2.8
The Linear Total Cost Function
TC = FC + VC
– TC : Total Cost = Sum of fixed costs and variable costs
– FC : Fixed Costs (irrespective of the level of output)
– VC : Variable Costs (vary with the level of output)
25
Example: A firm has fixed TC = 10 + 2Q
20
production cost of $10 and
variable production costs of $2 15
Cost
per unit produced. 10

Write the equation and make the FC = 10


5
graph
0
0 1 2 3 4 5 6
Quantity
TC = 10 + 2Q
The Linear Total Revenue Function

TR = P . Q  TR is a linear straight line


– P: the price of good X  slope of the line
– Q: the number of units X sold
When the price is constant (irrespective of the units sold)
25

Example: suppose that each 20

snack box is sold for $3.50 15


Total
irrespective of the units sold. Revenue 10
Write the equation and make
5
the graph
0
TR = 3.5Q 0 1 2 3 4 5 6
Quantity
Translations of Linear Functions
A straight line is translated when it is moved, intact, to another
position in the plane. Slope and length of line do not change.
Vertical intercept and the horizontal intercept change, thus the
equation of the line changes.
Vertical translations

• Upwards by c units (y  y-c)


From y = f(x) to y – c = f(x)
 y = f(x) + c

• Downwards by c units (y  y+c)


From y = f(x) to y + c = f(x)
 y = f(x) - c
Translations of Linear Functions
Horizontal translations

• Forwards (+ direction) by c units : Replace x  x-c

• Backwards (- direction) by c units : Replace x  x+c

• Combination
Example: Subsidy
The cost function for solar panels (in units of $000) is given as TC = 10 + 2Q.
a. What is the equation of the cost function when the producer
receives a grant of 10 in order to cover fixed costs.
b. What is the equation of the cost function if no grant is given
and fixed costs are increased by 150%.

70
60 TC = 10 + 2Q
Cost 50
($000) 40 TCa = 10 + 2Q – 10
30 = 2Q
20
10 TCb = 10(250%) + 2Q
= 25 + 2Q
5 10 15 25 30
Q
Exercise
The supply function for toolboxes is given by P = 100 + 0.4Q.
Deduce the equation of the new supply function when,
(a) a subsidy of $5 per unit is introduced.
(b) a tax of $10 per box is imposed

130
125 P = 100 + 0.4Q
120
115
Price 110
105 Pa + 5 = 100 + 0.4Q
100 Pa = 95 + 0.4Q
95
90 Pb – 10 = 100 + 0.4Q
85 Pb = 110 + 0.4Q
10 20 30 40 50
Q
Elasticity
The concept of elasticity in economics:
• The ratio of the percentage change in the quantity demanded
(or supplied) to a percentage change in an economic variable,
such as price, income, etc.
• May be used to predict the responsiveness of demand (and
supply) to changes in such economic variables.

For example

When the price of a car is £9000, will a 5% increase in price result in


a 5% decrease in demand, or a larger percentage decrease in
demand? When the price of a car is £19 200, will a 5% increase in
price result in a smaller or larger percentage decrease in demand?
Price Elasticity of Demand
Price elasticity of demand measures the responsiveness
(sensitivity) of quantity demanded to changes in the good’s price

percentage change in quantity demanded


d 
percentage change in price
Q
100
%Qd Q
d  
%P P
100
P
Q P
d  
P Q
Price Elasticity of Demand
Since demand function P  a  bQ
Remember!!
Q 1
then  y = mx + C
P b y

Point elasticity of demand at any point


Slope = m
(P0 and Q0) : C

Q P 1 P0 P0
d     x
P Q b Q0 P0  a

• Demand is elastic if |εd| > 1


Study work example
• Demand is unit elastic if |εd| = 1 2.19 page 85-89!!
• Demand is inelastic if |εd| < 1
Price Elasticity of Supply

Price elasticity of supply measures the responsiveness


(sensitivity) of quantity supplied to changes in the good’s price
percentage change in quantity supplied
d 
percentage change in price
Q
100
%Qs Q
s  
%P P
100
P
Q P
s  
P Q
Price Elasticity of Supply
Since supply function P  c  dQ

Q 1
then 
P d

Point elasticity of supply at any point (P0 and Q0) :

Q P 1 P0 P0
s    
P Q d Q0 P0  c

• Supply is elastic if |εs| > 1


• Supply is unit elastic if |εs| = 1
• Supply is inelastic if |εs| < 1
Budget Contraints
A budget constraint (or budget line), relates the amount of goods that
a consumer can afford to purchase to his/her income and prices

Consider a consumer who spends all of his/her income, M, on two


goods, referred to as X and Y, priced at Px and Py per unit rrespectively.
The consumer can choose to spend his/her income on:
• all X and no Y (the number of X is M/Px )
• all Y and no X (the number of Y is M/Py ).
• a combination of X and Y
M  PX 
xPX  yPY  M  y     x
PY  PY 
Example
Given PX = £3: PY = £6 : M = £180
 x(3) + y(6) = 180
 y = (180-3x)/6
 y = 30 - 0.5x

Quantity of good
Y, y 30 Budget constraint for
M = £ 180

Quantity of good
60 X, x
Example
When Price of X changed
PX changes from £3 to £1.5.
 x(1.5) + y(6) = 180.
 y=(180-1.5x)/6
 y=30-0.25x y

30

Original Constraint
20
= 30 - 0.5x
Constraint with PX
10
changed
y = 30 - 0.25x
0
0 20 40 60 80 100 120 x
Example
When the budget limit increases
M changes from £180 to £240
 x(3) + y(6) = 240
 y = (240 - 3x)/6 y
 y = 40 - 0.5x 50

40
Budget = 240
30

20
Budget = 180
10

0 x
0 20 40 60 80

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