MJNV1W03 - Business Mathematics: Session 2 September 13, 2019
MJNV1W03 - Business Mathematics: Session 2 September 13, 2019
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, …)
Example: Qs=-20+2P
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
• 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
Q P 1 P0 P0
d x
P Q b Q0 P0 a
Q 1
then
P d
Q P 1 P0 P0
s
P Q d Q0 P0 c
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