MATHEMATICAL ECONOMICS

WITH APPLICATION

Nik Hashim Nik Mustapha

Program of Economics
School of Social and Economic Development
University Malaysia Terengganu
21030 Kuala Terengganu
 CONTENTS
CHAPTER 1

INTRODUCTION TO MATHEMATICAL ECONOMICS 1

1.1 The relevance of Mathematical Economics 1

1.2 Empirical Aspect of Mathematical Economics 2
1.3 Relations and Functions 3
1.4 Mathematical Functions Used in Economics 4
1.5 Regression Estimate of Actual versus Classified Data 4

CHAPTER 2

REVISION OF BASIC MATHEMATICAL METHODS 6

2.1 Exponents 6
2.2 Polynomials 7
2.3 Linear and Quadratic Equations 8
2.4 Solving Simultaneous Equations 11
2.5 Functions 12
2.6 Graphs, Slopes and Intercepts 12
2.7 Identifying Functions and Equations 13

CHAPTER 3

EQUATIONS AND GRAPHS

IN MICROECONOMICS 14

3.1 Demand and Supply 14

3.2 Production Theory 17
3.2.1 Production Function with One Input 17
3.2.2 Isocost Line 18
3.2.3 Isoquant Curve 19
3.3 Production Possibility Curve 21
3.4 Estimate of PPC from Empirical Data 24

CHAPTER 4

UNDERSTANDING EQUATIONS AND GRAPHS

IN MACROECONOMICS 26

4.1 Basic Macroeconomic Model 26

4.2 Equilibrium Output for a Close Economy 27
4.2.1 Autonomous Spending and the Multiplier 27
4.2.2 Autonomous Consumption Spending 28
4.3 Understanding IS and LM curves 31
4.3.1 Commodity Market Equilibrium 31
4.3.2 Financial Market Equilibrium 32
4.4 Equilibrium in Commodity and Financial Market 33

CHAPTER 5

DIFFERENTIATION, EXTREMA AND OPTIMIZATION

IN SINGLE INPUT-OUTPUT RELATIONSHIP 37

5.1 Limits 37
5.2 Rules of Differentiation 38
5.2.1 Derivative of a Constant 38
5.2.2 Derivative of a Linear Function 38
5.2.3 Derivative of Power Function 39
5.2.4 Derivation of Product functions 39
5.2.5 Derivation of the Quotient Function 40
5.2.6 Derivative of Generalized Power Function 40
5.2.7 Other Differentiation Examples 41
5.3 Relative Extrema 42
5.4 Marginal Concepts in Economics 43
5.5 Optimization 49

CHAPTER 6

DIFFERENTIATION, EXTREMA AND OPTIMIZATION OF

SEVERAL OUTPUT-INPUT RELATIONSHIPS 52

6.1 Partial Derivatives of Several Variables 52

6.1.1 Product Rule 52
6.1.2 Quotient Rule 53
6.1.3 Generalized Power Function Rule 53
6.2 Second-Order Partial Derivatives 54
6.3 Constrained Optimization with Lagrange Multipliers 59
6.3.1 Constrained Maximization Problem 60
6.3.2 Constrained Minimization Problem 61
6.4 Graphical Solution using Economic Principle 62
6.5 Constrained Maximization with CES Production Function 65

CHAPTER 7

USE OF EXPONENTIAL AND LOGARITHMIC FUNCTIONS

IN ECONOMICS 67

7.1 Exponential Functions 67

7.2 Logarithmic Functions 68
7.3 Natural Logarithmic Functions 70
7.4 Application of Exponential and Logarithmic Functions 71
7.5 Differentiation of Exponential and Logarithmic Functions 74
7.6 Optimum Forest Rotation 76

CHAPTER 8

INTEGRAL CALCULUS AND ITS USE IN ECONOMICS 78

8.1 Indefinite Integral 78

8.2 Definite Integral 82
8.3 Properties of Definite Integrals 83
8.4 Consumers’ Surplus 84
8.5 Producers’ Surplus 86
CHAPTER 9

MATRIX ALGEBRA AND ITS APPLICATION IN ECONOMICS 88

9.1 Definitions of a Matrix 88

9.2 Addition of Matrices 88
9.3 Subtraction of Matrices 89
9.3 Matrix Multiplication 90
9.5 Applications of Matrix System 91
9.6 Using System of Linear Equation in Economics 92

CHAPTER 10

SPECIAL TOPICS IN MATRIX FOR ECONOMISTS AND

THE RELATED DISCIPLINES 98

10.1 Jacobian Determinant 98

10.2 Hessian Matrix 99
10.3 Application of Hessian Matrix 101
10.3.1 Use of Hessian on Unconstrained Profit Maximization 101
10.3.2 Use of Hessian on Constrained Profit Maximization 102
10.3.3 Use of Hessian on Constrained Cost Minimization 104
10.4 Input-Output Analysis for a Simple Economy 105
10.4.1 Technical Coefficient Matrix 106
10.4.2 Solution to total output Using Matrix 108

CHAPTER 11

OPTIMAL CONTROL THEORY AND ITS APPLICATION

IN ECONOMICS 112
11.1 Solving Optimal Control Problem 113
11.2 Intertemporal Resource Use and Discount Rate 114
11.3 Intergenerational Distribution, Sustainability and Discount Rate 117
11.4 Intertemporal Fisheries Based on Clark’s Model 119
11.5 Intertemporal Fisheries Management with Application 121
11.6 Simulation of Essential Fisheries Policy Variables 122
REFERENCES 127
INDEX