ECN 2100 – INTERMEDIATE

MICROECONOMICS

Lecture 1
MATH REVIEW
TOSHIA MC DONALD (JAMES), M.Sc.
Department of Economics
Faculty of Social Sciences, University of
Guyana
Math Review &
Working Tools

Structure:
• Lecture session
• Questions for Discussion
• Activity
• Reading requirements
Why Math?

• Mathematics is a very precise language, thus it is useful to express

the relationships between related variables.
• Economics is the study of the relationships between resources and
the alternative outputs hence math is a useful tool to express
economic relationships.

Principles of Microeconomics Slide 3

Why Math?

• In order to make Economic Analysis predictions, it is important to

understand the basics of mathematics. For example we know that a
decrease in supply will lead to an increase in demand. This is
common sense when looking at rational consumer behaviours. In
this scenario, the job of economists is to use mathematics to make
proper precise predictions on how much demand will rise by.

Principles of Microeconomics Slide 4

Relationships
• A relationship between two or more variables can be
expressed as an equation, table or graph
– equations & graphs are “continuous”
– tables contain “discrete” information
• tables are less complete than equations
• it is more difficult to see patterns in tabular data than it is
with a graph -- economists prefer equations and graphs
For Intermediate Microeconomics we will be using
equations and graphs.
Equations

• ……relationship between two variables can be expressed as an

equation.
• the value of the “dependent variable” is determined by the equation
and the value of the “independent variable.”
• the value of the independent variable is determined outside the
equation, i.e. it is “exogenous”

Principles of Microeconomics Slide 6

Equations
• An equation asks when a function is equal
to a particular number.

• The solution to an equation is just a value

of the variable or (variables) that makes
the equation true.
– y = 2x is a function
– 3x = 9 is an equation
• Answer:
– x=3 7
Functions and Graphs
• Functions describe the (unique) relationship between
two variables.
– y = f(x) can be read as “y is a function of x”
• We refer to y as the dependent variable and x as the
independent variable because the value of y depends
on the value of x.
• Y = fi (X) says the value of Y is determined by the value of
X

A linear relationship may be specified: Y = a ± mX [the

function will graph as a straight line]
• When X = 0, then Y is “a”
• for every 1 unit change in X, Y changes by “± m” 8
Functions and Graphs
[Cont. . .]
• E.g.
Suppose y = f(x), where f(x) = 2x + 4
This means that
• The relationship between Y and X is determined; for each value of X there is one and
only one value of Y [function]
• Substitute a value of X into the equation to determine the value of Y
• Values of X and Y may be positive or negative, for many uses in economics the values
are positive
– if x is 1, y must be 2(1) + 4 = 6
– if x is 2, y must be 2(2) + 4 = 8

This relationship can also be described graphically.

Principles of Microeconomics Slide 9
Graphing Functions
y = 2x + 4

10
8
6
4
y

2
0
-2

-3 -2 -1 0 1 2 3

x 10
 Graphing Functions Cont.
A when X = 0 then Y = 6
Y 6
[this is Y-intercept] sets of (X, Y)
5 A line that slopes from when X = 1 (0, 6)
upper left to lower right then Y = 4
Given the represents an inverse or (1, 4)
relationship, 4 negative relationship, when the
value of X increases, Y (2, 2)
Y = 6 - 2X, decreases! (3, 0)
3
When X = 2, then Y = 2

2 The relationship for all positive

values of X and Y can be illustrated
1 by the line AB
When X = 3, Y = 0,
B [this is X-intercept]
X
1 2 3 4 5 6

Principles of Microeconomics Slide 11

Graphing Functions Cont.
Y Given a relationship, Y = 6 - .5X
6 (0,6)

5 (1,5.5)
(2, 5)
4 (4,4)
(6,3)
For every one unit increase in
3 the value of X, Y decreases by
one half unit. The slope of this
2 function is -.5! The Y-intercept is 6.
Y = 0, when X = 12,
1 What is the X-intercept?  6 
 = 12
 .5 
X
1 2 3 4 5 6
Properties of Functions
• A function is called continuous - A function is said to be
continuous in an interval if it is possible to draw the curve
without any breakage. A function is continuous if all the
points in the interval satisfy the function

• A function is called smooth if it has no corners when drawn.

• A function is monotonic if the dependent variable always

increases or always decreases as the independent variable
increases.

13
Linear Function – The Demand Function

• Linear demand function

– a relationship between quantity demanded and

the market price q = −ap + b
D

– The relationship is negative since consumers buy

less when the price gets higher
Demand and Supply

Slope: price sensitivity

Intercept: should be positive because consumers will buy
something when the price is zero→satiation level
Inverse of a function

• A function y = f(x) implies that for any

value of x, there is a unique value of y.

• The inverse of a function exists if there

is also a unique value of x associated
with each value of y.

16
Inverse Demand and Supply Functions

• Economists prefer to put the price on the vertical axis

– Historical tradition
– The intercept of the supply function now has economic
meaning, whether positive or negative
• Inverse demand function is the demand function where the price
is the dependent variable
– More quantity in the market (less scarcity) makes prices fall
• Inverse supply function is the supply function where the price is
the dependent variable
– Economic interpretation is more difficult
Inverse Demand Function
Inverse Supply Function
Identities
• An identity is a relationship between
variables that holds no matter what
value is assigned to the variable.
– (2x + y)2 = 4x2 + 4xy + y2

– 6(x+2) = 6x + 12

20
Rate-of-Change and Slope
• We are often interested in precisely how the dependent
variable depends on the independent variable.
– We want to know the rate-of-change of one variable relative to
the other.

• For example, how does the amount of output (y) change as a firm
increases the quantity of an input (x)?

• This is captured by the slope of a graph.

21
Rate-of-Change and Slope
• For linear functions, this rate of change is constant and
y
written as Δy/Δx. What is they linear function graphed
below?
6 2

-4 1
Rise
2 4 -2 Run
2

2 4 x 3 4 x

slope = Δy/Δx slope = Δy/Δx = -2/1 = -2

=(change in y)/(change in x)
= -4/2 = -2
22
Slope of the Line
• Positive Slope means that as
one variable increases in value
so does the other, and vice
versa.
y y
• Negative Slope means that as
one variable increases in value,
the other one decreases, and
vice versa.

x x

23
Slope of the Line Cont’d
Y
6 Y = 6 -.5X
5
4 as the value of X
DY= -1 increases from 2 to 4,
3
2
1 DX = 2 the value of Y
decreases from
1 2 3 4 5 6 X 5 to 4
DY is the rise [or change in Y caused by DX]{in this case, -1}

DX is the run {+2}, so, slope is -1/2 or -.5

rise
slope is run
 Slope of the Line Cont’d
Y
For a relationship, Y = 1 + 2X
6 When X=0, Y=1 (0,1)
When X = 1, Y = 3
slope = +2
5 (1,3)
When X = 2, Y = 5
(2,5)
4 rise This function illustrates a positive relationship
+2 between X and Y. For every one unit increase
in X, Y increases by 2 ! for a relationship
3 Y = -1 + .5X
This
run function shows that for a 1 1
2 unit slope = +2
+1 increase in X, Y increases
one half unit rise
+1
1 run
+2

1 2 3 4 5 6 X
Non-linear Functions
y
• What happens when functions are
y “non-linear”?
slope = 24/2 = 12 slope = 9/1 = 9 – Consider the functional relationship y
= f(x), where f(x) = 3x2 + 1

28

24 13

9
4 4
2 1

1 3 x 1 2 x

• For non-linear relationships, Δy/Δx is a

discrete approximation of the slope at any
given point.
– This approximation is better, the smaller
the change in x we consider.

26
Non-linear Functions
• We can also approximate the slope analytically:
– Consider again the relationship y = f(x), where f(x) = 3x2 + 1

• Starting at x = 1, if we increase x by2 2 what will be the corresponding

change in y? f (1+ 2) - f (1) (3(3) +1) - (3(1) +1) 28 - 4
2
= = =12
2 2 2

• Similarly, starting at x = 1, if we increase x by 1 what will be the

corresponding change in y?
f (1 + 1) − f (1) (3(2) 2 + 1) − (3(1) 2 + 1) 13 − 4
= = =9
1 1 1

• So this functional relationship between x and y means that the change in y

that results from a change in x depends on how big of a change in x and
where you evaluate this ratio.
27
Computing the Rate of Change
• Given a relationship between x and y such that y = f(x) for some function f(x), we
have been considering the question of “if x increases by Δx, what will be the relative
change in y?”, or Dy f ( x + Dx) − f ( x)
=
Dx Dx

• For linear functions, the rate-of-change will always be constant. For example, if y = a
+ bx:

• For non-linear functions, the rate of change depends on the value of x. For example,
if y = x2

28
Derivative

• When we have a nonlinear function, a simple derivative can be used

to calculate the slope of the tangent to the function at any value of
the independent variable ( the slope of a function at any given point)
• The notation for a derivative is written:

dY
is the change in Y " caused " by a change in X
dX

Principles of Microeconomics Slide 29

The Derivative
– Recall that we get a better approximation to the
relative rate-of-change the smaller the change in x
we consider.

– The derivative is just the limit of this expression as

Δx goes to zero, or
f ( x) f ( x + Dx) − f ( x)
= lim Dx→0
x Dx

• So going back to the example on the last slide as Δx goes

to 0, the derivative is just 2x.

– We will also sometimes express the derivative of f(x)

as f’(x)
30
The Derivative
• Given y = f(x), where f(x) = 3x2 + 1, what is
y
the expression for the derivative?

– slope of f(x) =
So what is 28 slope = ?

3x2 + 1 at x = 1?
slope = ?

– slope of f(x) =
What is
4

3x2 + 1 at x = 3? 1 3 x

– How do we
interpret these
slopes? 31
Second Derivatives
• The derivative of the derivative.
• Intuitively, if the first derivative gives you the slope of a
function at a given point, the second derivative gives you
the slope of the slope of a function at a given point.
– In other words, the second derivative is the rate-of-change
of the slope.
» If y = x2

dy
= 2x
dx
d 2 y d æ dy ö d
2 = ç ÷ = 2x = 2
dx dx è dx ø dx

32
Finding maxima and minima
• Often calculus methods are
used for finding what value
maximizes or minimizes a
function.
y
y – A necessary condition
for an “interior”
maximum or minimum
f(x) is where the first
derivative equals zero.
f(x)

x* x
x* x

33
Local minima and maxima

10
8
x - 2 * sin(x)

6
4
2
0

0 2 4 6 8 10

x 34
Finding maxima and minima
• This means that when trying to find where a function
reaches its maximum or minimum, we will often take the
first derivative and set it equal to zero
– “First Order Condition”

– f(x) = 10x – x2
– F.O.C.: 10 – 2x = 0
x* = 5

– How do we know if this is a maximum or a minimum?

• f(x) has a minimum at x = a if f’(a) = 0 and f’’(a) > 0
• f(x) has a maximum at x = a if f’(a) = 0 and f’’(a) < 0
35
Partial Derivatives
• Often we will want to consider functions of
more than one variable.
– For example: y = f(x, z), where f(x, z) = 5x2z +
2z

– We will often want to consider how the value

of such function changes when only one of its
arguments changes.

– This is called a Partial derivative

36
Partial Derivatives

• The Partial derivative of f(x, z) with respect to x,

is simply the derivative of f(x, z) taken with
respect to x, treating z as just a constant.
– Examples:
• What is the partial derivative of f(x, z) = 5x2z3 + 2z
with respect to x?

– 10xz3

• With respect to z?
37
What Is Intermediate Microeconomics?
• Intermediate Microeconomics is concerned with
building models of economic behavior.
– Two principles:
• The Optimization Principle
• The Equilibrium Principle
• Our next topic is Consumer Choice:
– How do economists model an individual’s choices?
– What kinds of behavior is consistent/inconsistent?
– Can we aggregate individual behavior into a
discussion of consumer behavior more generally?
38
Questions

• Open

39
EXERCISE

• Graph the equation: Y = 9 - 3X

– What is the Y intercept? The slope?
– What is the X intercept? Is this a positive (direct) relationship or negative
(inverse)?
• Graph the equation Y = -5 + 2X
– What is the Y intercept? The slope?
– What is the X intercept? Is this a positive (direct) relationship or negative
(inverse)?

Principles of Microeconomics Slide 40

References

• Math Review, https://slideplayer.com/slide/7584856/

• Chiang, Alpha C., Wainwright, Kevin, (2005), Fundamental
Methods of Mathematical Economics. 4th (Forth) Edition,
Mc Graw Hill-Irwin