Economics 10 1

GRADSM.NET
Lecture 4
GSM-ABIDJAN
Math for Economics
Content
 Show me the math
 General: Graphs & Equations
 Equations
 Demand & Supply Equations
 Equilibrium Equations
 Graphing

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General: Graphs & Equations

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Graphs used in Economic Models

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Graphs used in Economic Models

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Graphs used in Economic Models

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The Slope of a Relationship
 The slope of a relationship is the change in the value of the
variable measured on the y-axis divided by the change in the
value of the variable measured on the x-axis.

 We use the Greek letter  (capital delta) to represent “change

in.”
 So y means the change in the value of the variable
measured on the y-axis and x means the change in the
value of the variable measured on the x-axis.
 Slope equals y/x.

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 The Slope of a Relationship
 The Slope of a Straight Line
 The slope of a straight line is
constant.
 Graphically, the slope is
calculated as the “rise” over the
“run.”
 The slope is positive if the line is
upward sloping.

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 The Slope of a Relationship

 The slope is negative if the line is

downward sloping.

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Equations demand and supply

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In math graphs and equations
 Y = mX + b
 slope intercept format
Y
 Slope = ?? Rise/Run
 Intercept = ??

 Y = 5X + 10
 So if X = 0 then Y = ?

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 Demand Curve
 Demand curves follow this general
equation..
 QD = c – dP
Quantity
 c = intercept

Given QD = 10-2P
 If P = 2 then Qd = ?
 If P = 3 then Qd = ?
 If P = 5 then Qd = ?

Price

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 Demand Curve
Given QD = 10-2P
 Expresses Qd as a function of Price
and in economics that is fine.
Price

 In Graphing – need to rearrange

demand equation
Inverse Demand Curve used for
graphing!

Quantity

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 Demand Curve
Given QD = 10-2P
 P = 5- 1/2Qd
Price
5  Intercept = 5
 Slope = ½

 If Q = 0 then P = 5

Inverse Demand Curve used for

Quantity graphing!

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 Supply Curve
All supply curves follow this
general equation..
Quantity Qs = a + bP
a = intercept
if P =0 how many
supplied to the market by firm?
b = inverse slope of curve

Price

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 Supply Curve
 Qs = P-4
2
Quantity
Rearrange and get

Price

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 Supply Curve
 Qs = P-4
2

Price
Rearrange and get

P = 2Q + 4

If Q = 0 then P = 4
4

Quantity

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Market equilibrium

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Market Equilibrium
 Qd= Qs
 Find Price
 no product in excess and no product in shortage
 not everyone is happy

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Market Equilibrium

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Example 1
 Given
 QD= 8 – P
 QS = ½ P-1

Find market equilibrium

 Set Qd = Q s
 Solve for P value or equilibrium price
 Solve for Q by inputting this price into either equation!
 Please graph this problem labeling all lines, axes, and the
equilibrium, price, slope, intercept and quantity

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Example continued : Same equations
 The government institutes a price support program where the
support price is $4.
 Calculate the resulting shortage or a surplus value

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Example 2
 Qd = 80-3P
 Qs = -20+ 2P

 Find the market equilibrium

 Please graph this problem labeling all lines, axes, and the
equilibrium, price, slope, intercept and quantity

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Watch your

Ps & Qs 24
WATCH YOUR P’s AND Q’s
Given QD= a - bP .. Demand Curve
Conceptually correct!
P defines Qd
Graphically – not so much! Why?
Because it is the equation for graph
like this ..

This equation provides info for

Quantity vertical axis
Price horizontal axis
meaning that
Qd defines price ..not in economics !
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 WATCH YOUR P’s AND Q’s
 In economics …

 Price defines Qd
 And we use the graph where
Price vertical axis
Quantity horizontal axis

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 WATCH YOUR P’s AND Q’s
 Thus - if we want to graph this
equation
QD= a - bP
And want a graph where
 P is on the vertical axis
 Q is on the horizontal axis
 Find the slope and intercept for
that graph and curve
Need to rearrange things..
All that means is to put P on the
left hand of the equation!

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WATCH YOUR P’s AND Q’s
QD = a - bP
QD + bP = a
then
bP = a- QD
Intercept
Slope

P = a/b -1/b QD
Now the intercept & slope are
correct for these axis

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Example
Given Qd= (16-P)/4
Multiply both sides by 4

4Qd = 16-P
Subtract 16 from both sides

4Qd – 16 = -P
Multiply both side by -1

-4Qd + 16 = P
rearranged to P = 16-4Qd
So slope (rise/run) is 4 and intercept is 16 on a graph where P vertical axis and Q
horizontal axis

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example
Supply Qs= (P-4)/2
rearranged
P = 2Q + 4

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WATCH YOUR P’s AND Q’s
 Slope Defined:
 slope is always equal to
rise/run..
 So the slope depends upon the
axis. In this graph …

 Rise is change in price and Run

is change in quantity


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WATCH YOUR P’s AND Q’s
 Watch the Sign of the SLOPES
 Be careful with your + and - and
remember the use of a + bP does not
imply that the a and b are always
positive.
 These are generalized equation
forms where a is the intercept and
b is the slope.
 Slope (b value) in a demand curve
will be negative
 Slope (b value) in a supply curve
will be negative

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Example
 Given a SUPPLY curve of
Qs= (P-4)/2
then you need to place it into this generalized format

2Qs = P-4
2Q+4 = P or
P = 2Q + 4

so here the intercept = 4 and slope is equal to positive 2

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Example
 Given a DEMAND curve of
 Qd= (16-P)/4

 Rearrange to find the slope b and intercept a as follows:
 4Qd= 16-P
 4Qd - 16 =- P
 Rearrange to make P positive
 P = 16-4Qd

 So intercept is 16 and slope is negative 4

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 And to find equilibrium??? What do you do?
 Does it matter which of these you use??

Demand Qd= (16-P)/4 or rearranged to P = 16-4Qd

Supply Qs= (P-4)/2 or rearranged to P = 2Q + 4

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End of slides

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