Mathematics for Economics and Business

Chapter 1: Systems of Linear Equations and Matrices

Faculty of Economic Mathematics, University of Economics and Law

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 1 / 64
Outline

1 Introduction to MEB
2 Systems of Linear Equations
3 Matrices and systems of linear equations
Matrices
Matrix Operations
Matrix inversion and Determinant
Matrices and Linear Equations
4 Applications
Market model
National Income Determination
Leontieff’s Input-Output model

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 Introduction to MEB

Who am I? Who are you?

Lecturer
Dr. Hà Văn Hiếu,
Faculty of Economics Mathematics, UEL.
Email: [email protected]. Mobile number: 0972 236 365
The best way to contact me is by email!
Students
Given your very varied backgrounds, you will need to
stay focused,
work with your team,
become practiced at communicating your own insights and challenges.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 3 / 64
 Introduction to MEB

How to pass?
1 Minimum attendance: 80%.
2 No smartphone, no cigarette, etc.
3 Speaking: English, Vietnamese.
4 Writing: English.

Forms of Assessments Type of Collaboration Weight

Attendance, assignments Individual, team 30%
Midterm Individual, team 20%
Final exam Individual 50%
Table: Super important table

Syllabus

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 4 / 64
 Introduction to MEB

Resources
The main recommended text is
Ian Jacques, Mathematics for Economics and Business, 9th
edition, Pearson Education, 2018.
David C. Lay, Steven R. Lay, & Judi J. McDonald, Linear Algebra
and its Applications, 5th edition, Pearson Education, 2016.
lms.uel.edu.vn
https://www.investopedia.com/
Other resources:
1 Raymond A. Barnett; Calculus for Business, Economics, Life Sciences and Social
Sciences, 13th edition.
2 Thomas Holey, Armin Wiedemann; Analysis and Linear Algebra: An Introduction for
Economists, 5th edition, Springer Nature, 2023.
3 Lê Anh Vũ (Chủ biên); Giáo trình Toán Cao Cấp;NXB Đại học Quốc gia Tp. HCM.
Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 5 / 64
 Introduction to MEB

What is MEB?

1 System of Linear equation and matrices [Chapter 1 -

1st textbook, and Chapters 1, 2, 3 - 2nd textbook].
2 Vector spaces and applications in Economics
[Chapter 4 - 2nd textbook].
3 Differentiations and applications in Economics
[Chapter 4 - 1st textbook].
4 Partial differentiation and applications [Chapter 5 -
1st textbook].
5 Integration in economics and business [Chapter 6 -
1st textbook].

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 6 / 64
 Introduction to MEB

QUESTIONS?

Format of Answer sheet of Teamwork

ANSWER SHEET DATE: [the date]
PROBLEM: [the problem]
TEAM: [your team name]
CLASS: [your class]
Format of individual’s Answer sheet
ANSWER SHEET DATE: [the date]
PROBLEM: [the problem]
NAME: [your name]
CLASS: [407CA, ...]
STUDENT ID: [K21...]

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 Systems of Linear Equations

First example

A system of linear equations: A system of nonlinear equations:

( (
3x + 2y = 1 3x + 2y2 = 1
−2x + y = 2 −2x + y = 2

Elimination method
Step 1 Add/subtract a multiple of one equation to/from a multiple of the other to eliminate x.
Step 2 Solve the resulting equation for y.
Step 3 Substitute the value of y into one of the original equations to deduce x.
Step 4 Check that no mistakes have been made by substituting both x and y into the other
original equation.

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 Systems of Linear Equations

Solutions of systems of linear equations

Claim. A system of linear equations has

1 no solution, or
2 exactly one solution, or
3 infinitely many solutions.

Exercise
Give an example for each possibility above.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 9 / 64
 Matrices and systems of linear equations Matrices

Matrices - Definitions

Suppose that a firm produces three types of

good, G1, G2 and G3, which it sells to two
customers, C1 and C2. The monthly sales for
these goods are given in the following table:

It makes sense to write this information more concisely as

 
7 3 4
A=
1 5 6
This is an example of a matrix.
Definition
”In mathematics, a matrix (plural matrices), is a rectangular array or table of numbers,
symbols, or expressions, arranged in rows and columns.” - Wikipedia
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 Matrices and systems of linear equations Matrices

Matrices - Entries

Let  
7 3 4
A=
1 5 6
be a matrix.
1 How many rows and columns the matrix A has?
2 What is the dimension of A?
3 We denote matrices by capital letters (that is, A, B, C, . . . ) and their elements (or entries)
by the corresponding lower-case letter in ordinary type. For example, a12 = 3. Determine
a13 , a22 , a24 , a34 .

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 Matrices and systems of linear equations Matrices

Practice Problem

Let  
  1 0 2 3 1
1 2  
A= B = 1 −1 0 6 2 C = 5 7 9 0 2  D = [6]
3 4
3 4 6 7 8

a. Determine the dimensions of the matrices A, B, C and D.

b. Write down (if possible) the values of

a11 , a22 , b14 , c25 , c33 , c43 , d11

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 Matrices and systems of linear equations Matrices

Transposition

Definition
The transpose of a matrix is found by replacing rows by columns, so that the first row
becomes the first column, the second row becomes the second column, and so on.

Example
Write down the transpose of the following matrices:
 
1 4 0 1 2  
  1 2 3
 3 7 6 1 4 
A= , B = 1 5 , C= 2 4 5 
 2 1 3 5 −1  7 9
3 5 6
2 −5 1 8 0

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 Matrices and systems of linear equations Matrices

Row matrices and column matrices

A row vector (or row matrix) is a matrix that has only one row. For example,
B = [1 5 7] is a row vector.
A column vector is a matrix that has only one column. For example,
 
1
 2 
C=  −3 


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 Matrices and systems of linear equations Matrix Operations

Addition and subtraction

Let          
7 5 5 2 −6 2 0
A= , B= , C= , D= , O= .
2 1 4 2 1 −9 0
Find

a. A+D b. A+C c. B−C d. C−O e. D−D

Definition
A + B = [entries of A] + [entries of B]
Remark: To add (or subtract) two matrices of the same size, we simply add (or subtract)
their corresponding elements.

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 Matrices and systems of linear equations Matrix Operations

Scalar multiplication
Let   
1 −2 0 −1
A= 3 5  and B =  2 7 
0 4 1 6

1 Find

a. A+A b. 2A c. 2B d. A+B e. 2(A + B)

Hence, verify that 2(A + B) = 2A + 2B

2 Find

a. 3A b. −6A

Hence, verify that −2(3A) = −6A

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 Matrices and systems of linear equations Matrix Operations

Matrix multiplication

Suppose that a firm produces three types of Furthermore, let us suppose that goods G1,
good, G1, G2 and G3, which it sells to two G2 and G3 sell at $50, $30 and $20,
customers, C1 and C2. The monthly sales for respectively.  
these goods are given in the following table 50
P = 30

20

Find the total revenue received from the sale to C1, C2 and the total revenue of the firm.

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 Matrices and systems of linear equations Matrix Operations

Matrix multiplication

If A is a row vector  
A = a11 a12 a13 . . . a1n
and B is the column vector  
b11
b21 
 
 
B = b31 
 .. 
 . 
bn1
Then we define the matrix product to be the 1 × 1 matrix

AB = [a11 b11 + a12 b21 + a13 b31 + · · · + a1n bn1 ]

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 Matrices and systems of linear equations Matrix Operations

Practice Problem

Let 
0  
−1 −2
     
A = 1 −1 0 3 2 B= 1 2 9 C=
1
 D= 1 
1 0
2
Find (where possible)
a. AC
b. BD
c. CD

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 Matrices and systems of linear equations Matrix Operations

Matrix multiplication

$20, respectively. While the corresponding

prices for the second half of the year are $40,
$50, $30.
 
50 40
Let us suppose that the first half of the year, P = 30 50
goods G1, G2 and G3 sell at $50, $30 and 20 30
Calculate the total revenue from the sales to C1, C2 for the first half of the year and for the
year.
Question?
 
  50 40
7 3 4
Let A = and P = 30 50. How can we define the multiplication of two matrices
1 5 6
20 30
A and P?
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 Matrices and systems of linear equations Matrix Operations

Practice Problem
Definition
 
columns
AB = [Rows of A] ·  of 
B

Practice Exercise: Let

     
2 1 1 1   1 1  
1 2 1 2 3
A= 5 1 0 B =  2 C=  
D = −1 1 and E =
3 1 4 5 6
−1 1 4 1 2 1
Find (where possible)
a. AB c. CD e. AE g. DE
b. BA d. DC f. EA h. ED
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 Matrices and systems of linear equations Matrix Operations

Summary on Operations on matrices

Definition

A + B = [entries of A] + [entries of B] (Addition)

αA = [α · every entries of A] (Scalar multiplication)
 
columns
AB = [Rows of A] ·  of  (Matrix multiplication)
B

Properties
Associativity: (A + B) + C = A + (B + C), (AB)C = A(BC), (αβ)A = α(βA)
Commutativity: A + B = B + A

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 Matrices and systems of linear equations Matrix Operations

Zero matrices and Identity matrices



a b
Let A = be an arbitrary 2 × 2 matrix, we know that A + O2×2 = O + A = A.
c d

Question
Is there a matrix, says I, such that

A · I = I · A = A?

Identity matrix
The n × n identity matrix is the n × n matrix in which the entries in the main diagonal equal
to 1 while the other entries equal to 0.
 
  1 0 0
1 0
Example: I2 = and I3 = 0 1 0 are identity matrices.
0 1
0 0 1
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 Matrices and systems of linear equations Matrix inversion and Determinant

Matrix inversion


a b
Let A = be an arbitrary 2 × 2 matrix, we know that A + (−A) = (−A) + A = O.
c d

Question
Is there a matrix, denoted by A−1 for example, such that

A · A−1 = A−1 · A = I ?

Definition
The inverse of an n × n matrix A (if exists) is the n × n matrix A−1 such that

A · A−1 = A−1 · A = In×n

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 Matrices and systems of linear equations Matrix inversion and Determinant

Practice Problem - Teamwork

1 Find (where possible) the inverse of the following matrices.

 
  1 2 0
6 4
A= B =  0 1 2
1 2
0 0 1

2 Is the following matrix invertible? Why?

 
1 2
C=
2 4

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 Matrices and systems of linear equations Matrix inversion and Determinant

Determinant

Theorem
 
a b
The matrix A = is invertible if and only if ad − bc ̸= 0. Furthermore, the inverse of A is
c d
 
1 d −b
ad − bc −c a

The number ad − bc is called the determinant of A and is written as

a b
det(A) or |A| or
c d

If the matrix has a non-zero determinant, it is said to be non-singular or invertible;

otherwise it is said to be singular or non-invertible.
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 Matrices and systems of linear equations Matrix inversion and Determinant

Determinant - Definition

If A = (a)1×1 then det A = |A| = a.

 
a11 a12 a a
If A = then det A = 11 12 = a11 a22 − a12 a21 .
a21 a22 2×2 a21 a22
 
a11 a12 a13
a a a a a a
If A = a21 a22 a23  then det A = a11 22 23 − a12 21 23 + a13 21 22 .
a32 a33 a31 a33 a31 a32
a31 a32 a33 3×3
How is about the determinant of 4 × 4 matrices?

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 Matrices and systems of linear equations Matrix inversion and Determinant

Cofactors

If  
a11 a12 a13
A = a21 a22 a23 
a31 a32 a33
then
a22 a23 a a a a
det A = a11 − a12 21 23 + a13 21 22
a32 a33 a31 a33 a31 a32
If we denote
a22 a23 a21 a23 a21 a22
A11 = A12 = − A13 =
a32 a33 a31 a33 a31 a32
Then
det A = a11 A11 + a12 A12 + a13 A13

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 Matrices and systems of linear equations Matrix inversion and Determinant

Cofactors

a22 a23 a a a a
det A = a11 − a12 21 23 + a13 21 22
a32 a33 a31 a33 a31 a32
det A = a11 A11 + a12 A12 + a13 A13

The cofactor of the element, aij , is the determinant of the matrix left when row i and
column j are deleted, multiplied by +1 or 1, depending on whether i + j is even or odd,
respectively.

Definition
For an n × n matrix A, we have
X
n
det(A) = a1j A1j .
j=1

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 Matrices and systems of linear equations Matrix inversion and Determinant

Inversion

Theorem
A square matrix A is invertible if and only if det A ̸= 0
If the dimension of A is 3 × 3 and det A ̸= 0, then
 
A11 A21 A31
1 
A−1 = A12 A22 A32 
det A
A13 A23 A33

The adjugate matrix The adjoint matrix

 
A11 A12 A13  
A11 A21 A31
A21 A22 A23 
A12 A22 A32 
A31 A32 A33
A13 A23 A33

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 Matrices and systems of linear equations Matrix inversion and Determinant

Practice Problem

Find (where possible) the inverses of

   
1 3 3 270 −372 0

A= 1 4 3 and B = 552 201 0
1 3 4 999 413 0

Find the determinant of the following matrix:

 
1 70 2
A =  0 3 0
2 300 1

Remark: In order to calculate the determinant, we can expand along any row/column.

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 Matrices and systems of linear equations Matrices and Linear Equations

Matrices and Linear equations

      
 a11 x + a12 y + a13 z = b1 a11 a12 a13 x b1
a21 x + a22 y + a23 z = b2 ⇐⇒ a21 a22 a23  × y = b2 

a31 x + a32 y + a33 z = b3 a31 a32 a33 z b3

Hence, the system can be written as

AX = b or just [A | b] or just [A b].

 
x
The vector of unknowns, X = y, can be found by
z

X = A−1 b

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 Matrices and systems of linear equations Matrices and Linear Equations

When A is non-singular - Cramer’s rule

Given the system

Ax = b
where      
a11 a12 . . . a1n x1 b1
a21 a22 . . . a2n  x2  b2 
     
A= . .. .. ..  x=. b=.
 .. . . .   ..   .. 
an1 an2 . . . ann xn bn
Then
det Ai
xi =
det A
where Ai is the n × n matrix found by replacing the ith column of A by the right-hand-size
vector b.

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 Matrices and systems of linear equations Matrices and Linear Equations

Practice Problem

1 Solve the system of equations

2x1 + 4x2 = 16
3x1 − 5x2 = −9
using Cramer’s rule to find x2 .
2 Solve the system of equations

4x1 + x2 + 3x3 =8
−2x1 + 5x2 + x3 = 4
3x1 + 2x2 + 4x3 = 9

using Cramer’s rule to find x3 .

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 Matrices and systems of linear equations Matrices and Linear Equations

Rank of a matrix-Elementary row operations

Elementary row operations

1. (Replacement) Replace one row by the sum of itself and a multiple of another row.
2. (Interchange) Interchange two rows.
3. (Scaling) Multiply all entries in a row by a nonzero constant.
Two matrices are called row equivalent if there is a sequence of elementary row operations that
transforms one matrix into the other.
Question
Do these preserve a system of linear equations?

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 Matrices and systems of linear equations Matrices and Linear Equations

Row echelon forms

A rectangular matrix is in echelon form (or row echelon form) if it has the following three
properties:
1 All nonzero rows are above any rows of all zeros.

2 Each leading entry of a row is in a column to the right of the leading entry of the row

above it.
3 All entries in a column below a leading entry are zeros.

If a matrix in echelon form satisfies the following additional conditions, then it is in reduced
echelon form (or reduced row echelon form):
1 The leading entry in each nonzero row is 1.

2 Each leading 1 is the only nonzero entry in its column.

Uniqueness of the reduced echelon form

Each matrix is row equivalent to one and only one reduced echelon matrix.
Exercises: 1 and 2 (page 22 - 2nd textbook)
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 Matrices and systems of linear equations Matrices and Linear Equations

Gauss-Jordan method
Pivot column
A pivot position in a matrix A is a location in A that corresponds to a leading 1 in the reduced
echelon form of A. A pivot column is a column of A that contains a pivot position.

Gauss-Jordan elimination method

1 Begin with the left-most nonzero column. above it. Apply steps 1–3 to the
This is a pivot column. sub-matrix that remains. Repeat the
2 Select a nonzero entry in the pivot process until there are no more nonzero
column as a pivot (interchange rows if rows to modify.
necessary)
3 Use row replacement operations to create 5 Beginning with the rightmost pivot and
zeros in all positions below the pivot. working upward and to the left, create
4 Cover (or ignore) the row containing the zeros above each pivot. If a pivot is not
pivot position and cover all rows, if any, 1, make it 1 by a scaling operation.
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 Matrices and systems of linear equations Matrices and Linear Equations

Reduced row echelon form

Exercises: 3 and 4 - p.22 (2nd textbook)

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 Matrices and systems of linear equations Matrices and Linear Equations

Rank

Rank of a matrix
The rank of a matrix A is the number of non-zero rows in its echelon form.

Example
Determine the rank of the following matrices:
     
1 3 3 270 −372 0 1 70 2
A = 1 4 3 , B = 552 201 0 , and C = 0 3 0
1 3 4 999 413 0 2 300 1

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 Matrices and systems of linear equations Matrices and Linear Equations

Kronecker-Capelli Theorem

Theorem
A system of linear equations Ax = b with n variables has a solution if and only if the rank of
its coefficient matrix A is equal to the rank of its augmented matrix [A | b]. In particular:
if n = rank(A), the solution is unique,
otherwise, there are infinitely many solutions.

Example
Determine if the following is consistent:

x1 − 2x2 + x3 = 0
2x2 − 8x3 = 8
5x1 − 5x3 = 10

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 Matrices and systems of linear equations Matrices and Linear Equations

Free variables
Example
Suppose, for example, that the augmented matrix of a linear system has been changed into the
equivalent reduce echelon form  
1 0 2 1
0 1 1 4
0 0 0 0

The variables x1 and x2 corresponding to pivot columns in the matrix are called basic variables.
The other variable x3 is called a free variable.
The (general) solution for this system of equations is

(
x1 = 1 − 2x3

x1 = 1 − 2x3
x2 = 1 − x3 or

 x2 = 1 − x3
x3 is free
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 Matrices and systems of linear equations Matrices and Linear Equations

The number of free variables

Theorem
Let Ax = b be a system of linear equations which has n variables.
1 If rank A < rank(A b) then the system has no solution.
2 If rank(A) = rank(A b) = n then the system has a unique solution.
3 If rank(A) = rank(A b) = k < n then the system has infinitely many solutions with n − k
free variables.

Practice problems
Exercises 7 - 14 (page 22 - 2nd textbook)

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 Applications Market model

Demand functions

1 In microeconomics, the quantity demanded (Qd ) of a good

depends on the market price (P).

Qd = f(P)

Alfred Marshall (1842-1924)

2 However, Economists also consider P, the price, as a function

depending on quantity, Qd .

P = g(Qd )
Léon Walras (1834-1910)
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 Applications Market model

The law of demand

The law of demand

Demand usually falls as the price of a good rises. That is, P is a decreasing function of Qd .
Remark: If P is a linear function, i.e., P = aQd + b, then a < 0 and b > 0.
Example: A potter makes and sells ceramic bowls. It is observed that when the price is $32,
only 9 bowls are sold in a week; but when the price decreases to $10, weekly sales rise to 20.
Assuming that demand can be modelled by a linear function,
a. obtain a formula for P in terms of Q;
b. sketch a graph of P against Q;
c. comment on the likely reliability of the model.

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 Applications Market model

The law of supply

The law of supply

An increase in price results in an increase in quantity supplied. That is, P is an increasing
function of Qs .
Remark: If P is a linear function, i.e., P = aQs + b, then a > 0 and b > 0.
If the supply function are expressed as Qs = cP + d, then c > 0 > d.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 45 / 64
 Applications Market model

The law of demand-supply

Law of supply and demand: supply and

demand pull against each other until the
market finds an equilibrium price.
Equilibrium (market): This state occurs when
quantity supplied and quantity demanded are
equal.
Remark: The supply and demand functions
are not necessary to be linear. However, in
this chapter, we assume that they are linear.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 46 / 64
 Applications Market model

The supply-demand model

The supply-demand model
In general case: In the case where the supply and demand are
modelled as linear functions:
 

P = f(Qd ) P = −aQd + b

P = g(Qs ) P = cQs + d

 

Qs = Qd Qs = Qd
Example: The demand and supply functions of a good are given by P = 2Qd + 50 and
P = 1/2Qs + 25, where P, Qd and Qs denote the price, quantity demanded and quantity
supplied, respectively.
a. Determine the equilibrium price and quantity.
b. Determine the effect on the market equilibrium if the government decides to impose a
fixed tax of $5 on each good.
Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 47 / 64
 Applications Market model

The market model - Two goods

A general model When Qd , Qs are linear

 
 Qd,1 = f1 (P1 , P2 )  Qd,1 = a1 P1 + a2 P2 + a3

 


 

Qd,2 = f2 (P1 , P2 )
 Qd,2 = α1 P1 + α2 P2 + α3


Q = g (P , P ) 
Q = b P + b P + b
s,1 1 1 2 s,1 1 1 2 2 3

 Q = g (P , P 2) 
 Q = β P + β P + β


s,2 2 1 

s,2 1 1 2 2 3

 Qd,1 = Qs,1 
 Q Q

 
 d,1 = s,1
 
Qd,2 = Qs,2 Qd,2 = Qs,2
Example: The demand and supply functions for two interdependent commodities are given by
Qd1 = 10 − 2P1 + P2 , Qd2 = 5 + 2P1 − 2P2 , Qs1 = −3 + 2P1 , Qs2 = −2 + 3P2 , where Qdi , Qsi
and Pi denote the quantity demanded, quantity supplied and price of good i, respectively.
Determine the equilibrium price and quantity for this two-commodity model.
Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 48 / 64
 Applications Market model

Complementary and substitutable goods

Suppose that the demands and the supplies of Question: What can we say about the sign of
two goods are given by the parameters

 Q = a1 P1 + a2 P2 + a3
 d,1
 a1 , a2 , a3 , α1 , α2 , α3 , b1 , b2 , b3 , β1 , β2 , β3 .
Q = α P + α P + α
d,2 1 1 2 2 3

 Qs,1 = b1 P1 + b2 P2 + b3


Qs,2 = β1 P1 + β2 P2 + β3

1 Two goods are said to be substitutable, if an increase in the price of one good causes an
increase in the demand of the other good.
2 Two goods are said to be complementary, if an increase in the price of one good causes a
decrease in the demand of the other good.
Exercises: Exercises 7.3 (p. 568 - 1st textbook).
Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 49 / 64
 Applications National Income Determination

National income determination

Macroeconomics is concerned with

the analysis of economic theory and
policy at a national level. We focus
on one particular aspect known as
national income determination. We
describe how to set up simple models
of the national economy which enable
equilibrium levels of income to be
calculated.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 50 / 64
 Applications National Income Determination

National income determination - variables

Firms use resources such as land,

capital, labour and raw materials to
produce goods and services. These
resources are known as factors of
production and are taken to belong to
households. National income
represents the flow of income from
firms to households given as payment
for these factors.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 51 / 64
 Applications National Income Determination

National income determination - variables

The economy is in equilibrium if

Y =C + I
Y =C + S
I =S

where Y is the national income, C is

the consumption and S is the savings.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 52 / 64
 Applications National Income Determination

Consumption functions

The consumption function is a function of Y: C = f(Y).

Question
Is f a decreasing function?
If the relationship between C and Y are linear, we may assume C = aY + b, where 0 < b and
0 < a < 1.
Savings function: S = Y − C.

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 Applications National Income Determination

The equilibrium level of income and consumption

If the level of investment that firms plan to inject into the economy is supposed to be some
fixed value, I∗ , then the equilibrium level of income and consumption can be calculated via the
following system of equations: 
 Y= C+I
C = aY + b

I = I∗

Example
Find the equilibrium level of income and consumption if the consumption function is

C = 0.6Y + 10

and the planned investment I = 12.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 54 / 64
 Applications National Income Determination

Government Expenditure and Taxation

To make the model more realistic, let us now Example: Given that
include government expenditure, G, and
taxation, T, in the model. If so, the income
that households have to spend on consumer G= 40
goods is no longer Y but rather Y − T, which I= 55
is called disposable income, Yd . C= 0.8Yd + 25
T= 0.1Y + 10.
Y= C+I+G
C= aYd + b
T= cY + d Calculate the equilibrium level of national
Yd = Y−T income.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 55 / 64
 Applications National Income Determination

IS Schedule
It is more realistic to assume that planned investment depends on the rate of interest, r. As
the interest rate rises, so investment falls. Therefore, we may suppose that I = f(r). If the
relationship between those are linear, we may write

I = cr + d, where c < 0 and d > 0.

From the equations 

 Y= C+I
C = aY + b

I = cr + d,
we may eliminate C and I to set up an equation relating Y and r, which is called IS schedule.
Question
Determine the IS schedule in the above system.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 56 / 64
 Applications National Income Determination

The equilibrium of the money market

To make the model more realistic, we will need some additional information, that is the
equilibrium of the money market.
The equilibrium of the money market
The money market is said to be in equilibrium when the supply of money, Ms , matches the
demand for money, Md : that is, when

Ms = Md .
The level of money supply, Ms , is assumed to be controlled by the central bank and is taken to
be autonomous, so that
Ms = M∗s
for some fixed value M∗s .

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 57 / 64
 Applications National Income Determination

Money demand
1 The transactions demand is used for the daily exchange of goods and services, Ms,1 .
2 The precautionary demand is used to fund any emergencies requiring unforeseen
expenditure, Ms,2 .
3 The speculative demand is used as a reserve fund in case individuals or firms decide to

invest in alternative assets, such as government bonds, Ms,3 .

We assume transactions demand and precautionary demand are proportional to national
income. Consequently, Ms,1 + Ms,2 = k1 Y for some positive constant k1 .
As interest rates rise, speculative demand falls. We model this by writing
Ms,3 = k2 r + k3
where k2 is a negative constant and k3 is a positive constant.
The money demanded,
Md = Ms,1 + Ms,2 + Ms,3 = k1 Y + k2 r + k3 .

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 58 / 64
 Applications National Income Determination

LM Schedule
If the money market is equilibrium, then Md = Ms , or
k1 Y + k2 r + k3 = M∗s

LM Schedule
The above equation, relating national income, Y, and interest rate, r, is called the LM
schedule.

Exercise: Determine the equilibrium income, Sketch the IS and LM curves on the same
Y, and interest rate, r, given the following diagram. What effect would an increase in
commodity market C = 0.7Y + 85, the value of autonomous investment have on
I = 50r + 1200, and the money market the equilibrium values of Y and r?
Reference: p102 - 2nd textbook
Ms = 300, Md = 0.2Y − 40r + 30.
Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 59 / 64
 Applications Leontieff’s Input-Output model

Input-output Analysis

The input-output analysis of Prof. Wassily Leontief, a Nobel Prize winner, deals with this
particular question: “What level of output should each of the n industries in an economy
produce, in order that it will just be sufficient to satisfy the total demand for that product?”
Assumptions:
1 Each industry produces only one homogeneous commodity.
2 Each industry uses a fixed input ratio for the production of its output.
3 Production in every industry is subject to constant returns to scale.
That means:
in order to produce each unit of the j-th commodity, the input need for the i-th commodity
must be a fixed amount, which we shall denote by aij , and refer to as an input coefficient.
For example, a32 = 0.35 means that 0.35$ worth of the third commodity is required as an
input for producing 1$ worth of the second commodity.

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 Applications Leontieff’s Input-Output model

Example - I/O table of Vietnam in 2007

In order to
produce 1 VND
“Thóc”, it is
required the inputs
of 0.08663 VND
“Thóc”, 0.00477
VND “Mía cây”,
0.01260 VND
“Cây hàng năm
khác”, and so on.

Source: IO-Viet-Nam-2007.pdf
Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 61 / 64
 Applications Leontieff’s Input-Output model

Structure of Input-output Model

Coefficient matrix: activities.

 
a11 a12 · · · a1n Let’s denote by xi the output level of
a21 a22 · · · a2n  industry i. Then the model is in
 
A= . .. .. ..  equilibrium if
 .. . . . 
an1 an2 · · · ann x1 = a11 x1 + a12 x2 + · · · + a1n xn + b1
Each column sum represents the partial x2 = a21 x1 + a22 x2 + · · · + a2n xn + b2
input cost and must be less than 1. ···
Final demand is a column vector xn = an1 x1 + an2 x2 + · · · + ann xn + bn
b = [b1 b2 . . . bn ]t , including
consumer demand, government This model is called Leontieff’s input-output
expenditure and export - import model.

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 Applications Leontieff’s Input-Output model

I/O model in terms of Matrices


 x = a11 x1 + a12 x2 + · · · + a1n xn + b1
 1

x = a x + a x + · · · + a x + b
2 21 1 22 2 2n n 2
⇔ X = AX + b ⇔ (I − A)X = b ⇔ X = (I − A)−1 b

 · · ·


xn = an1 x1 + an2 x2 + · · · + ann xn + bn

Exercises: Given the input matrix and the 1 Explain the economic meaning of the
final-demand vector entries 0.33, 0, and 200.
   
0.05 0.25 0.34 1800 2 Explain the economic meaning of the
A = 0.33 0.10 0.12 , b =  200  third-column sum.
0.19 0.38 0 900
3 Determine the levels of outputs.

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 63 / 64
 Thank you for your attention!

Faculty of Economic Mathematics (UEL) Chapter 1: Systems of Linear Equations and matrices 64 / 64