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Basic tools of economics analysis

Before we deal with the main theme of ME, let us acquaint ourselves with basic tools often used in economic analysis. Functional relationships Concept of slope Elementary differential calculus

Functional relationships
Any economic quantity, value or rate that varies on its own or due to change in its determents is an economic variable. For ex. Price and quantity demanded Price and quantity supplied Income and expenditure etc.

Dependent vs. Independent Variable


A dependent variable is one whose value depends on the value of other variables An independent variable is one whose value changes on its own, or is assumed to change due to certain exogenous factors- the factors outside the model. It may be controlled or uncontrolled variable. For ex. Demand of computer depends on its price

Endogenous Vs. Exogenous variable


An endogenous variable is one whose value is determined within the model An exogenous variable is one whose value is determined outside the model. For ex. Demand of computer depends on its price income of the consumer not inside the model

The function
A function is a mathematical technique of stating the relationship between any two or more variables having cause and effect relationship Bi- variate function Multi- variate function

Forms of function and solution


Linear q x = a bp x Non - linear Polynomial Quadratic function q = a + bL - cL
2 2 3

Cubic function q = a + bL + cL + dL Power function q = aL


b

Solve the equation by factoring method And by quadratic formula

y = x + x 12
2

Concept of slope
The rate of change in the dependent variable as a result of a change in the independent variable. For ex. Slope of a demand curve, TC curve etc.

Elementary differential calculus


Differential calculus provides a technique of measuring the marginal change in the dependent variable, say Y, due to a change in the independent variable, say, X when the change in X approaches zero.
y dy = lim dx x0 x

The measure of such a marginal change is called derivative.

Rules of differentiation
dy =0 y=k dx dy n = nkx n 1 y = kx dx dy = f / ( x) g / ( x) y = f ( x) g ( x) dx dy = f ( x).g / ( x) + g ( x). f / ( x) y = f ( x).g ( x) dx f ( x) dy g ( x). f / ( x) f ( x).g / ( x) = y= g ( x) dx [g ( x)]2 dy dy dt = . y = f (t ) and t = f ( x) dx dt dx

Assignment -2
dy find for the following values of y dx 2 3 1. ( x + 4 x)( x 5 x) 2. (4 x 3)
3 3

4x 7x + 3 3. 4 + 2x 4.(2 x 2 3 x + 5) 5
2

5. y = 3 + t

and t = 5 x

Thank you