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Mathematics of Economics and Business

Book · January 2006

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2 authors:

Frank Werner Yuri N. Sotskov

Otto-von-Guericke-Universität Magdeburg United Institute Of Informatics Problems
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 PREFACE

Today, a firm understanding of mathematics is essential for any serious student of economics.
Students of economics need nowadays several important mathematical tools. These include
calculus for functions of one or several variables as well as a basic understanding of opti-
mization with and without constraints, e.g. linear programming plays an important role in
optimizing production programs. Linear algebra is used in economic theory and economet-
rics. Students in other areas of economics can benefit for instance from some knowledge
about differential and difference equations or mathematical problems arising in finance. The
more complex economics becomes, the more deep mathematics is required and used. To-
day economists consider mathematics as the most important tool of economics and business.
This book is not a book on mathematical economics, but a book on higher-level mathematics
for economists.

Experience shows that students who enter a university and specialize in economics, have
an enormous range of mathematical skills and aptitudes. Since mathematics is often a
requirement for specialist studies in economics, we felt a need to provide as much elementary
material as possible in order to give those students with weaker mathematical backgrounds
the chance to get started. Using this book might depend on the skills of readers and their
purposes. The book starts with very basic mathematical principles. Therefore, we have
included some material that covers several topics of mathematics in school (e.g. fractions,
powers, roots and logarithms in Chapter 1 or functions of a real variable in Chapter 3). So,
the reader can judge whether or not he (she) is sufficiently familiar with mathematics to be
able to skip some of the sections or chapters.

Studying mathematics is very difficult for most students of economics and business. However,
nowadays it is indeed necessary to know a lot of results of higher mathematics to understand
the current economic literature and to use modern economic tools in practical economics and
business. With this in mind, we wrote this book as simple as possible. On the other hand,
we presented the mathematical results strongly correct and complete as it is necessary in
mathematics. The material is appropriately ordered according to mathematical requirements
(while courses e.g. in macroeconomics often start with advanced topics such as constrained
optimization for functions of several variables). On the one hand, previous results are used
by later results in the text. On the other hand, current results in a chapter make clear why
previous results were included into the book.

The book is written for non-mathematicians (or better to say, for those people who only want
to use mathematical tools in their practice). It intends to support the students in learning
the basic mathematical methods that have become indispensable for a proper understanding
of the current economic literature. Therefore, the book contains a lot of worked examples
and economic applications. It also contains many illustrations and figures to simplify the
used mathematical techniques and show how mathematical results may be used in economics
and business. Some of these examples have been taken from former examinations (at the
Otto-von-Guericke-University of Magdeburg), and many of the exercises given at the end of
each chapter have been used in the tutorials for a long time. In this book, we do not show
how the mathematical results have been obtained and proved, but we show how they may

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be used in real life economics and business. Therefore, proofs of theorems have been skipped
with a few exceptions so that the volume of the book does not exceed 500 pages, but in
spite of the rather small volume, the book includes the main mathematical subjects useful
for practical economics and an efficient business.

The book should serve not only as a textbook for a course on mathematical methods for
students, but also as a reference book for business people who need to use higher-level
mathematics to increase their profit (of course, one will not increase the profit by solving e.g.
a differential equation, but one can understand why somebody has increased the profit after
modelling a real process and finding a solution for it). One of the purposes of this book is to
introduce the reader to the most important mathematical methods used in current economic
literature. We also provide an introduction to the close relationship between mathematical
methods and problems arising in economy. However, we have included only such economic
applications which do not required an advanced knowledge in economic disciplines since
mathematics is usually taught in the first year of the studies at the university.

The reader of this book needs only knowledge of elementary mathematics from the secondary
school to understand and use the results of the book, i.e. the material of the book is self-
sufficient for understanding. For a deeper understanding of higher mathematics used in
economics, we also propose a small selection of some German and English textbooks and
lecture materials [1 - 20] listed in the literature section at the end of the book. Some of
these books have been written in a comparable mathematical level (e.g. references [12,
16, 17]) while others have been written in a more elementary style (e.g. [8, 9, 11, 14]).
The booklets [18, 20] contain most important definitions, theorems of a one-year lecture in
mathematics for economists in a compact form and they sketch some basic algorithms taught
in the mathematics classes for economists at the Otto-von-Guericke University of Magdeburg
during the last decades. References [2] and [5] are well-known handbooks of mathematics
for students. Reference [19] is a standard textbook for intermediate microeconomics, where
various economic applications of mathematics can be found.

The book is based on a two-semester course with four hours of lectures per week which
the first author has given at the Otto-von-Guericke-University of Magdeburg within the last
ten years. The authors are indebted to many people in the writing of the book. First of
all, the authors would like to thank Dr. Iris Paasche who was responsible for the tutorials
from the beginning of this course in Magdeburg. She contributed with many suggestions for
including exercises and for improvements of the contents of the book and last but not least,
she prepared the answers to the exercises. Moreover, the authors are grateful to Dr. Günther
Schulz for his support and valuable suggestions which were based on his rich experience with
teaching students of economics and management at the Otto-von-Guericke-University of
Magdeburg for more than 20 years. The authors are grateful to both colleagues for their
contributions.

The authors also thank Ms. Natalja Leshchenko from the United Institute of Informat-
ics Problems of the National Academy of Sciences of Belarus for proofreading the whole
manuscript (and checking carefully the examples) and Mr. Georgij Andreev from the same
institute for preparing a substantial part of the figures. Moreover, many students of the inter-
national study program of Economics and Management at the Otto-von-Guericke-University

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 Magdeburg have read single chapters and contributed with useful suggestions, particularly
the students from the course starting in October 2002. In addition, the authors would like to
express their gratitude to the former Ph.D. students Dr. Nadezhda Sotskova and Dr. Volker
Lauff, who carefully prepared in early stages a part of the book formerly used as printed
manuscript in LATEX and who gave a lot of constructive suggestions for improvements.

Although both authors have to teach in English at the universities for many years and
although we have meanwhile more than 100 research papers written in English, we are nev-
ertheless not native speakers. So we apologize for all linguistic weaknesses (and hope that
there are not too many). Of course, for all remaining mathematical and stylistic mistakes
we overtake responsibility, and we will be grateful for all further comments and suggestions
for improvements by the readership to be included into future editions (email address for
correspondence: frank.werner@mathematik.uni-magdeburg.de). Furthermore, we are grate-
ful to Routledge for the pleasant cooperation during the preparation of this textbook. The
authors wish all readers success in studying mathematics.

We dedicate this book to our parents Hannelore Werner, Willi Werner, Maja N. Sotskova
and Nazar F. Sotskov.

Frank Werner and Yuri Sotskov

Magdeburg and Minsk, January 2005

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