Introductory Mathematical

Economics
1. Preliminaries
 Aim of the course
• This is a basic course on the application of mathematical
techniques in economics.
• Students of science or engineering background would find it
helpful. Their grounding in mathematics would be helpful,
but we are going to introduce things from the scratch.
• The course will enable them to explore the subject of
economics.
• Students of economics and other social sciences would also
benefit from this course.
• The course follows a syllabus which is approved by the UGC.

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 Topics to be covered
1. Real number system, logic, mathematical proof
2. Sets and set operations
3. Functions of one variable, graph of functions, types of functions
4. Differentiation, partial differentiation, differentiable functions: properties
5. Differentiation of higher order, linear approximation
6. Sequence and series, limits, convergence, exponential and logarithmic functions
7. Single variable optimization: convex and concave functions, geometric properties
8. Single variable optimization: results, applications
9. Integration: area under curves, indefinite and define integrals, integration by substitution
10. Applications of integration
11. Difference equations: discrete time, first order difference equation, applications
12. Higher order difference equations, summing up

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• In all, about 40 lectures will cover these 12 topics.
• Aside from introducing the topics, and discussing their
properties, applications of the topics in economics will
be provided.
• Many examples will be provided, especially from
economics.

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 References
1. K Sydsaeter and P Hammond: Mathematics for Economic
Analysis, 1st edition, Pearson Education India, 2002.
2. K Sydsaeter P Hammond and A Strom: Essential
Mathematics for Economics Analysis, 4th edition, Prentice
Hall, 2012.
3. A C Chiang: Fundamental Methods of Mathematical
Economics, 3rd Edition, McGrawHill, 1984.
4. C P Simon and L Blume: Mathematics for Economists, 1st
edition, Viva Books, 2018.

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 Use of mathematics in economics
• Till the 18th century some elementary arithmetic was used in the day to
day economic transactions. Examples, keeping accounts of business,
estimating tax revenues, assessing land tax by the government.
• Modern economics was born in the 18th century, with the publication of
the works of Physiocrats in France and Classical Political Economists in
England.
• As economics developed, it became more abstract.
• Instead of using arithmetic only, to capture the abstract ideas of modern
economics, algebra, calculus, optimization techniques started to be used.
• The use of economic models and statistics in economics warranted that
appropriate mathematical tools be deployed.

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 Symbols
• Mathematics speaks with a language of its own. To understand
mathematics the symbols through which it speaks must be
understood and agreed to.
• Rudimentary symbols such as 1, , 5 are called logical constants.
They represent certain numbers. [2, 3] represents an interval. It is
also a logical constant.
• Symbols can also represent variables. All the objects which are
represented by a symbol are collectively called the domain of
variation.
• Let x is the symbol (a variable) for an arbitrary number, where
(x+2)2 = x2+4x+4

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• In language it means: if an arbitrary number (hereby called x) is added
with 2 and then squared, then the result would be same as x squared
plus 4 multiplied by x plus 4.
• The relation (x+2)2 = x2+4x+4 is called an identity, because this is valid
for all values of x identically. We also use the identity sign, “”,
(x+2)2  x2+4x+4
• The equality sign “=“ is used in other ways. Example,
x-5 = 10. This equation is true only for a definite value of x (i.e.,15).
• For other values of x the equation does not hold.
• x = 15 is called the solution of this equation.

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• An example: In the macroeconomy for a country (which is closed and
without a government), the aggregative equations denoting a model
are given by: (i) Y = C+I, (ii) C = a+bY
• Here Y is the national income, C is aggregate consumption
expenditure, I is the aggregate investment expenditure.
• I is assumed to be constant atI. a and b are also constants, i.e., given
from outside. In this case I, a, b are called the parameters of the
model. In contrast, Y and C are called variables of the model.
• Suppose we are asked to find the value of Y.

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• Substituting C from (ii) to (i) and using I =I we get,
• Y = a + bY + I
• Or, Y(1-b) = a + I
𝑎 𝐼ҧ
• Or, Y = +
1−𝑏 1−𝑏
• Thus, we have expressed a variable Y in terms of the parameters a,
b,I. If their values are known, we can plug in them and find the value
of Y.

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 Real number system
• The numbers we use to count things are called natural numbers. For
example, 1, 2, 3,.. are natural numbers.
• Adding two natural numbers gives a natural number (4+7 = 11).
• But this is not true for the subtraction operation. Subtraction takes us
to the number 0, and negative numbers (e.g., 3-8 = -5).
• The numbers, 0, ±1, ±2, ±3,..are called integers.
• Division of natural numbers takes one to fractions (e.g., 2÷4 =1/2).
• Rational numbers are all those numbers which can be written in the
a/b form, where both a and b integers.
• All rational number can be represented along the number line.

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• But there will be gaps in the line. These are irrational numbers.
• Irrational numbers are the numbers which cannot be expressed in the
a/b form, where a and b are integers.
• For example 2 is an irrational number.  is also an irrational number.
It’s value is approximated by 3.14159265358..
• We wrote this value in decimal system. It is a positional system to
express numbers with 10 as the base number.
• Example: 8564 = 8.103 + 5.102 + 6.101 + 4.100
• 5.43 = 5.100 + 4.(10)-1 + 3.(10)-2

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• Some rational numbers can be written using only a finite number of
decimal places, these are called finite decimal fractions (5/4 =1.25).
• Infinite decimal fractions have infinite decimal place numbers: 1/3
=0.333333…
• If the decimal fraction is a rational number then it will always be
periodic. After certain decimal places it stops, or continues to repeat
a finite sequence of digits. 9/11 = 0.8181…
• Real numbers are defined as of the form = ±m.123…, where m is
an integer, n (n = 1,2,..) is an infinite series of digits (digits range 0 to
9). This definition includes rational numbers with periodic decimal
fractions. But it also includes infinitely many irrational numbers with
non-periodic decimal fractions. E.g., 0.121221222…

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• There is a one to one correspondence between the set of
real numbers and the points on the real number line. Each
point represents a real number.
• When the basic four operations are applied on real numbers,
we get real numbers. There is just one exception. One cannot
divide a real number by 0, it is undefined.

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 Inequalities
• Inequalities are often used in economics, as much as equalities are
used.
𝑎+𝑏
• An example: If a ≥ 0, b ≥ 0, show that ≥ 𝑎𝑏
2
• We know, ( 𝑎 − 𝑏)2 ≥ 0
• Or, a + b - 2 𝑎𝑏 ≥ 0
• Or, a + b ≥ 2 𝑎𝑏
𝑎+𝑏
• Or, ≥ 𝑎𝑏
2
• Hence the proof.
• This implies arithmetic mean between two numbers is never less than
the geometric mean.

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 Intervals
• If x and y are two real numbers located on the real number line then
all numbers that lie between x and y constitute an interval.
• Some intervals include their endpoints, some don’t.
• If x < y, then there can be four kinds of intervals using x and y.

Name Notation All a satisfying

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 Absolute values
• If a is a number on the real number line, then the distance between 0
and a is called the absolute value of a, denoted by 𝑎
• If a is positive or 0, then the absolute value is the number a itself.
• If a is negative, the absolute value is the positive number –a.
• Or,
• 𝑎 = a, if a ≥ 0
= -a, if a < 0
For example, 𝑥 − 2 = x-2, if x ≥ 2
= 2-x, if x < 2

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• If 𝑥 < a and a is a positive number, it means the distance between 0
and x is less than a.
• Thus, – a < x < a.
• Using this one can say, if 2𝑥 − 1 < 5 then,
• -5 < 2x-1 < 5
• Or, -2 < x < 3

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 Logic
• Propositions
Assertions which are either true or false are called statements or
propositions. For example, “all humans are animals” is an example of a true
proposition. “All animals are humans” is a false proposition.
Some mathematical propositions are true only for specific values of x. Such
propositions are open propositions.
E.g., x2 – 4x + 4 = 0
This proposition is true for x = 2. It is not true for every arbitrary value of x.
It is not true or false in a general sense, which is why it is called an open
proposition.

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• Implications
Suppose A and B are two propositions such that when A is true B is also
true. It is symbolically convenient to link these two propositions by an
implication arrow.
A→B
This is read as “A implies B”. Or, “if A, then B”. Or, “B is a consequence
of A”. The symbol “→” is called the implication arrow.

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Examples:
x > 5 → xy = 0 → x = 0 or y = 0
x is a square → x is a rectangle
• The term “or” in “P or Q” means “either P, or Q, or both”.
• In the examples above all propositions are open propositions. An
implication P → Q, means for the values for which P is valid, Q is also
valid. E.g., for x = 8, x > 5 is valid, and so is, x2 > 25.
• In some cases, whenever implication P → Q is valid, it is possible to
draw the logical conclusion that the opposite implication is also valid.

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• In other words, if P → Q is true then Q → P is also true.
• In such cases, both the implications are written together as a single
logical equivalence:
PQ
• This is read as, “P is equivalent to Q”, or “P if and only if Q”, or “P iff
Q”.
• Note, “P → Q” means “P only if Q”. Whereas “Q → P” means “if Q
then P”.
• Thus “P  Q” means “P if and only if Q”.
These relations can be shown in terms of Venn diagrams.

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 Necessary and sufficient conditions
• If the proposition P implies proposition Q, we say, P is a sufficient
condition for Q. For Q to be true it is sufficient that P is true.
• In the same vein, if P is true, it is certain that Q is also true. In this
case, we say Q is a necessary condition for P. Q must necessarily be
true if P is true.
• Thus,
• P is a sufficient condition for Q means P → Q
• Q is a necessary condition for P means P → Q

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• Example:
• A necessary condition for x to be a square is that it is a rectangle.
• A sufficient condition for x to be a rectangle is that it is a square.
• The expression “P  Q” means “P is a necessary and sufficient
condition for Q”, or “P if and only if Q”.
• Example:
• Find all x which satisfy the following equation.
x+2= 4−𝑥
Squaring both sides of the equation yields,

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Or, (𝑥 + 2)2 = ( 4 − 𝑥)2
Or, 𝑥 2 + 4𝑥 + 4 = 4 − 𝑥
Or, 𝑥 2 + 5𝑥 = 0
Or, 𝑥 𝑥 + 5 = 0
Which implies x = 0, or
x + 5 = 0,
i.e., x = -5.
But at x = -5, LHS: x + 2 = -3; RHS: 4 − 𝑥 = 9 = 3.
What was wrong in our argument?

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• The problem with the argument is,
the implication arrows were going from top to bottom, not the other
way.
• x + 2 = 4 − 𝑥 → (𝑥 + 2)2 = ( 4 − 𝑥)2
• It does not go the other way.
• Therefore at x = -5, x+2 = 4 − 𝑥 will not be satisfied necessarily.
• Take a simple example,
• a = 5 → a2 = 25
• But a2 = 25 does not necessarily imply a = 5.
• a2 = 25 may mean a = -5.

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• Moral of the story: while constructing mathematical proofs it is
important to pay attention to mathematical logic.

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 Mathematical proof
• In mathematics and economics important results are called theorems.
• Theorems need proofs. Otherwise their validity remains in doubt.
• Every mathematical theorem can be expressed as an implication:
P→Q
• Here P is a proposition, or a series of propositions, called premises
(“what is known”), Q is a proposition or a series of propositions called
the conclusions (“what we want to know”).
• A statement like P  Q consists of not one but two theorems.
• Next we turn to proof of theorems.

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• Broadly, there are three ways to prove a theorem.
(a) Direct proof
(b) Indirect proof
(c) Proof by contradiction

• In direct proof, we start from the premises, and proceeding logically

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Take: − 𝑥 2 + 5𝑥 − 4 > 0 → 𝑥 > 0
Direct proof:
• − 𝑥 2 + 5𝑥 − 4 > 0 implies,
−𝑥(𝑥 − 4) + 1(𝑥 − 4) > 0
Or, −(𝑥 − 4)(𝑥 − 1) > 0
Or, (𝑥 − 4)(1 − 𝑥) > 0
So, either x > 4, x < 1, or x < 4, x > 1.
The first possibility is discarded. One is left with the possibility 4 > x > 1.
This satisfies x > 0.
Hence the proof.

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Indirect proof:
• In indirect proof, rather than starting from P in P → Q, we use the fact
that the above proposition is equivalent to  Q →  P.
• If Q is not true then P is not true.
• To prove, − 𝑥 2 + 5𝑥 − 4 > 0 → 𝑥 > 0
• Let x ≤ 0, thus negating 𝑥 > 0
• If x ≤ 0, then − 𝑥 2 + 5𝑥 − 4 < 0. Thus negating − 𝑥 2 + 5𝑥 − 4 > 0
• Hence we have proved that  (𝑥 > 0) →  (− 𝑥 2 + 5𝑥 − 4 > 0)
• Thus, − 𝑥 2 + 5𝑥 − 4 > 0 → 𝑥 > 0

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Proof by contradiction:
• Suppose there is a proposition A. Based on the supposition that A is
false, we arrive at a contradiction. We conclude, A is true.
• To prove, − 𝑥 2 + 5𝑥 − 4 > 0 → 𝑥 > 0
• Suppose, the above is not true.
• − 𝑥 2 + 5𝑥 − 4 > 0 and x ≤ 0
• But if x ≤ 0, then − 𝑥 2 + 5𝑥 − 4 < 0.
• This contradicts, − 𝑥 2 + 5𝑥 − 4 > 0
• Hence the proof.

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 Deductive and inductive reasoning
• The reasoning deployed above in each case is called deductive
reasoning.
• The reasoning is based on the consistent rules of logic.
• In contrast, reasoning could be inductive, where based on a set of
observations a general conclusion or set of conclusions is derived.
• For example, if share prices have been rising in the last 100 days it is
concluded that they would rise on the 101 st day.
• In mathematical proofs inductive reasoning is not accepted as a valid
method of proof.

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