UGC SWAYAM MOOCS - Mathematical Economics Content Writer: Sikha Ahmad

Module 1: Mathematical Economics: Number System and Set Theory

Try to imagine an economy without money. Recall the barter economy where goods were
exchanged for goods. Do you think that life in ancient times was very difficult? On the contrary, do
you think life today is even more difficult?
This module will take you back to ancient times to find an answer to these questions!
A. Objectives
The objectives of this module are:
1. Explore the evolution of number system and set theory.
2. Demonstrate the importance of numbers in everyday economic and business activities
3. Apply the Set Theory to organize household and business activities to save time, money and
energy.
B. Terminology
1. Numeral system: a way to express numbers.
2. Number system: a set of numbers as well as some arithmetic operation defined on them.
These include integers, fractions, real and complex.
3. Real numbers: rational and irrational numbers
4. Rational numbers: integers and fractions
5. Integers: positive and negative numbers and zero
6. Irrational numbers: numbers that cannot be used as ratio of two integers
7. Imaginary numbers: numbers having a real component and an imaginary component. Also
called complex numbers.
8. Cardinal numbers: numbers that can use mathematical operations
9. Ordinal numbers: numbers that denote ranks
10. Fibonacci series: a number series where a number is the sum of two numbers preceding it as
the series proceeds.
11. Golden Ratio: a ratio obtained by dividing two numbers in the Fibonacci series, that equals
1.618 as the series proceeds
12. Set Theory: a branch of mathematics that study sets
13. Set: a collection of things with common characteristics and each element is distinct and
distinguishable
14. Subset: a set formed from the elements of a set
15. Convex set: is a set where a line joining any two points in a set lies within the set.
16. Complement of a set: is a set that has elements included in the universal set but not included
in the set.
17. Venn Diagram: diagrammatic representation of sets
18. Linear Expenditure System: an expenditure system where items consumed are grouped in
sets and utility of each set can be added.

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1.1. Number System

Numbers were originally being used for the purpose of counting. The origin of counting dates back
to ancient times. Our forefathers used different methods to make life meaningful. The number
system started with the use of symbols that finally led to the invention of numbers. Since then,
humans have been evolving and developing the number system as the need arose for them.
Below is a list of numeral systems by culture and time period:

Image 1.1 Numeral systems by culture and time period

[Source: https://en.wikipedia.org/wiki/List_of_numeral_systems ]

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Image 1.1 Numeral systems by culture and time period (contd..)

[Source: https://en.wikipedia.org/wiki/List_of_numeral_systems ]

Numbers may be broadly categorized as:

A) Real numbers and
B) Imaginary numbers.

A. Real Numbers:
The term “real” was introduced by Descartes (1596- 1650). Numbers that are used in real life and
play an important role in day to day activities are real numbers. These numbers can be represented
in the number line. They may either be positive or negative.

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Image 1.2 The Number Line

[Source: https://en.wikipedia.org/wiki/Real_number#/media/File:Real_number_line.svg ]

Real numbers may be categorized as rational or irrational.

a) Rational numbers:
Literally, the word “rational” means something that is based on reason or clarity. In Economics, a
“rational consumer” is a consumer who makes choices after considering alternatives and who aims
at maximizing satisfaction. Mathematically, rational numbers are those numbers that can be
represented as ratios of two numbers. Rational numbers may be categorized as Integers and
fractions.
i) Integers:
The symbols such as 1,2,3,…. Or -1,-2,-3,….are positive numbers and negative numbers respectively.
These numbers together with ‘zero’ are known as integers. Positive integers are called natural
numbers. All natural numbers with a zero are called whole numbers.
ii) Fractions:
Some numbers may be expressed as parts of a whole such as 1/4 (One-fourth), 2/4 (two-fourth), 3/4
(three-fourth) and so on. These are called fractions. Fractions either terminate or keep repeating the
same digit. For example, ½ or ¼ are terminating.
The difference between integers and fractions is that integers are numbers that can be written
without a fractional component. The denominator of integers is always 1.
b) Irrational numbers:
Considering the fact that there always exist opposites to anything on earth, if there is something
called rational, there also has to be something called irrational.
The literal meaning of the word “irrational” means something that is not logical or not reasonable.
In mathematics, this word has a slightly different meaning. If any number cannot be expressed as a
ratio of two integers, it is termed as an irrational number. These numbers are non-terminating and
non-recurring.

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For example, 1/3 or 1/6 is non-terminating and non-recurring. Pi (π) = 3.1415…. is an example of an
irrational number.
The use of irrational numbers may be seen in Engineering, Trigonometric, or Logarithmic.
B. Imaginary numbers:
The term imaginary was coined in the 17th century and the concept came to be widely accepted
following the work of Leonhard Euler and Carl Friedrich Gauss.

Image 1.3 Leonhard Euler Image 1.4 Carl Friedrich Gauss

[Source: https://en.wikipedia.org/wiki/Leonhard_Euler] [Source: https://en.wikipedia.org/wiki/Carl_Friedrich_Gauss]

Imaginary numbers are also called complex numbers. From the name itself, it can be understood
that these numbers are not simple to use. As negative numbers were invented, mathematicians,
physicists and other scholars also invented imaginary numbers. These numbers help to solve
equations that do not have real roots.
For example,
If you have to find the value of x in the equation: x2 - 4 = 0
This may be written as x2 = 4 or, x = 2 or -2, where 2 and -2 are real roots.
Now if you have to find the value of x in the equation: x2 + 4 = 0
We get, x2 = - 4, or x = √-4
Clearly, √-4 is not a real root.
To arrive at solutions to such problems, imaginary numbers were invented.

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Complex numbers may be real because they exist. These numbers have two components, a real
component and an imaginary component. A standard form of complex number is “a + bi”, where a
and b are real and i is imaginary and i= √-1
Note: Since Real numbers are easy to understand, it is most widely used. This course will deal with
only real numbers. Further, as negative numbers do not carry any meaning in Economics, they will
be ignored.
1.2. Application of numbers in Economics

a) Cardinal and Ordinal Numbers

There are two types of numbers that are used in Economics. They are:
i) Cardinal numbers: Real numbers may also be called as cardinal numbers. The use of these
numbers is seen in the Cardinal Utility Theory. These numbers may be added or subtracted.
ii) Ordinal Numbers: Those numbers that are used to denote ranks or order may be called as
ordinal numbers. For example: 1st (First), 2nd (Second), 10th (Tenth) and so on. The use of
these numbers is seen in the Ordinal Utility Theory. These numbers cannot be used to add or
subtract.

b) Fibonacci Numbers and Golden Ratio:

These are very interesting numbers that follow a certain sequence. A number in the series is the
sum of the two numbers preceding it. This series is given as 0 1 1 2 3 5 8 13 21 and so on. This series
is named after an Italian mathematician Leonardo Fibonacci. Interestingly, dividing any number by
the previous number gives a number that rotates around 1.618. (Visible for higher numbers in the
sequence) This ratio is known as the Golden Ratio.
In an economy, one will usually encounter the Fibonacci sequence in stock markets. In an article
titled “How to use Fibonacci to identify buying levels”, by Kshitij Anand, Editor, ET Online, published
in The Economic Times, dated Aug 16, 2016, it was mentioned that traders can use this series to
position themselves in trade.

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Image 1.5 How to use Fibonacci- The Economic Times

[Source: https://economictimes.indiatimes.com/markets/stocks/news/technicals-with-etmarkets-how-to-use-fibonacci-
to-identify-buying-levels/articleshow/53718163.cms ]

Image 1.6 Leonardo Fibonacci

[Source: https://da.wikipedia.org/wiki/Leonardo_da_Pisa ]

Fact: Numbers are creation of the human mind

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1.3. Role of Mathematics in Directorate of Economics & Statistics: A Case Study of DES Guwahati

The main activities of Directorate of Economics and Statistics are collection, compilation and
analysis of State Domestic Products, District Domestic Products, Agricultural Statistics, Price
Statistics, Industrial Statistics, Block level Statistics etc and to conduct different Socio-Economic
Surveys and studies from time to time. Apart from this, the DES has regularly been participating in
different rounds of NSS (National Sample Survey) since 1958-59. To conduct Assam Govt.’s
Employees Census and Annual Employment and Unemployment Survey are two regular exercises of
this Directorate.
This department has a key role in the State. It takes a pivotal role in decision making of State’s
planning and policy as well as to measure socio-economic condition of the State. So, mathematics
plays a very important role in all the activities of the Directorate. The department cannot be run
without the use of Mathematics in daily activities. It is elaborately used from collection of data to
interpretation of data at highest level. It seems from different surveys/studies conducted by this
Directorate, a person has to be good data collector if he/she applies basic mathematical knowledge
properly during the time of data collection. For example, Basic statistics, Price statistics, Agricultural
statistics etc.
Different techniques of pure mathematics like algebra, differential calculus, integration are used in
Statistics. In algebra, simple average growth rate, compounded growth rate, exponential growth
rate, etc are usually used in the Directorate to calculate growth rate or to project growth during a
certain period.
On the other hand, a large number of statistical method like probability, average, dispersion,
estimation, central tendency, time series, index numbers, sample draw, sampling error, graphical
presentation etc are used in different statistical works of this Directorate that are actually part of
Mathematics. Several areas of mathematics like linear algebra, calculus and geometry is used in
statistical as well as economic analysis of different surveys/studies. As for example, the basic
geometry concept is used in selection of an experimental plot (5metre x 5 metre) for some selected
crops (paddy, sugarcane, jute) to determine yield rate of the particular crop under Crop Experiment
Survey.
The basic mathematics concepts are highly needed in estimation of Gross State Domestic Products
(GSDP), Net State Domestic Products (NSDP) and Per Capita Income of a State at both current and
constant prices. The National Account Division, Central Statistics Office (CSO), Ministry of Statistics
and Programme Implementation, Govt. of India estimates National Accounts on the basis of GSDP of
entire States/UTs. The different rates and ratios are used in determination of Gross Value Output
(GVO) for Agricultural products and its bye-products, livestock, fishing etc.

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As for example,

Table 1.1 VALUE OF AGRICULTURAL PRODUCTS

At Current Prices.
District:: Year ::

Area Average
Sl. Out Turn Prices Value of Out Turn
CROPS
No. ( '000' ( '000' ( In Rs.per
( Rs. In Lakhs )
Hectres ) Tonnes ) Tonne )
1 2 3 4 5 6
A. CEREALS
1 Paddy A1 Q1 P1 V1=Q1xP1/100
2 Wheat A2 Q2 P2 V2=Q2xP2/100
3 Maize A3 Q3 P3 V3=Q3XP3/100
Small Millets & other P4=¾ of
A4 Q4
4 Cereals P3 V4=Q4XP4/100
Sub-Total V=V1+V2+V3+V4
Total Egg % of Egg Nos of % of Nos of Chicken Adult Adult Adult Adult
Produced Consumption Eggs Eggs for Eggs & Fowls Fowls Ducks Ducks
000' Nos Consumed Hatching Hached Ducking 000' Killed 000' Killed
survived Nos Nos
1/3 of
Nos of
Eggs
Hached
1 2 3 4 5 6 7 8 9 10

1/3 of ½ of ½ of
P 79% Px79% 21% Q=Px21% M N
Q M N
[Source: Department of Economics and Statistics, Guwahati, Assam]
Mathematics is also used in this department for compilation of different price indices as well as
industrial indices. To compile Consumer Price Index , Consumer Price Index of Assam for Industrial
Worker, Consumer Price Index of Assam for Working Class Population, Consumer Price Index for
Agricultural and Rural Labour of Assam, Wholesale Price Index (only for Agricultural Commodities),
Industrial production are regular activities of the Directorate. Simple mathematics concepts are
used at the time of compilation of indices. Mathematical concepts are also needed in this
Directorate for developing/designing a need-base schedule on a particular survey or study.
Mathematics is the language of numbers and symbols that can be used to logically solve problems
and precisely describe size, quantity and other concepts. It also solves the problems by the support
of logical process. Economic concepts and relationships can be measured in mathematical indices,
formulae and graphs.

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Mathematics is incredibly important in our daily activities and without realizing it, we use
mathematical concepts as well as the skills we have learned from our early stage of life. The laws of
mathematics govern around us and without a good understanding of them; one can encounter
significant problems in life. (Written by: Purbajyoti Das, Senior Research Officer, DES, Guwahati)
1.4. Set Theory
Set theory is a branch of mathematics that studies “set”. Elementary set theory is informal that is
generally taught in elementary level, using Venn Diagrams. The modern study of set theory was
initiated by Georg Cantor and Richard Dedekind.

Image 1.7 Georg Cantor Image 1.8 Richard Dedekind

[Source: https://en.wikipedia.org/wiki/Georg_Cantor ] [Source: https://en.wikipedia.org/wiki/Richard_Dedekind ]

A. Set
Set is a basic concept in Mathematics. It is a term used for a collection of things with some common
characteristics. The members of a set are known as elements and the elements are distinct and
distinguishable.
Symbolically, a set is represented as follows:
If S is a set of first four even numbers, it may be denoted as S = (2,4,6,8)
Sets may also be infinite.
B. Subset: A subset is a set formed from the elements of a set.
Example:
If N is the set of Integers, then N includes both positive numbers and negative numbers.
Symbolically, it can be written as
N ={(1,2,3,4,5……),(-1,-2,-3,-4,-5….)}

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where the positive numbers may be grouped as another set say, P =(1,2,3,4,5,…..) and negative
numbers may be grouped as Q =(-1,-2,-3,-4,-5,…..)
Both P and Q are subsets of set N.
C. Formula:
The number of all possible subsets of a set with ‘n’ members is given by 2 n.
Example:
a) If A is a set of 2 members or elements, then the total number of subsets is 22= 4
Thus, A = {1,2} will have 4 subsets, {1}, {2}, {1,2} and φ
b) If f is a set of 4 members of a group, the possible subsets or relationship that may exist may
be given by the subset of this set. Thus, the total number of subsets is given by
24= 16. Thus, F ={A,B,C,D} will have 16 subsets, {A}, {B}, {C}, {D}, {AB},{AC}, {AD}, {BC}, {BD}, {CD},
{ABC}, {ABD}, {ACD}, {BCD}, {ABCD} and φ

D. Convex Set:
A convex set is a set such that given any two points in that set, the line joining the two points lies
within the set.
Example: A solid cube is a convex set while a crescent is a non-convex set. In economics,
indifference curves are normally convex in shape, which means that all the bundles on an
indifference curve are equally desired and hence may be called a convex set.

Image 1.9 (b): Convex set [9] Image 1.10 (c): Non-convex set [10]
[Source: https://en.wikipedia.org/wiki/Convex_set ]

In Fig 1.10(c), the two points X and Y are connected through a set of points, some of which lie within
the set, (the green region) while some (the points in the red line) lie outside the set. Hence it is a
non-convex set.

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1.5. Operations of sets:

a) Union and Intersection of sets
Two or more sets may form a single set known as Union of sets, generally represented by the
symbol U. Also, two or more sets may have common elements known as intersection of sets,
generally represented by the symbol ∩
Example
If A=(2,4,6,8 ) and B =(1,2,3,4,5,6,7,8), then AUB=(1,2,3,4,5,6,7,8) and A∩B=(2,4,6,8)
where the set AUB includes all the elements of set A and all the elements of set B and A∩B includes
the elements that are common to both the sets A and B.
b) Universal set and Complement of a set
A Universal set may be any set relating to any particular situation and it includes all the elements
under consideration for that particular situation.

Example
Suppose, U is a set of the first 9 numbers in the number system, then U can be written as,
U = (1,2,3,4,5,6,7,8,9) If A is another set such that A =(1,2,3), then is known as the complement of
set A and this set includes all those elements that are not included in set A but are included in set U.
Thus, = (4,5,6,7,8,9)
1.6. Venn Diagram
A Venn Diagram is a diagrammatic representation of a set. Sets may be diagrammatically
represented in closed figures, such as a circle or a rectangle.

A B

Fig 1.1 Intersection between two sets A and B

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A
B c

Fig 1.2 Intersection between three sets A, B and C

1.7. Application of sets in Economics

Linear Expenditure System: An example of the application of sets in Economics is the Linear
Expenditure System. The expenses from different items consumed by a consumer may be grouped
in sets such as Food, Clothing, Furniture and Travel. Each of these sets is the element of a universal
set called “consumption expenditure”.
If E represents the set of Consumption expenditure, then E = (Food, Clothes, Furniture, Travel)
Each of the elements in E that is, Food, Clothes, Furniture and Travel also may have subsets.
The set of Food may have subsets such as Indoor food, outdoor food, fruits, and vegetables, boiled,
fried and so on. The set of clothes may have subsets such as summer clothes, winter clothes,
casuals, formals and so on. The set of Furniture may have subset such as wooden and steel and the
set of travel may have subsets such as domestic and international.
Each of the sets is independent of each other.

Fact: The use of sets organizes different items into groups that may further help to save time and
energy.

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