Welcome to Business Mathematics

Mathematics in Business????

Why?
 Calculate Production
cost?

Human needs
Determination of
depend on math (Air
profit?
planes, medicines)?

Analyze finance? Measure Profits?

 Introduction to functions
Interesting questions are usually about relationships between variables. Variables
are denoted by symbols and can take on a range of values. In the business
context, variables often correspond to metrics and values of processes of interest.
The key question of interest is “how is a change in one variable associated with
the change in another?"
For example:
 How does the rate of inflation depend on the unemployment rate?
 How has the number of cellular phone subscribers in the US changed
over time?
What is the relationship between a customer's current
loyalty for a particular product and the chance
(propensity) that they purchase this product again?
Fig 2: Propensity to purchase a product as a function of customer
loyalty
 What is a function?
• We can generalize these examples to the statement “how is the value
of one variable associated with the value of another?"
• Mathematically, we describe relationships through the use of an
object called a function.
• A function is simply a “rule". The rule takes a value as an input and
provides a specific and unique output.
• Both the input and output are called variables, with the input of- ten described as the
independent variable and the output as the dependent variable.
• Another common terminology is to call the input the x-variable and the output the y-variable.
• The potential values that x can take are called the domain of the function.
• The potential values that y can take are called the range of the function.
For the customer loyalty example:
• The x-variable is customer loyalty.
• The y-variable is the chance that they repeat purchase.
• The domain of the function that relates loyalty to chance of a repeat purchase is
the interval [1,10] because that’s how the loyalty metric was defined.
• The range of the function is [0,1] because it is a probability/propensity and
probabilities must lie between 0 and 1 inclusive.
 Depicting a function

We can consider a function as depicted by the following diagram: an

input goes into the box, the rule is in the box, and the output comes
out. Pictorially it would look like this:
Fig 3: Pictorial depiction of a function
 Necessity to learn functions
Ask yourself an interesting practical question and see if it's not about the
relationship between variables. To accomplish tasks you have to understand the
world in which you work. To understand, we need to describe. There are many
ways to describe the world and a mathematical description (through a function)
offers one view.
This is an extremely powerful representation because:
• A function forces you to define terms.
• A function makes you think through assumptions.
• A function allows you to explore scenarios.
• A function provides for a concise description of a problem.
• In summary, we can understand functions as descriptions and summaries
• of the world about us.
 Types of Functions
• Constant Function
• Multiplicative function
Constant function:
The most simple function of all is an extremely straightforward one. It’s
called the constant function. An example of the constant function is the
fixed-price all-you-can-eat buffet.
Recall that a function is a rule that describes how an output depends
on an input. Here the input is the quantity you eat and the output of
the “cost function” is the price you pay for it ($8.99 in this instance). Of
course, by definition there is no relationship between quantity eaten (x-
variable) and the price (y-variable), that is, the amount you pay does
not depend on how much you eat.
Figure 4: The constant function
Examples of CF:
• The constant function sometimes shows up as a component of more
complicated functions. Two examples of the constant function that
have interpretations in a business context are:
• Fixed costs in a cost model. Fixed costs are that part of total cost that do not
vary with volume. So by definition the fixed costs do not depend on the
output volume and are therefore constant.
• Start-up time in a productivity function. Start-up time is the component of
the time required to perform a job that does not depend on the volume of
output and, again, by definition is constant.
 The multiplicative function
• A familiar example of this function is the multiplicative function that
relates the quantity of gas purchased to the total cost of filling up a
vehicle. For example, if gas is priced at $3.50/gallon, then we have the
following rule for determining the total cost:
Figure 5: The multiplicative function
Representation of the function relating gallons of gas purchased
to total cost
 The linear function
• A straightforward way to understand the linear function is to start
with the example of converting temperatures between measurement
scales.
• To convert from Celsius to Fahrenheit you use the rule (function)
“multiply by 9/5 and then add 32”. If a function only involves
multiplication and addition of the input, then it is termed a linear
function.
• You can see that this example is a combination of the previous two
functions. It involves a multiplication step (multiply by 9/5) and then
the addition of a constant (32).
 Ways of expressing a function
• This temperature conversion function can be represented as:
• Figure 6: Transforming Celsius to Fahrenheit:
Figure 7: The Linear Function
 Summary of Linear Functions
• So far, the three functions we have looked at have all been linear
functions.
• The constant and multiplicative functions are special cases of a linear
function.
• The constant function is a linear function where the multiplicative
factor is zero.
• The multiplicative function is a linear function in which the constant is
zero.
• Linear functions are fundamental to all applied mathematics. You will
see them everywhere, particularly in Managerial Economics,
Operations, Finance, and Statistics.
 Non-linear functions
• A function is non-linear when the magnitude of the change in the
output for a given absolute change in the input depends on the value
of the input itself.
• For example: if an increase in age from 25 to 30 years is associated
with an expected increase in salary of $10,000, but an increase of age
from 40 to 45 is associated with an expected rise in salary of $15,000
then this is a non-linear function. It is non-linear because age is.
changing by the same amount, 5 years in each case, but the expected
increase in salary is different, $10,000 and $15,000 respectively
 Example of a non-linear function

• An is the square function. The rule for the square function is to

multiply the input by itself. It can be represented as:
Figure11: A particular instance of the square function
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