Chapter 2 - For Students

Lecture Notes on Mathematics for Economists
CHAPTER 2
FUNCTIONS AND SERIES
2.1. Functions
What is a function?
Function is a unique mathematical rule that relates one or more variables to determine another
variable. It is a special type of relation in which an independent variable (domain) can never be
tied with more than one dependent variable (range). It is a relationship between numbers in
which to each element in the input (domain), there corresponds exactly one element in the output
(range).
Example 2.1: Consider the following tables of cube and square root.
Table 1. y = x 3 Table 2. x = y 2 or y =  x
X Y X Y
-2 -8 0 0
-1 -1 1 -1
0 0 1
1 1 4 2
2 8 -2
9 3
-3
In this example, Table 1 is a function since we don’t have any two range values mapped from a
single domain. But, Table 2 is not a function since at least one independent variable [domain]
value is correspondence more than one range value.
Let D and R be two sets of real numbers. A function f is a rule that matches each number x in D
with exactly one and only one number y or f (x) in R. D is called the domain of f and R is called
the range of f. The letter x is sometimes referred to as independent variable and y dependent
variable.
A function f is a rule which assigns to each value (x), called the argument of the function, one
and only one value [f(x)], and referred to as the value of the function at x. The domain of a
function refers to the set of all possible values of x; the range is the set of all possible values for
f(x). Functions are generally defined by algebraic formulas, as illustrated in Example 2.2. Other
letters, such as g, h, or the Greek letter  , are also used to express functions.
| FUNCTIONS AND SERIES 1

Example 2.2: The function f(x) = 8x-5 is the rules that takes a number, multiplies it by 8, and
then subtracts 5 from the product. If a value is given for x, the value is substituted for x in the
formula, and the equation solved for f(x). For example,
If x = 3, f ( x) = 8(3) − 5 = 19
If x = 4, f ( x) = 8(4) − 5 = 27
Example 2.3:
Let f ( x) = x 3 − 2 x 2 + 3x + 100. Find f (2).

Solution
f ( x) = (2) 3 − 2(2) 2 + 3(2) + 100 = 106.
Domain of a Function
The set of values of the independent variables for which a function can be evaluated is called the
domain of the function.
D = x  R / y  R, y = f ( x)
Exercise 1:
Find the domain of each of the following functions:
1
a. f ( x) = ;
x−3
x+3
b. g ( x) = ;
x + 3x − 10
2
2.2. Types of function

2.2.1. Linear and Quadratic Function
Linear function
Linear function is a function that changes at a constant rate with respect to its independent
variable. The graph of a linear function is a straight line. The equation of a linear function can be
written in the form
y = mx + b ; where 𝑥 and 𝑦 are variables and m and b are constants.
Dependent and Independent Variables
Consider the linear function,
𝑦 = 𝑎𝑥 + 𝑏
The variable on the left hand side, 𝑦, is called the dependent variable as its value depends on the
value of the independent variable. The variable on the right hand side, x, is called the
independent variable.

For example, given the two variables “number of days of rain per month” and “number of
umbrella sales”, the number of days of rain would be the independent variable, whereas the
number of umbrella sales would be the dependent variable. This is because the number of
umbrella sales will likely depend on how much it has rained, rather than the other way around.
The Slope of a Line

The slope of a line is the amount by which the y coordinate of a point on the line changes when
the x coordinate is increased by 1.
The slope of the nonvertical line passing through the points ( x1 , y1 ) and ( x 2 , y 2 ) is given by the
formula
y y 2 − y1
Slope = =
x x2 − x1
Horizontal and Vertical Lines

The horizontal line has the equation y = b, where b is a constant. Its slope is equal to zero. The
vertical line has the equation x = c, where c is a constant. Its slope is undefined. See the figure
below.
The Slope-Intercept Form

The Slope-Intercept Form of the Equation of a Line The equation y = mx + b is the equation of
the line whose slope is m and whose y intercept is the point (0, b).
Exercise 2:
Find the slope and y intercept of the line 3 y + 2 x = 6 and draw the graph.

Quadratic Functions
A quadratic function possesses the general form,
y = ax 2 + bx + c
Where 𝑥 and 𝑦 are variables and 𝑎 and 𝑏 and 𝑐 are parameters.
The important thing to note about quadratic functions is the presence of a squared variable term
(e.g. 𝑥2 ). Graphically, quadratic functions form a parabola:
When the coefficient of the squared term is positive, the parabola will be opening up. When the
coefficient of the squared term is negative, the parabola will be upside-down. One way to
remember this more easily is that a positive coefficient results in a smiley face, whereas a
negative coefficient results in a frowny face.
A quadratic equation is one that can be written in the form
y = ax 2 + bx + c = 0
Where x is an unknown variable and a, b and c are constant parameters with a  0 . For example,
y = 6 x 2 + 2.5 x + 7 = 0
A quadratic equation that includes terms in both x and x2 cannot be rearranged to get a single
term in x, so we cannot use the method used to solve linear equations.
There are two possible methods one might try to use to solve for the unknown in a quadratic
equation:
(i) by factorization
(ii) using the quadratic ‘formula’
i) by factorization
A quadratic equation can be factorized in order to find its roots. The roots of a quadratic equation
are the values of 𝑥 which make the equation equal to 0. They also represent the two places on the
function that intersects the 𝑥-axis. Thus, “solving” a quadratic equation means finding its roots.
Example 2.4: Consider the following quadratic function:
y = x 2 + 12 x + 32
Step 1: Factorize
Recall that the above quadratic function can be factorised by finding the two values which add to
12 and multiply to get 32. Hence, the above function can be factorised into:
y = ( x + 4)( x + 8)
Step 2: Find the Roots
Since multiplying anything by 0 results in 0, given the factorised form:
y = ( x + 4)( x + 8)
The equation will equal 0 when any of the following two are true,
( x + 4) = 0
( x + 8) = 0
That is where, 𝑥 = −4 or 𝑥 = −8.

Hence, the roots of the equation are 𝒙 = −𝟒 and 𝒙 = −𝟖
ii) using the quadratic ‘formula’

The quadratic equation can be used to find the roots of a quadratic function. It is particularly
useful when the roots are not integers and hence factorisation will be difficult.
Given a function, y = ax 2 + bx + c
− b  b 2 − 4ac
x=
2a
Where 𝑎, 𝑏 and 𝑐 are the coefficients of the quadratic function. The term under the square root,
𝑏2− 4𝑎𝑐, is called the discriminant and a function will only have real roots if the discriminant is
positive i.e. b 2 − 4ac  0
For example, y = x 2 + 12 x + 32
− 12  12 2 − 4(1)(32)
x=
2(1)
− 12  16
x=
2
𝑥 = −6 ± 2
Hence, the roots of the equation are 𝑥 = -4 and 𝑥 = -8.
2.2.2. Exponential and Logarithmic functions
Exponential function
Exponential function is a function in which a constant base a is raised to a variable exponent x
and is defined as
y = ax a  0 and a  1
Commonly used to express rates of growth and decay, such as interest compounding and
depreciation, exponential functions have the following general properties.
Given y = a x , a  0, and a  1 :
1. The domain of the function is the set of all real numbers; the range of the function is the
set of all positive real numbers, i.e., for all x, even x < 0, y > 0.
2. For a > 1, the function is increasing and convex; for 0 < a <1, the function is decreasing
and convex.
3. At x = 0, y = 1, independently of the base.
1
Example 2.5: Given (a) y = 2x and (b) y = 2 − x = ( ) x , the above properties of exponential
2
function can readily be seen from the tables and graphs of the function in figure 2.1 below. More

complicated exponential functions are estimated with the help of the y* key on pocket
calculators.
1
a) y = 2 x b) y = 2 − x = ( ) x
2
x y
-3 1/8 x y
-2 1/4 -3 8
-1 1/2 -2 4
0 1 -1 2
1 2 0 1
2 4 1 ½
3 8 2 ¼
3 1/8
Fig 2.1
Logarithmic functions
Interchanging the variables of an exponential function f defined by y = a x gives rise to a new
function g defined by x = a y such that any order pair of numbers in f will also be found in g in
reverse order. For example, if f(2) = 4, then g(4) = 2: if f(3) = 8, then g(8) = 3. The new function
g, the inverse of the exponential function f, is called a logarithmic function with base a. Instead
of x = a y , the logarithmic function with base a is more commonly written
y = log a x a  0, a  1
Log a x is the exponent to which a must be raised to get x. any positive number except 1 may
serve as the base for a logarithmic. The common logarithm of x, written log a x or simply log x , is
the exponent to which 10 must be raised to get x. logarithms have the following properties.
Given y = log a x, a  0, a  1 :
1. The domain of the function is the set of all positive real numbers; the range is the set of
all real numbers- the exact opposite of its inverse function, the exponential function.
2. For base a > 1, f(x) is increasing and concave. For 0 < a <1, f(x) is decreasing and
convex.
3. At x = 1, y = 0, independent of the base.
Example 2.6: A graph of two function f and g in which x and y are interchanged, such as y = 2 x
and x = 2 y in Figure 2.2 below, reveals that one function is mirror image of the other along the
45 line y = x, such that if f(x) = y, then g(y) = x. Recall that x = 2 y is equivalent to and more
commonly expressed as log 2 x .

a) y = 2 x b) y = log 2 x  x = 2 y
X y X y
-3 1/8 1/8 -3
-2 1/4 ¼ -2
-1 1/2 ½ -1
0 1 1 0
1 2 2 1
2 4 4 2
3 8 8 3
Fig 2.2
Example 2.7: Knowing that the common logarithm of x is the power to which 10 must be raised
to get x, it follow that
log 10 = 1 sin ce 101 = 10 log 1 = 0 sin ce 10 0 = 1
log 100 = 2 sin ce 10 2 = 100 log 0.1 = −1 sin ce 10 −1 = 0.1
log 1000 = 3 sin ce 10 3 = 1000 log 0.01 = −2 sin ce 10 − 2 = 0.01
Example 2.8: For numbers that are exact powers of the base, logs are easily calculated without
the aid of calculators.
𝑙𝑜𝑔7 49 = 2 𝑠𝑖𝑛 𝑐 𝑒 72 = 49 𝑙𝑜𝑔2 16 = 4 𝑠𝑖𝑛 𝑐 𝑒 24 = 16

1 1
𝑙𝑜𝑔36 6 = 𝑠𝑖𝑛 𝑐 𝑒 361⁄2 = 6 𝑙𝑜𝑔16 2 = 𝑠𝑖𝑛 𝑐 𝑒 161/4 = 2
2 4
1 1 1 1
𝑙𝑜𝑔3 = −2 𝑠𝑖𝑛 𝑐 𝑒 3−2 = 𝑙𝑜𝑔2 = −3 𝑠𝑖𝑛 𝑐 𝑒 2−3 =
9 9 8 8
Note: for numbers that are not exact powers of the base, log tables or calculators are needed.
Properties of exponents and logarithms
Assuming a, b>0; a, b ≠ 1; and x and y are any real numbers:
1. a x .a y = a x + y 4. (a x ) y = a xy
2.
1
= a −x 5. a x .b x = (ab) x
x
a x
ax  a 
ax 6. = 
3. y
= a x− y bx  b 
a

For a, x, and y positive real numbers n a real number, and a ≠ 1:

1. log a xy = log a x + log a y 3. loga x n = n loga x
x 1
2. log a = log a x − log a y 4. log a n
x= log a x
y n
Example 2.9: The problem below are kept simple and solved by means of logarithms to
illustrate the properties of logarithms.
a) x = 7  2 b) x = 18  3
log x = log 7 + log 2 log x = log 18 − log 3
log x = 0.8451 + 0.3010 log x = 1.2553 − 0.4771
log x = 1.1461 log x = 0.7782
x = 14 x=6
c) x = 32 x=3 8
log x = 2 log 3 1
log x = log 8
log x = 2(0.4771) 3
log x = 0.9542 log x = (0.9031)
1
x=9 3
log x = 0.3010
x=2
2.2.3. Univariate and Multivariate Functions
Univariate function is a function which has only single independent variable. It is also known as
a function of one independent variable.
Example: The law of demand is univariate function. Qd = f ( p ) , ceteris paribus
Multivariate function is a function which has two or more independent variable. It is also known
as a function of several independent variables.
Examples: a) Z = f ( x, y ) is a function of two independent variables.
b) Q = f ( K , L) production function
c) W = f ( x, y, z ) is a function of three independent variables
d) Qd = f ( P0 , Ps , Pc , Y , T , A, Dt −1, N )

2.2.4. Explicit and Implicit Functions
Explicit function is a function in which the independent and dependent variables are explicitly/
clearly defined. Whenever the cause and effect relationship is clear or when the objective is to
show that relationships, it is important to use explicit function.
Examples: a) y = f (x) is an explicit function of one independent variable. Where, y is
dependent variable and x is independent variable.
b) Qs = f ( p ) , ceteris paribus
c) Q = f ( K , L) It tells that output (Q) is determined by L & K.
Implicit function is a function in which the independent and dependent variables are not likely
defined. Whenever the cause and effect relationship is not clear or when the objective is not to
show that relationships, it is better to use implicit function.
Examples: a) f ( x, y ) = 0 is an implicit function of one independent variable.
b) f ( x, y, z ) = 0 is an implicit function of two independent variables.
c) The budget formula is an implicit function
➢ It can be written as M = Px X + Py Y
Remark: in this case neither X nor Y is cause & effect relationship between them.
Example: y = f ( x) = 3x − 2 is an explicit function convert to equivalent implicit function.
y − 3x + 2 = 0
2.3. Economic applications of linear models
Supply and demand analysis (Market Equilibrium)

An important economic application involving intersections of graphs arises in connection with
the law of supply and demand. In this context, we think of the market price (p) of a commodity
as determining the number of units of the commodity that manufacturers are willing to supply as
well as the number of units that consumers are willing to buy. In most cases, manufacturers’s
supply S(p) increases and consumers’ demand D(p) decreases as the market price (p) increases.
See figure 2.3 below.
Fig 2.3
The point of intersection of the supply and demand curves is called the point of market
equilibrium. The p coordinate of this point (the equilibrium price) is the market price at which
supply equals demand. We can say another way that the market price is a price at which there
will be neither a surplus nor a shortage of the commodity.
Equilibrium in supply and demand analysis occurs when Qs = Qd . By equating the supply and
demand functions, the equilibrium price and quantity can be determined.
Example 2.10: Given Qs = −5 + 3P Qd = 10 − 2 P
In equilibrium, Qs = Qd
Solving for Po − 5 + 3P = 10 − 2P
5 P = 15
P=3
Substituting P=3 in either of the equations,
Qs = −5 + 3P = −5 + 3(3) = 4 = Qd
Break-Even Analysis
Intersections of graphs arise in business in the context of break-even analysis. In a typical
situation, a manufacturer wishes to determine how many units of a certain commodity have to be
sold for total revenue to equal total cost. Suppose x denotes the number of units manufactured
and sold, and let C(x) and R(x) be the corresponding total cost and total revenue, respectively. A
pair of cost and revenue curves is sketched in Figure 2.4:
Fig 2.4
Example 2.11:
The Green-Belt Company determines that the cost of manufacturing men’s belts is $ 2 each plus
$ 300 per day in fixed costs. The company sells the belts for $ 3 each. What is the break-even
point?
Solution
The break-even point occurs where revenue
and cost are equal. By letting x = the
number of belts manufactured in a day, and
then we obtain revenue function R( x) = 3x
and cost function C ( x) = 2 x + 300. For
C ( x) = R( x) , we obtain
3x = 2 x + 300
x = 300
So, 300 belts must be sold each day for the
company to break even. The company must
sell more than 300 belts each day to make a
profit.
Example 2.12:
Suppose that a company has determined that the cost of producing x items is 500 + 140x and that
the price it should charge for one item is P= 200 – x
a. Find the cost function.
b. Find the revenue function.
c. Find the profit function.
d. Find the break-even point
Solution
a. The cost function is given: C = 500+ 140x
b. The revenue function is found by multiplying the price for one item by the number of items
sold. R( x) = P  x = (200 − x) x = 200 x − x 2
c. Profit is the difference between revenue and cost
P( x) = R( x) − C ( x)
= (200 x − x 2 ) − (500 + 140 x)
= − x 2 + 60 x − 500
d. To find the break- event, set the revenue equal to the cost and solve for x
R( x) = C ( x)
200 x − x 2 = 500 + 140 x
x 2 − 60 x + 500 = 0
( x − 10)( x − 50) = 0
x = 10 or x = 50

This model shows that a profit occurs if the company produces between 10 and 50 items. We
will discuss calculus techniques for maximizing profit later.
2.4. Functions and curves in Economics

The most common microeconomic functions are demand functions, supply functions, production
function, cost functions, revenue functions, profit functions, pollution functions, and other
natural resource functions. The most common macroeconomic functions are consumption,
saving, investment, and aggregate production functions. There are also, a lot of other economic
functions, but we don’t discuss them here due to time limit we have. For the sake of introduction,
let’s take some examples of economic functions.
Example 2.13:
Given the supply and demand functions
P = Qs2 + 12Qs + 32,

P = −Qd2 − 4Qd + 200,
Calculate the equilibrium price and quantity.
Solution: At equilibrium, the quantity supplied is equal to the quantity demanded, so that
Qd = Qs = Q, say.
The supply and demand equations become
P = Q 2 + 12Q + 32,
P = −Q 2 − 4Q + 200
Equating the expressions on the right-hand sides of these equations, we have
Q 2 + 12Q + 32 = −Q 2 − 4Q + 200

Figure 2.5: The graph of the supply and demand functions in Example 2.13
We can do this since both expressions are equal to P. Rearranging this equation and collecting
like terms yields the quadratic equation
2Q 2 + 16Q − 168 = 0
This equation can be simplified by dividing throughout by 2. We then have the quadratic
equation
Q 2 + 8Q − 84 = 0
Solving this equation using the formula with a = 1, b = 8, and c = -84 yields
− 8  8 2 − 4(1)(−84)
Q=
2(1)
− 8  400
Q=
2
− 8  20
Q=
2
− 8 + 20 − 8 − 20
Therefore, either Q = = 6 , or Q = = −14
2 2
So the quadratic equation has solutions Q = 6 and Q = −14. The solution Q = −14 can be
discarded because a negative quantity does not make sense.
Therefore, the equilibrium quantity is 6. The corresponding equilibrium price can be determined
by substituting Q = 6 into either the supply or demand equation. If we substitute this value into
the supply equation, we have
P = 6 2 + 12  6 + 32 = 36 + 72 + 32 = 140
Therefore, the equilibrium price is 140.

The graphs of the supply and demand functions are shown in Fig. 2.5. There are two points of
intersection. The one for positive Q provides the market equilibrium.
Example 2.14
Draw the graph of the function, C=200+0.6Y, where C is consumer spending and Y is income,
which cannot be negative.
Solution
Before plotting the shape of this function
you need to note that the notation is different
from the previous examples and this time C
is the dependent variable, measured in the C
vertical axis, and Y is the independent C = 200 + 0.6y
variable, measured on the horizontal axis.
When Y = 0, then C = 200, and so the line 500
cuts the vertical axis at 200. However, when
C = 0, then
0 = 200 + 0.6Y
− 0.6Y = 200
200
200
Y =−
0.6
y
As negative values of Y are unacceptable,
0 500
just choose another pair of values, e.g. when
Y = 500 then C = 200+0.6(500) = 200 + 300
= 500.This graph is shown in Figure 2.6. Fig 2.6
One function of particular interest in economics is the profit function. We denote this function by
the Greek symbol π. The profit function is defined to be the difference between total revenue,
TR, and the total cost, TC, i.e.,
 = TR − TC
The total revenue received from the sale of Q goods at price P is given by the product of P and
Q, i.e.
TR = P  Q
The total cost function relates the cost of production to the level of output, Q, and is the sum of
the fixed costs, FC, and variable costs, VC × Q, where VC denotes the variable cost per unit of
output. Fixed costs include, for example, the cost of land, rental, equipment, and skilled labour.
Variable costs include, for example, the cost of raw materials, energy, and unskilled labour. The
total cost in producing Q goods is given by

TC = FC + (VC )  Q
Thus the profit function is
 = P  Q − FC + (VC )  Q = PQ − FC − (VC )  Q
Example 2.15
If fixed costs are 18, variable costs per unit are 4, and the demand function is
P = 24 − 2Q
obtain an expression for π in terms of Q and hence sketch a graph of π against Q.
1. For what values of Q does the firm break even?
2. What is the maximum profit?
Table 3. Table of values of the profit function  = −2Q 2 + 20Q − 18 for even integer values of Q
for which 0 ≤ Q ≤ 10.
Solution
The total revenue function is given by
TR = P  Q = (24 − 2Q)Q = 24Q − 2Q 2 ,
where we have used the demand function P = 24 − 2Q to eliminate P in the expression defining
TR. We have expressed TR solely in terms of the level of output, Q. The total cost function is
given by
TC = FC + (VC )  Q = 18 + 4Q,
Since FC = 18 and VC = 4. We can now obtain an expression for the profit function by
subtracting the expression for TC from the expression for TR, i.e.,
 = TR − TC
= 24Q − 2Q 2 − (18 + 4Q)
= 24Q − 2Q 2 − 18 − 4Q
= −2Q 2 + 20Q − 18,
where we have taken care to change the sign of all terms inside the brackets on their removal.
Since the coefficient of Q2 in the quadratic expression defining  is negative, the graph of the
profit function has a  shape. When Q = 0, π = −18. The profit function is tabulated in Table 3
for 0 ≤ Q ≤ 10. From this information, we are able to sketch the graph of the function. This is
shown in Fig. 2.7.
1. The value of the profit function will be zero (i.e., π = 0) for values of Q that satisfy the
quadratic equation
− 2Q 2 + 20Q − 18 = 0
Solving this equation using the formula with a = -2, b = 20, and C -18 yields
− 20  20 2 − 4(−2)(−18)
Q=
2(−2)
− 20  256
Q=
−4
− 20  16
Q=
−4
− 20 + 16 − 20 − 16
Therefore, either Q = = 1 , or Q = =9
−4 −4
The profit is zero when Q = 1and Q = 9. Therefore, the firm breaks even when Q = 1and Q = 9.
For1 <Q< 9, the profit function is positive (see Fig. 2.7) and the firm is in profit. For values of Q
outside this range, i.e.,Q< 1and Q> 9, the profit function is negative and therefore the firm makes
a loss at these levels of output.
Figure 2.7: The graph of the profit function  = −2Q 2 + 20Q − 18 .

2. To determine the maximum value of the profit function, we complete the square.
 = −2Q 2 − 10Q + 9

= −2 (Q − 5) − 25 + 9
2

= −2(Q − 5) − 16 
2
= (−2)  (Q − 5) 2 + (−2)  (−16)

= −2(Q − 5) 2 + 32
Therefore, the maximum profit is π = 32 since the term (−2)  (Q − 5) 2 is always negative except
when Q = 5 when it is zero.
2.5. Sequences and Series

2.5.1. Arithmetic sequences and series
An arithmetic sequence is a sequence in which each term after the first, a1, is equal to the sum of
the preceding term and the common difference, d. The terms of the sequence can be represented
as follows.
a1 , a1 + d , a1 + 2d , ...
To find the next term in an arithmetic sequence, first find the common difference by subtracting
any term from its succeeding term. Then add the common difference to the last term to find the
next term in the sequence.
The nth term of an arithmetic sequence can be found by using a formula if the first term and the
common difference are known. This type of formula is called a recursive formula. This means
that each succeeding term is formulated from one or more previous terms.
first term a1 a -11
second term a2 a+d -11 + 1(4) = -7
third term a3 a + 2d -11 + 2(4) = -3
fourth term a4 a + 3d -11 + 3(4) = 1
fifth term a5 a + 4d -11 + 4(4) = 5
nth term an a + (n-1)d -11 + (n - 1)4
The nth term of an arithmetic sequence with first term a1 and common difference d is given by
the following formula.
a n = a1 + (n − 1)d
Notice that the preceding formula has four variables: an, a1, n, and d. If any three of these are
known, the fourth can be found. By definition, the nth term is also equal to an-1 + d, where an-1
is the (n-1)th term. That is, a n = a1 + (n − 1)d .
Example 2.16: Find the 68th term in the sequence 16, 7, -2,…
First find the common difference.
7 − 16 = −9 − 2 − 7 = −9
The common difference is -9. Then, use the formula for nth term of an arithmetic sequence.

a n = a1 + (n − 1)d
a 68 = 16 + (68 − 1)(−9) n = 68, a1 = 16, and d = −9
= − 587
An arithmetic series is the indicated sum of the terms of an arithmetic sequence. The lists below
show some examples of arithmetic sequences and their corresponding arithmetic series.
Arithmetic sequence Arithmetic series
3, 8, 13, 18, 23 3 + 8 + 13 + 18 + 23
1 1 1 1 1 1  1  1
, ,0,− ,− + + 0 + −  + − 
2 4 4 2 2 4  4  2
a1 , a 2 , a3 , a 4 ,..., a n a1 + a 2 + a3 + a 4 + ... + a n
The symbol S n is used to represent the sum of the first n terms of the series. To develop a
formula for S n for an arithmetic series, a series can be written in two ways and added term by
term, as shown below. The second equation for S n given below is obtained by reversing the
order of the terms in the series.
𝑆𝑛 = 𝑎1 + (𝑎1 + 𝑑) + (𝑎1 + 2𝑑)+. . . +(𝑎𝑛 − 2𝑑) + (𝑎𝑛 − 𝑑) + 𝑎𝑛

𝑆𝑛 = 𝑎𝑛 + (𝑎𝑛 − 𝑑) + (𝑎𝑛 − 2𝑑)+. . . +(𝑎1 + 2𝑑) + (𝑎1 + 𝑑) + 𝑎1
2𝑆𝑛 = (𝑎1 + 𝑎𝑛 ) + (𝑎1 + 𝑎𝑛 ) + (𝑎1 + 𝑎𝑛 )+. . . +(𝑎1 + 𝑎𝑛 ) + (𝑎1 + 𝑎𝑛 ) + 𝑎1 + 𝑎𝑛
2𝑆𝑛 = 𝑛(𝑎1 + 𝑎𝑛 ) 𝑇ℎ𝑒𝑟𝑒 𝑎𝑟𝑒 𝑛 𝑡𝑒𝑟𝑚𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑠𝑒𝑟𝑖𝑒𝑠, 𝑎𝑙𝑙 𝑜𝑓 𝑤ℎ𝑖𝑐ℎ 𝑎𝑟𝑒 (𝑎1 + 𝑎𝑛 )
𝑛(𝑎1 + 𝑎𝑛 )
𝑇ℎ𝑒𝑟𝑒𝑓𝑜𝑟𝑒, 𝑆𝑛 =
2
The sum of the first n terms of an arithmetic series is given by the following formula.
n
Sn = (a1 + a n )
2
Example 2.17: Find the sum of 27 terms in the series -14 – 8 – 2 - …. + 142
n
Sn = (a1 + a n )
2
27
S 27 = (−14 + 142) n = 27, a1 − 14, and a 27 = 142
2
= 1728
When the value of the last term, an, is not known, you can still determine the sum of the series.
Using the formula for an arithmetic sequence, you can derive another formula for the sum of an
arithmetic series.

n
Sn = (a1 + a n )
2
S n = a1 + (a1 + (n − 1)d 
n
a n = a1 + (n − 1)d
2
S n = 2a1 + (n − 1)d 
n
2
Example 2.18
Celeste Bay will be a freshman at the University of Kentucky in the fall. Starting one month
from today, she plans to withdraw $10 from her savings account, and then increase her
withdrawal by $10 each week so that she can purchase items for college. If her account has a
balance of $1200 today, how long will it take her to empty her savings account?
Let S n = the amount of money that is currently in the savings account, $1200.
Let a1 = the first withdrawal of $10. In this example, d = 10.
We want to find n, the number of weeks that it will take to empty the savings account.
Sn =
n
2a1 + (n − 1)d 
2
1200 = 2(10) + (n − 1)10
n
S n = 1200, a1 = 10, and d = 10
2
2400 = n20 + (n − 1)10 Multiple each side by 2.
2400 = n(20 + 10n − 10) Simplify.
2400 = n(10 + 10n)
0 = 10n 2 + 10n − 2400
0 = n 2 + n − 240 Divide each side by 10.
0 = (n − 15)(n + 16) Factor .
n − 15 = 0 or n + 16 = 0
n = 15 n = −16 − 16 is not possible answer .
Thus, it would take Celeste 15 weeks to empty her account.
2.5.2. Geometric Sequences and Series
The ratio of successive terms in a geometric sequence is a constant called the common ratio,
denoted r.

A geometric sequence is a sequence in which each term after the first, a1, is the product of the
preceding term and the common ratio, r. the terms of the sequence can be represented as follows,
where a1 is nonzero and r is not equal to 1 or 0.
a1 , a1 r , a1 r 2 ,...
The common ratio of a geometric sequence can be found by dividing any term by the preceding
term. Then multiply the last term by the common ratio to find the next term in the sequence.
Example 2.19: Find the next three terms in the geometric sequence 27, 135, 675, …
First find the common ratio.
135  27 = 5 675  135 = 5
The common ratio is 5.
Then, multiply the third term by 5 to get the forth term, and so on.
675  5 = 3375 3375  5 = 16875 16875  5 = 84375

The next three terms are 3375, 16875, and 84,375.
As with arithmetic sequences, geometric sequences are also recursive. Successive terms of the
geometric can be expressed as the product of the common ratio the previous terms. Thus, it
follows that each term can be expressed as the product of a1 and a power of r. The terms of a
geometric sequence for which a a1 = 3 and r = 4 can be represented as follows.
first term a1 a1 3
second term a2 a1r 3.41 = 12
third term a3 a1 r2 3.42 = 48
fourth term a4 a1r3 3.43 = 192
fifth term a5 a1r4 3.44 = 768
nth term an a1rn-1 3.4n-1
The nth term of a geometric sequence with first term a1 and common ratio r is given by the
following formula.
a n = a1r n−1
Example 2.20
1 1
Find the 14 term in the sequence 3 , 9 ,...
th 1,

First find the common ratio.
1 1 1 1 1
1 =  =
3 3 9 3 3
1
The common ratio is 3
Then use the common formula for the nth term of the geometric sequence.
a n = a1 r n −1
14 −1
1 1
a14 = 1  n = 14, a1 = 1, and r =
3 3
13
1
= 
3
1 1
13
or
3 1,594,323
A geometric series is the indicated sum of the terms of a geometric sequence. The lists below
show some examples of geometric sequences and their corresponding geometric series.
Geometric Sequence Geometric Series
1,4,16,64,256 1 + 4 + 16 + 64 + 256
1 1 1 1 1 1
2,1, , , 2 +1+ + +
2 4 8 2 4 8
a1, a 2 , a3 , a 4, ..., a n a1 + a 2 + a 3 + a 4 + ... + a n
To develop a formula for the sum of the series, Sn, write an expression for Sn and for rSn, as shown
below. Then subtract rSn from Sn and solve for Sn.
S n = a1 + a1 r + a1 r 2 + ... + a1 r n − 2 + a1 r n −1
− (rS n = a1 r + a1 r 2 + ... + a1 r n − 2 + a1 r n −1 + a1 r n
S n − rS n = a1
S n (1 − r ) = a1 − a1 r n Factor
a1 − a1 r n
Sn = Divide each side by 1 − r , r  1.
1− r
The sum of the first n terms of a geometric series is given by the following formula
a1 − a1 r n
Sn = , r 1
1− r
Example 2.21:
Find the sum of the first eight terms of the series 3 − 6 + 12 + ...
First, find the common ratio.
− 6  3 = −2 12  (−6) = −2
The common ratio is -2. The find the sum.
a1 − a1 r n
Sn =
1− r
3 − 3(−2) 8
S8 = n = 8, a1 = 3, r = −2
1 − (−2)
3 − 3(−256)
=
3
= −255
Thus, the sum of the first eight terms is -255.
Infinite geometric series
If Sn is the sum of n terms of a series, and S is a number such that S > Sn for all n, and S - Sn
approaches zero as n increases without limit, then the sum of the infinite series is S.
lim S n = S
n →
The formula for the sum of the first n terms of a geometric series can be written as follows.
a1 − a1 r n
Sn = , r 1
1− r
Suppose n →  ; that is, the number of terms increases without limit. If r  1 , r n increases
without limit as n →  . However, when r  1 , r n approaches 0 as n →  . Then, Sn approaches
a1
the value . The series is convergent if r  1 and divergent if r  1 . If r = 1, the test provide
1− r
no information.
The sum, S, of an infinite geometric series for which r  1 is given by the following formula.
a1
Sn =
1− r

1 1 1
Example 2.22: Find the sum of the series + + + ...
25 250 2500
1 1 a
In the series, a1 = and r = . Since r  1 , S n = 1 .
25 10 1− r
1
a 2
S n = 1 = 25 =
1− r 1 45
1−
10
2
The sum of the series is
45
2.6. Simple and compound interests, Present value, Annuities

2.6.1. Simple and compound interests
Time is money. If you borrow money you have to pay interest on it. If you invest money in a
deposit account you expect to earn interest on it. From an investor’s viewpoint the interest rate
can be looked on as the ‘opportunity cost of capital’. If a sum of money is tied up in a project for
a year then the investor loses the interest that could have been earned by investing the money
elsewhere, perhaps by putting it in a deposit account.
Simple interest is the interest that accrues on a given sum in a set time period. It is not reinvested
along with the original capital. The amount of interest earned on a given investment each time
period will be the same (if interest rates do not change) as the total amount of capital invested
remains unaltered
Compound interest is interest which is added to the original investment every time it accrues.
The interest added in one time period will itself earn interest in the following time period. The
total value of an investment will therefore grow over time.
Suppose that an individual wishes to invest a sum of £10,000 over a period of three years and
that the annual rate of interest is 5%. After one year, the interest on the investment amounts to
5% of £10,000, which is £500. If the investment is subject to simple interest, then the return on
the investment would be £500 per year for each subsequent year. The total amount of interest
earned over the five-year period in this case is 5 × £500 = £2,500. However, most financial
investment products use compound interest as a means of enticing their customers not to
withdraw the interest earned after the first and subsequent years from the accumulated value of
their investment. When interest is compounded annually, the amount of interest earned in the
second year is 5% of £10,500, which is the sum of the initial investment (£10,000) and the first
year’s interest (£500). The interest earned in the second year is therefore £525 and so the value

of the investment at the end of the second year is £10,500 + £525 = £11,025. Finally, at the end
of the third year the investment is worth £11,025 plus 5% of £11,025 interest giving a total of
£11,576.25.
There is a formula that can be used to determine the future value of an investment. Let P0 denote
the value of the initial investment. This is sometimes known as the principal. Let Pt denote the
value of the investment after t years. If the interest on the principal is compounded annually, at
an interest rate r (written as a decimal or fraction), then after one year the investment is worth
P1 = P0 + rP0 = P0 (1 + r )........................................................................................(1)
Similarly, after the second year the investment is worth
P2 = P1 + rP1 = P1 (1 + r )........................................................................................(2)
Substituting equation (1) in to equation (2) we have
P2 = P0 (1 + r )(1 + r ) = Po (1 + r ) 2 .........................................................................(3)
In general, one can show that Pt = Po (1 + r ) t ........................................................(4)
Now suppose that the interest is compounded semi-annually (six monthly intervals). In this case,
(4) would have to be modified to
r
Pt = Po (1 + ) 2t ..............................................................................................................(5)
2
Similarly, one can show that if interest is added monthly, the value of the investment after t years
is
r 12t
Pt = Po (1 + ) .............................................................................................................(6)
12
If this argument is continued and interest is compounded n times a year, then we have the
formula
r
Pt = Po (1 + ) nt ..............................................................................................................(7)
n
If n is very large then we are approaching the situation in which interest is added continuously
(at every instant of time) instead of at discrete moments in time. If we make the substitution m =
n/r in (7), then we have

mrt
 1
Pt = Po 1 +  ..............................................................................................................(8)
 m
rt
 1 
m
Pt = Po 1 +   ..........................................................................................................(9)
 m  
Note that
m
 1
1 +  → m as m → 
 m
If we allow m →∞ in (8) (which is equivalent to allowing n →∞ in (7) since r is held constant),

then we obtain the formula for the continuous compounding of interest:
P(t ) = Po e rt ......................................................................................................................(10)
In this formula, t need no longer be a positive integer. It can take any positive value. For negative
growth rates, such as depreciation or deflation, the same formulae apply but with t or r negative.
Example 2.23
Suppose that the sum of $100 is invested at an annual rate of interest of 10%. Calculate the value
of the investment in five years’ time if the interest is compounded (a) annually, (b) semiannually,
(c) continuously.
Solution
1. We apply the formula (4) with P0 = $100, r = 10% = 0.1and t =5. Inserting these values
into the formula gives
P5 = 100(1 + 0.10) 5 = $161.05
0.10 25
P5 = 100(1 + ) = 100(1.05)10 = $162.89
2
S = 100e 0.105 = 100e 0.5 = $164.87
Example 2.24
The value of an asset, currently priced at $250,000, is expected to increase by 12% a year.
1. Find its value in ten years’ time.

Solution
1. We use the formula (10) with P0 = $250, 000, r = 12% = 0.12, and t = 10. Inserting these
values into the formula yields
P10 = 250,000(1 + 0.12)10
250,000(1.12)10
= $776,462.05
Therefore, after 10 years the asset will be worth $776,462.05.
2.6.2. Present value

An important economic application of sequences is the determination of the present value of a
sum of money to be received at some point in the future. This computation is the inverse of
determining how much money one would have in the future up on investing a certain amount
now. The following formula, which determines the present value PVt of amount V to be received
t periods from now when the interest rate is r per period and compounding occurs at the end of
each period:
V
PV t =
(1 + r ) t
Notice that for r  0 the denominator of (1 + r) t becomes larger as t becomes larger, and thus PVt
, gets smaller. In other words, receiving a certain sum in the future has a lower PV the longer one
has to wait for the payment. This is natural since the further in the future one receives the fixed
amount V, the less one would need to invest now to replicate that future payment. For this reason
1
economists refers to the discounting of future benefits and the value is referred to as the
(1 + r )
discount rate, or discount factor. Moreover, (1 + r)t grows without bound as t →  , and so
PV t → 0 as t →  .
Example 2.25: Compute the PV of $500 to be received in one year’s time given the interest rate
of 8%.
V V 500 500
PV1 = = = = = $462.96
(1 + r ) 1
(1 + r ) 1 + 0.08 1.08
Example 2.26: Compute the PV of receiving $1 million at the end of each of the next three years
given the interest rate of 12%.
Example 2.27
Determine the present value of $25,000 to be received in the future in the following situations. In
each case assume that the annual interest rate is 8%.
i. Payment is received at the end of one year’s time given annual compounding
ii. Payment is received at the end of 20 year’s time given annual compounding
iii. Payment is received at the end of one year’s time given quarterly compounding (i.e.,
every three months)
iv. Payment is received at the end of 20 year’s time given quarterly compounding
v. Payment is received at the end of one year’s time given continuous compounding
vi. Payment is received at the end of 20 year’s time given continuous compounding
As the applications above indicate, computing the present value streams of payments or periodic
payments can be quite tedious. These computations, however, are essentials to banks and other
financial institutions that need to determine the equivalence of streams of payments to a fixed
current amount.
2.6.3. Annuities
An annuity is a contract or agreement on the parts of another person or company to pay another
person (the annuitant) a fixed sum at periodic intervals usually for as long as the person lives or
for a specified term of years.
Example 2.28
An annuity will pay $8,000 at the end of each year for 5 successive years, the first payment being
12 months from the initial purchase date. What is the maximum price any rational investor would
pay for such an annuity if the opportunity cost of capital is 10%?

Chapter 2 - For Students

Uploaded by

Copyright:

Available Formats

Chapter 2 - For Students

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 2 - For Students

Uploaded by

Copyright:

Available Formats

Lecture Notes on Mathematics for Economists

| FUNCTIONS AND SERIES 1

Let f ( x) = x 3 − 2 x 2 + 3x + 100. Find f (2).

2.2. Types of function

| FUNCTIONS AND SERIES 2

The Slope of a Line

Horizontal and Vertical Lines

The Slope-Intercept Form

| FUNCTIONS AND SERIES 3

| FUNCTIONS AND SERIES 4

Hence, the roots of the equation are 𝒙 = −𝟒 and 𝒙 = −𝟖

ii) using the quadratic ‘formula’

2.2.2. Exponential and Logarithmic functions

| FUNCTIONS AND SERIES 5

| FUNCTIONS AND SERIES 6

𝑙𝑜𝑔7 49 = 2 𝑠𝑖𝑛 𝑐 𝑒 72 = 49 𝑙𝑜𝑔2 16 = 4 𝑠𝑖𝑛 𝑐 𝑒 24 = 16

Properties of exponents and logarithms

Assuming a, b>0; a, b ≠ 1; and x and y are any real numbers:

| FUNCTIONS AND SERIES 7

For a, x, and y positive real numbers n a real number, and a ≠ 1:

2.2.3. Univariate and Multivariate Functions

| FUNCTIONS AND SERIES 8

2.2.4. Explicit and Implicit Functions

2.3. Economic applications of linear models

Supply and demand analysis (Market Equilibrium)

Example 2.10: Given Qs = −5 + 3P Qd = 10 − 2 P

| FUNCTIONS AND SERIES 11

2.4. Functions and curves in Economics

P = Qs2 + 12Qs + 32,

| FUNCTIONS AND SERIES 12

| FUNCTIONS AND SERIES 13

| FUNCTIONS AND SERIES 14

 = P  Q − FC + (VC )  Q = PQ − FC − (VC )  Q

Figure 2.7: The graph of the profit function  = −2Q 2 + 20Q − 18 .

= (−2)  (Q − 5) 2 + (−2)  (−16)

2.5. Sequences and Series

first term a1 a -11

second term a2 a+d -11 + 1(4) = -7

third term a3 a + 2d -11 + 2(4) = -3

fourth term a4 a + 3d -11 + 3(4) = 1

fifth term a5 a + 4d -11 + 4(4) = 5

nth term an a + (n-1)d -11 + (n - 1)4

First find the common difference.

| FUNCTIONS AND SERIES 17

Arithmetic sequence Arithmetic series

𝑆𝑛 = 𝑎1 + (𝑎1 + 𝑑) + (𝑎1 + 2𝑑)+. . . +(𝑎𝑛 − 2𝑑) + (𝑎𝑛 − 𝑑) + 𝑎𝑛

| FUNCTIONS AND SERIES 18

Let a1 = the first withdrawal of $10. In this example, d = 10.

Thus, it would take Celeste 15 weeks to empty her account.

2.5.2. Geometric Sequences and Series

| FUNCTIONS AND SERIES 19

First find the common ratio.

135  27 = 5 675  135 = 5

The common ratio is 5.

675  5 = 3375 3375  5 = 16875 16875  5 = 84375

second term a2 a1r 3.41 = 12

third term a3 a1 r2 3.42 = 48

fourth term a4 a1r3 3.43 = 192

fifth term a5 a1r4 3.44 = 768

nth term an a1rn-1 3.4n-1