Chapter 1.

Linear equations

Phan Quang Sang

Department of mathematics

September 12, 2023

quangsangphan@gmail.com
Content

1 Introduction to algebra

2 Graph of Linear equations

3 Linear system

4 Supply and demand analysis

5 Transposition of formulas

6 National income determination

Introduction to algebra Graph of Linear equations Linear system Supply and demand analysis Transposition of formulas Nati

Revisions of basic rules used in arithmetic and algebra

*Abbreviation: Practice Problem page ⇒ PPp
Section 1.1
- Numbers and basic mathematical operations
- Expressions
- Brackets:
Section 1.2
- Fractions:
- Equations
- Inequalities
*Home work: Ex 1.1* page 20-, Ex 1.2* page 38-

Phan Quang Sang Chapter 1. Linear equations

Introduction to algebra Graph of Linear equations Linear system Supply and demand analysis Transposition of formulas Nati

Coordinate system:

Example: plot the points A(2, 3), B(−1, 4), C (−3, −1),
D(3, −2), and E (5, 0) on a coordinate plane.

Phan Quang Sang Chapter 1. Linear equations

Straight lines and linear equations:

ax + by = c, a2 + b 2 ̸= 0,

Example: decide which of the following points lie on the line

5x − 2y = 6: A(0, −3), B(2, 2), C (−10, −28), and D(4, 8).
Intercepts and slope: p.47-48
Example: draw the graph of the linear equation
2x + y = 5
y = kx + b, k is the slop of the straight line

If x changes by 1 unit then y changes by k units.

Simultaneous linear equations: page 45

Example: find the point of intersection of the two lines

2x + y = 5, 4x + 3y = 11
Example: page 63

*HW: Exercise 1.3*, page 52, problem 5

Introduction to algebra Graph of Linear equations Linear system Supply and demand analysis Transposition of formulas Nati

Elimination method: p.55

Example 1: solve the linear systems

3x + 2y = 1

−2x + y = 2
Example 2: solve the linear systems

x + 3y − z = 4

2x + y + 2z = 10
3x − y + z = 4
*HW: Exercise 1.4*, page 66, problem 1, 4

Phan Quang Sang Chapter 1. Linear equations

Introduction to algebra Graph of Linear equations Linear system Supply and demand analysis Transposition of formulas Nati

The supply is the quantity of a certain good that producers

are willing to provide.
The demand is the quantity of the good that consumers are
willing to buy.

The quantity demanded, QD , of a good depends on the

market price, P, and vice versa. We can write

P = g (QD ),

called the demand function.

Phan Quang Sang Chapter 1. Linear equations

Introduction to algebra Graph of Linear equations Linear system Supply and demand analysis Transposition of formulas Nati

The supply is the quantity of a certain good that producers

are willing to provide.
The demand is the quantity of the good that consumers are
willing to buy.

The quantity demanded, QD , of a good depends on the

market price, P, and vice versa. We can write

P = g (QD ),

called the demand function.

The process of identifying the key features of the real world

and making appropriate simplification and assumptions is
known as modelling.

Phan Quang Sang Chapter 1. Linear equations

A simple model is a linear function:

P = aQD + b,
for some constants a and b.

Usually, P is a decreasing function of QD (a < 0, b > 0).

Example: p.70
Endogenous and exogenous, p.72

Q = QD = f (P, Y , PS , PC , A, T ) ⇒ P = f (QD , Y , PS , PC , A, T )
Then QD and P are called endogenous variables. The
remaining variables are called exogenous.

Remark: in the previous model we implicitly assumed that the

variables Y , PS , PC , A, T are fixed.
Substitutable goods: A pair of goods that are alternatives
to each other. As the price of one of them goes up, the
demand for the other rises.

Complementary goods: A pair of goods consumed together.

As the price of either goes up, the demand for both goods
goes down.

Example: The demand Q for a certain good depends on its

own price P and the price of an alternative good PA ,
according to
Q = 30 − 4P + 2PA .
Is the alternative good substitutable or complementary? Give
a reason for your answer.
Discussion, p.72: (coal and electricity), (moto and car)...

Normal good: a good whose demand increases as income

increases

Inferior good: a good whose demand decreases as income

increases
The supply function is the relation between the quantity QS
of a good that producers plan to bring to the market and the
price P of the good.
A linear model for the supply function

P = aQS + b, a > 0, b > 0

Equilibrium price P0 and quantity Q0 : page 72

At the point of intersection the market is in equilibrium

because the quantity supplied exactly matches the quantity
demanded.
Example (page 75): The demand and supply functions of a
good are given by
P = −2QD + 50
1
P = QS + 25
2

(a) Determine the equilibrium price and quantity.

(b) Determine the effect on the market equilibrium if the
government decides to impose a fixed tax of $5 on each
good.
*Key terms page 80
*HW: Exercise 1.5*, page 82-, problems 4-5-6
Introduction to algebra Graph of Linear equations Linear system Supply and demand analysis Transposition of formulas Nati

Transpose

P = an expression involving Q
into
Q = an expression involving P

*HW: Exercise 1.6*, page 92, problems 1, 3, 4

Phan Quang Sang Chapter 1. Linear equations

National income
We will set up simple models of the national economy which
allows to determine equilibrium levels of income.

We assume that the economy is divided into two sectors,

households and firms.

The income of households is used up in consumption and

savings. We denote C the consumption function, S the
savings, and Y the income:

Y =C +S
We assume that

Remark b > 0, 0 < a < 1. The intercept b is known as

autonomous consumption (when Y = 0).
The slope a is called the marginal propensity to consume
(MPC).
We have also
S = (1 − a)Y − b

The slope 1 − a is called the marginal propensity to save

(MPS).
The autonomous savings are equal to S = −b < 0 (when
Y = 0).
*Example page 94
The simplest model of the national economy which shows the
circular flow of income and expenditure

If the economy is in equilibrium, the flow of income and

expenditure balance so that
Y = C + I,
where I is the Investment.
Example, page 97: Find the equilibrium level of income and
consumption if the consumption function is

C = 0.6Y + 10

and planned investment I = 12.

Example, page 97: Find the equilibrium level of income and
consumption if the consumption function is

C = 0.6Y + 10

and planned investment I = 12.

Solution: since Y = C + I , C = 0.6Y + 10, I = 10 then
Y = 55, C = 43.
A more complicated model of national economy

For more realistic, we include government expenditure G ,

and taxation T in the previous model. Then

Y =C +I +G

We assume that government expenditure and investment are

planed with fixed values:

I = I ∗, G = G ∗

The income after (less) tax that households have to spend on

consumer goods is now

Yd := Y − T ,

called disposable income.

Hence
C = aYd + b.
In practice, T is often given in the forms

T = T ∗ , or T = tY for some proportion t, or T = tY + T ∗

Example, p.99: Given that G = 20, I = 35, C = 0.9Yd + 70,

T = 0.2Y + 25. Calculate the equilibrium level of national
income.
Hence
C = aYd + b.
In practice, T is often given in the forms

T = T ∗ , or T = tY for some proportion t, or T = tY + T ∗

Example, p.99: Given that G = 20, I = 35, C = 0.9Yd + 70,

T = 0.2Y + 25. Calculate the equilibrium level of national
income.

Solution: well remember that from theory

Y =C +I +G

Yd = Y − T
IS schedule, page 100

Y =C +I
C = aY + b
Now we assume that planned Investment I depends on rate of
interest r :
I = cr + d,
where c < 0, and d > 0.
We have a relationship between national income Y and
interest rate r :

(1 − a)Y = cr + b + d, or

(1 − a)Y − cr = b + d,
called the IS schedule. (Investment-Saving schedule, I = S)
LM schedule, page 101

The money market is said to be in equilibrium when the

money supply MS , matches the money demand MD

MS = MD .
LM schedule, page 101

The money market is said to be in equilibrium when the

money supply MS , matches the money demand MD

MS = MD .

How we can determine MS and MD .

LM schedule, page 101

The money market is said to be in equilibrium when the

money supply MS , matches the money demand MD

MS = MD .

How we can determine MS and MD .

Suppose that MS can be planed

MS = MS∗ ,

for some fixed value MS∗ , and

MD = L1 + L2 ,
where L1 denotes the aggregate transaction-precautionary
demand, L2 denotes the speculative demand for money.
We assume that
L1 = k1 Y , k1 > 0,
L2 = k2 r + k3 , k2 < 0, k3 > 0
So the total money demand is

M D = k1 Y + k2 r + k3

If the money market is in equilibrium then

MS = MD ⇔ MS∗ = k1 Y + k2 r + k3

This equation, relating national income Y and interest rate r

w.r.t. the money market is called the LM schedule.

Example: page 102

Key term: page 105

*HW: Exercise 1.7, page 105-106

 THANK YOU
FOR YOUR ATTENTION!