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The document outlines an introductory lesson on Mathematics for Economics, focusing on how mathematical models can analyze economic processes such as decision-making and market equilibrium. It discusses the definition of economic models, equilibrium, and provides examples of constructing models for partial market equilibrium with linear and nonlinear equations. The lesson emphasizes the importance of mathematics in understanding economic concepts rigorously and generally.

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7 views

01 - Copy (2)

The document outlines an introductory lesson on Mathematics for Economics, focusing on how mathematical models can analyze economic processes such as decision-making and market equilibrium. It discusses the definition of economic models, equilibrium, and provides examples of constructing models for partial market equilibrium with linear and nonlinear equations. The lesson emphasizes the importance of mathematics in understanding economic concepts rigorously and generally.

Uploaded by

Mostafa Allam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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SM286A – Mathematics for Economics Fall 2015

Asst. Prof. Nelson Uhan

Lesson 1. Introduction
1 Overview
● Economics is the study of how society manages its scarce resources
● In particular, economists study
○ how people make decisions – e.g. how much they work, what they buy, how much they save
○ how people interact with each other – e.g. how buyers and sellers determine the price of a good
○ how forces and trends affect the wealth and resources of society as a whole –
e.g. unemployment rate, growth in average income
● Mathematics allows us to study problems in economics with rigor, generality, and simplicity
● This course will cover various mathematical topics essential to the study of economics

2 Today
● An example: an economic model for partial market equilibrium

3 Warm up
Example 1. On the axes below, draw the following equations and label the points of intersection.
Q = 4 − 2P
Q = −1 + P

P
-3 -2 -1 1 2 3 4

-1

-2

-3

1
4 What is an economic model?
● An economic model is a set of variables and a set of relationships (e.g. equations) between them
representing some economic process
● Models are typically abstractions of the real world
● Even a rough representation of the economic process we want to study can give us good insights
○ “All models are wrong, but some are useful.” –George Box, statistician

5 What is an equilibrium?
● Equilibrium is a state where economic forces (e.g. supply and demand) are balanced, and in the absence
of external influence, the values of these economic forces will not change
● In other words, equilibrium is a situation characterized by a lack of tendency to change
● Careful! An equilibrium is not necessarily desirable!
○ e.g. underemployment equilibrium resulting from an overqualified workforce

6 Constructing a model for partial market equilibrium


● Let’s consider a market with only one commodity
● Variables:

● Assumptions:
○ Standard market equilibrium condition: excess demand is zero

○ Quantity demanded is determined by: Qd = 4 − 2P


Does this make sense? Why?

○ Quantity supplied is determined by: Qs = −1 + P


Does this make sense? Why?

2
● Putting this all together, we have our equilibrium model:
Qd = Qs
Qd = 4 − 2P (A)
Qs = −1 + P

● Solution to (A):

7 Generalizing the model


● Instead of using specific numbers to define the relationships between Qd and Qs , we can use parameters
to write a general partial market equilibrium model:

(B)

⇒ As P increases, Qd and Qs

● We can find a solution to (B) through substitution:

3
● Does this solution match with our first equilibrium model?

● For what values of a, b, c, d does this solution make sense?

○ Equilibrium price must be positive

○ Equilibrium quantity must be positive

8 A nonlinear model for partial market equilibrium


● In our previous models, the quantity demanded and the quantity supplied were linear in the price

● What if the quantity demanded was instead quadratic in the price, like in the model below?

Qd = Qs
Qd = 4 − P 2 (C)
Qs = −1 + 4P

Example 2. Find a solution to equilibrium model (C) algebraically. Hint. Use the quadratic formula.

4
Example 3. Find a solution to equilibrium model (C) graphically by drawing Qd and Qs as a function of P.
Q

P
-3 -2 -1 1 2 3 4

-1

-2

-3

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