AMA 273, Lecture 1

James Huang

January 7, 2010

James Huang

AMA 273, Lecture 1

Outline of Lecture 1

Chapter 1: Mathematical Models in Economics.

Chapter 2: Mathematical Terms and Notations.

Chapter 3: Sequences, Recurrences, Limits.

James Huang

AMA 273, Lecture 1

Chapter 1: Mathematical Models in Economics

Section 1.1. Introduction Section 1.2. A Model of the Market Section 1.3. Market Equilibrium Section 1.4. Excise Tax

James Huang

AMA 273, Lecture 1

Section 1.1. Introduction

Refer Textbook, P 1, rst paragraph.

Language of mathematics to describe situations in economics. Motivation: mathematical arguments are logical and exact. Motivation: mathematical arguments enables us to work out in precise detail the consequences of economic hypothesis. Mathematical modeling has become an indispensable tool in economics, nance, business and management.
James Huang AMA 273, Lecture 1

Section 1.2. A Model of the Market

One of the most simplest and useful models: description of supply and demand in the market for a single good. This model is concerned with the relationship between two things: (1) p : the price per unit of the good (2) q : the quantity of it in the market Mathematical idea: representing a pair of numbers as a point in a diagram. How to represent? Pair of numbers Coordinates with respect to a pair of axes.
James Huang AMA 273, Lecture 1

Section 1.2. A Model of the Market

In economics, it is customary to take the following convention. (1): Horizontal axis as the qaxis (2): Vertical axis as the paxis. Recall: p, the price per unit; q, the quantity in the market. For example, the point with coordinates (2000, 7) represents the following situation: 2000 units are available at a price of 7 per unit.
James Huang AMA 273, Lecture 1

Section 1.2. A Model of the Market

How to describe the demand in such diagram? Idea: considering those pairs (q, p) in such a way (Refer Textbook, P 1): if p were the selling price, q would be the demand. The demand is just the quantity which would be sold to consumers at the price p. Find and depict all such pairs (q, p), we will get some gure like Figure 1.1 (see Textbook, P 2).

James Huang

AMA 273, Lecture 1

Section 1.2. A Model of the Market

We will refer the set of all these pairs (q, p) as the demand set, denoted as D. The economic theory tells us that the graph of D should be some smooth, downward sloping curve. Demand set D determines some demand function q D (p). This means given the price p, the corresponding demand quantity is uniquely determined as q D (p). In other words, the values written as q D (p) is the quantity which would be sold if the price were p.
James Huang AMA 273, Lecture 1

Section 1.2. A Model of the Market

Example, P 2. Demand set D: the straight line 6q + 8p = 125. Demand function q D (p) =
1258p . 6

For example, if the selling price is 4, then q D (p) = 125 8p 125 8 4 93 = = . 6 6 6

James Huang

AMA 273, Lecture 1

Section 1.2. A Model of the Market

Another way to look at the relationship between q and p. That is, suppose the quantity q is given, then the price p in the demand set D is the price that consumers would like to pay. Summary: expressing the price p in terms of quantity q. We write p D (q) for the value of p corresponding to a given quantity q. p D (q), the inverse demand function. See Example, P 3.

James Huang

AMA 273, Lecture 1

Section 1.2. A Model of the Market

How to describe the supply in such diagram? Idea: considering those pairs (q, p) in such a way: if p were the price, q would be the amount supplied (supply) to the market. The supply is just the quantity which would be supplied (or produced) to consumers at the price p. Find and depict all such pairs (q, p), we will get some gure like Figure 1.2 (see Textbook, P 2).

James Huang

AMA 273, Lecture 1

Section 1.2. A Model of the Market

We will refer the set of all these pairs(q, p) as the supply set, denoted as S. The economic theory tells us that the graph of S should be some smooth, upward sloping curve. Supply set S determines some supply function q S (p). This means given the price p, the corresponding supply quantity is uniquely determined as q S (p). In other words, the values written as q S (p) is the quantity which would be produced if the price were p.
James Huang AMA 273, Lecture 1

Section 1.2. A Model of the Market

Another way to look at the relationship between q and p. That is, suppose the quantity q is given, then the price p in the supply set S is the price that consumers would like to pay. Summary: expressing the price p in terms of the quantity q. We write p S (q) for the value of p corresponding to a given quantity q. p S (q), the inverse supply function. See Example, P 3.
James Huang AMA 273, Lecture 1

Section 1.2. A Model of the Market

For example, supply set S: the straight line 2q 5p = 12. Supply function q S (p) =
5p12 . 2 2q+12 . 5

Inverse supply function p S (q) =

James Huang

AMA 273, Lecture 1

Section 1.3. Market Equilibrium

Important problem: if the demand set D and supply set S are given, what values of (q, p) will be actually achieved in the market? Diagram illustration: graph the sets D and S, nd the intersection point. See Figure 1.3, P 4. The intersection point is just where the quantity supplied is exactly balanced by the quantity required. Mathematical symbol for intersection: E = S D.

In economics, E is the equilibrium set for the given market.

James Huang AMA 273, Lecture 1

Section 1.3. Market Equilibrium

Another way to nd the equilibrium set E . Note that E = S D. D, that is, E belongs to both S and

Therefore, we can solve the simultaneous equations. Example. P 4. The demand set D: q + 5p = 40. The supply set S: 2q 15p = 20. Then a point (q , p ) which is in the equilibrium set E = S D should satises the following simultaneous equations: q + 5p = 40,
James Huang

2q 15p = 20.
AMA 273, Lecture 1

Section 1.3. Market Equilibrium

Simultaneous equations: q + 5p = 40, 2q 15p = 20.

Only one solution (q , p )=(20, 4). In other words, the equilibrium set E is of a single point (20, 4). Remark: here D and S are both straight lines, thus E is of single point. More complex situation: the equilibrium set E maybe of multiple points.
James Huang AMA 273, Lecture 1

Section 1.4. Excise Tax

Now we study the problem of excise tax. Motivation example (P 5): the government wants discourage the whiskey drinking. How to get it? One way is to impose a xed tax on each bottle of whiskey sold. Policy: pay the government $1 for each bottle of whiskey the supplier sell. Note that the tax is a xed amount ($1) for each unit of the good, not a percentage of the selling price in this situation.
James Huang AMA 273, Lecture 1

Section 1.4. Excise Tax

Question: how the selling price changes when an excise tax is imposed. To answer this question, consider the example in P 5. Market setup: D, q + 5p = 40; S, 2q 15p = 20. Policy: the government imposes an excise tax $T per unit. Now consider the change of the selling price.

James Huang

AMA 273, Lecture 1

Section 1.4. Excise Tax

D, q + 5p = 40; S, 2q 15p = 20. We have q D (p) = 40 5p, q S (p) = 15 p 10. 2

Equilibrium price: 15 p 10 = p = 4. 2 Suppose the selling price after the tax is p. q D (p) = q S (p) = 40 5p = Then from the viewpoint of the supplier, it is as if the price is p T . Why?
James Huang AMA 273, Lecture 1

Section 1.4. Excise Tax

The reason is the suppliers revenue per unit is no longer p, but p T . As a result, the revenue function should be changed as follows. When the tex is T per unit, the new supply function q ST is given by q ST (p) = q S (p T ) = 15 (p T ) 10. 2

James Huang

AMA 273, Lecture 1

Section 1.4. Excise Tax

On the other hand, the demand function keeps unchanged: q D (p) = 40 5p. New equilibrium equation: q ST (p) = q D (p). Solving it, we have: 405p = 15 3 (pT )10 = p = 4+ T , 2 5 q = 203T .

Textbook, P 5-6, using the symbols p T , q T to emphasize their dependence on the tax.
James Huang AMA 273, Lecture 1

Section 1.4. Excise Tax

For example, if T = 1, we have 3 p = 4+ T = 4+0.6 = 4.6, 5 q = 203T = 203 = 17.

Note that the selling price rises from 4 to 4.6. And the quantity sold falls from 20 to 17. Remark: the tax is T per unit but the selling price has risen not by the full amount T , but some fraction 3 T . 5 In other words, not all the tax is passed on the consumers.
James Huang AMA 273, Lecture 1

Chapter 2: Mathematical Terms and Notations

Section 2.1. Sets Section 2.2. Functions Section 2.3. Composite Functions Section 2.4. Graphs and Equations

James Huang

AMA 273, Lecture 1

Section 2.1. Sets

Sets: a collection of objects. Notation: large letters and curly brackets. Members/elements of sets. Set representations: (1) list all its elements, (2) Specify the properties. Set operations. Example, Textbook, P 13. Common-used number sets: real, integers, natural
James Huang AMA 273, Lecture 1

Section 2.1. Sets

Ordered pairs of real numbers. Quadrant, rst quadrant (nonnegative ordered pairs). Example: supply and demand diagram.

James Huang

AMA 273, Lecture 1

Section 2.2. Functions

Function: mapping from one set A to set B. A function is determined by: A, B and the rule (mapping) from A to B. Function: black box illustration (see Figure 2.1). Function and its inverse function (see Figure 2.2). Example. P 14. Recall: Chapter 1, inverse supply and demand functions.
James Huang AMA 273, Lecture 1

Section 2.3. Composite Functions

Composite function: a function of a function, see P 16. Composite function: black box illustration (see Figure 2.3). Example, P 16: r (x) = x 2 + 2, s(x) = x 3 .

Composite function: function and its inverse function. Identity function, see P 16.

James Huang

AMA 273, Lecture 1

Section 2.4. Graphs and Equations

Linear equation, see P 17. Quadratic equation, see P 17. Solutions of quadratic equation: three cases (see P 18). Intersection points: Example, Figure 2.4, P 19.

James Huang

AMA 273, Lecture 1

Chapter 3: Sequences, Recurrences, Limits

Section 3.1. Sequences Section 3.2. First-order Recurrence Section 3.3. Limits Section 3.4. Special Cases

James Huang

AMA 273, Lecture 1

Section 3.1. Sequences

Sequence: y0 , y1 , y2 , . We can think of the sequence as a description of how a variable quantity evolves with respect to time. Recurrence equation: also named dierence equation, see P 25. Example, P 25.

James Huang

AMA 273, Lecture 1

Section 3.2. The First-order Recurrence

The rst-order recurrence: yt = ayt1 + b. Linear, constant coecients. Example, P 25-27. Initial condition, general solution.

James Huang

AMA 273, Lecture 1

Section 3.3. Limits; Section 3.4. Special Cases.

Figure 3.1, P 29. Summary table, P 30. Special cases, P 30.

James Huang

AMA 273, Lecture 1