The Theory and Practice of Economics 178703 Otto Reich

The Theory and Pracice of Economics178.703

Massey University, Auckland

Bacic Concepts Properties of Functions Types of Functions

Lecture 2 - Introduction to Functions

July 25, 2011

Todays Outline

The Theory and Practice of Economics 178703 Otto Reich

Bacic Concepts Properties of Functions Types of Functions

Bacic Concepts

Properties of Functions

Types of Functions

Preliminaries
We use functions to link endogenous and exogenous variables. Variables may be
qualitative, such as gender, employment status, political allegiance,.... or quanititative, as for instance, prices, national income, prots, ination, population, ....

The Theory and Practice of Economics 178703 Otto Reich

Bacic Concepts Properties of Functions Types of Functions

While the relationship between values of qualitative variables is not numerical, these variables are often recoded numerically. We have the following sets of numbers available:
The The The The set set set set of of of of Natural Numbers N , Integers I, Rational Numbers Q, Real Numbers R.

Due to analytical convenience, we will be mostly concerned with the set R.

Preliminaries
Instead of refering to R or a single number, we will occasionally refer to intervals, the set of all numbers between two endpoints:
closed interval: [1, 3] open interval: (1, 3) half-open or half-closed interval: [1, 3)

The Theory and Practice of Economics 178703 Otto Reich

Bacic Concepts Properties of Functions Types of Functions

A set is a collection of objects. A sets objects are referred to as elements. Example: S = {s| s is taking 178.703 in Sem 2, 2011} Xiaoying S, but Marco S. / We may also describe the set S by listing all its members S = {Xiaoying, Murray, . . .} instead of stating a condition for membership. [1, 3] may be described as I = {x R| 1 x 3}.

Graphing Univariate Functions

We can plot univariate functions on the basis of ordered pairs, (x, y ), in the Cartesian plane.
Horizontal axis (x-axis, abscissa), vertical axis (y-axis, ordinate), origin Plot the graph of the consumption function C (I ) = 200 + 0.8I .

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The consumption function is a linear function of the form y = a + bx (1)

where is a and b are referred to as intercept and (constant) slope.

The constant slope of a linear function f is dened by any two points of f : f (x2 ) f (x1 ) a + bx2 (a + bx1 ) = = b. x2 x1 x2 x1

Multivariate Functions
Multivariate functions have more than one argument:

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y = f (x1 , . . . , xn ). Example: A commonly used non-linear bivariate function in production or consumption theory is Q(K , L) = K L , which could be plotted with ordered triples (K , L, Q). Example: A linear trivariate consumption function is C (I , W , r ) = 200 + 0.8I + 0.01W 0.02r .

Properties of Functions Types of Functions

Limits and Continuity

The Left-Hand Limit of a fct. f (x) as its argument approaches some number a, written as
xa

The Theory and Practice of Economics 178703 Otto Reich

lim f (x),

Bacic Concepts Properties of Functions Types of Functions

exists and is equal to LL , if, for any , there exists a such that |f (x) LL | < whenever a < x < a. Example: Consider the function y = f (x) = x, x 0 x 1, x < 0

Let a = 0: LL = 1; for any , we can nd a such that |f (a ) LL | < |0 1 + 1| < .

Limits and Continuity

The Right-Hand Limit of a fct. f (x) as its argument approaches some number a, written as
xa+

The Theory and Practice of Economics 178703 Otto Reich

lim f (x),

Bacic Concepts Properties of Functions Types of Functions

exists and is equal to if, for any , there exists a such that |f (x) LR | < whenever a < x < a + . Example: Consider the function y = f (x) = x, x 0 x 1, x < 0

LR ,

Let a = 0: LR = 0; for any , we can nd a such that |f (a + ) LR | < |0 + 0| < .

Limits and Continuity

When LL = LR , we can write
xa xa xa

The Theory and Practice of Economics 178703 Otto Reich

lim f (x) = lim f (x) = lim+ f (x).

Bacic Concepts Properties of Functions Types of Functions

Example: Note that in the previous example LL = LR . The limit of a fct. f may be positive or negative innity, that is, the fct. may increase or decrease without bound:
xa

lim f (x) = +

if N > 0, a > 0 so that f (x) > N whenever a < x < a + . Example: y = f (x) = 1/x 2 , consider x = a: f (a + ) = f (0 + ) = f (0 ) = 1 1 >N< . 2 N 1 2

Limits and Continuity

Example: continued lim f (x) = lim+
x0

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x0+

1 = + x2

Bacic Concepts Properties of Functions Types of Functions

1 lim f (x) = lim 2 = + x0 x x0

f (x) = 1/x 2 has a vertical asymptote at x = 0.

For a fct. decreasing without bound, we have

xa

lim f (x) =

if N < 0, a > 0 so that f (x) < N whenever a < x < a + . Limits are useful in investigating continuity of a function.

Limits and Continuity

Loosely speaking a function f is continuous if it has no breaks or jumps. A fct. f is continuous at x = a, where a X , if LL and LR exist at x = a and are equal,
xa

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lim f (x) = lim f (x) = lim+ f (x),

xa xa

and the limit as x a equals the value of the function at that point lim f (x) = f (a).
xa

What can go wrong?

break: limits equal and existent but limxa f (x) = f (a). jump: limits exist but not equal vertical asymptote: limits exist and equal but f not dened at a. Graphically illustrate....

Increasing, Decreasing, and Monotonic Functions

For a function y = f (x) and any x2 > x1 :
f f f f is is is is increasing if f (x2 ) f (x1 ). strictly increasing if f (x2 ) > f (x1 ). decreasing if f (x2 ) f (x1 ). strictly decreasing if f (x2 ) < f (x1 ).

The Theory and Practice of Economics 178703 Otto Reich

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Graphically illustrate.... A function is

monotonic if it is increasing or decreasing. strictly monotonic if it is strictly increasing or strictly decreasing. non-monotonic if it is stricly increasing over some interval and strictly decreasing over some other interval.

Graphically illustrate.... Exercise: Specify functions y = f (x) with the above properties.

One-to-One Function
Strictly monotonic functions are one-to-one functions: A function f is one-to-one if for any x1 , x2 , f (x1 ) = f (x2 ) x1 = x2 . Any one-to-one function y = f (x) has an inverse function y = f 1 (x). Example: y = 1 + 3x 1 1 x = + y 3 3 and interchanging variables 1 1 y = f 1 (x) = + x. 3 3 For a fct f and its inverse f 1 , we have f (f 1 (x)) = x and f 1 (f (x)) = x

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One-to-One Function
The expression f (f 1 (x)) is an example of a composite function; a function whose argument is a function.
f 1 is referred to as the inside function h(x). f is referred to as the outside function g ().

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Bacic Concepts Properties of Functions Types of Functions

More generally, we write y = g (h(x)) for a composite function. Example: f (f 1 (x)) = 1 + 3 1 1 + x = 1 + x 1 = x. 3 3

Plotting an inverse function: Reection across 45 degree line; (a, b) coordinates become (b, a) coordinates.

Extreme Values of Functions

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Extreme values of a function within some interval

global maximum - largest value over entire domain global minimum - smalles value over entire domain local maximum - largest value within small interval local minimum - smallest value within small interval

Bacic Concepts Properties of Functions Types of Functions

Graphically illustrate.... Monotonic functions on a closed interval have a global max and min at the endpoints. A continuous function that is non-monotonic over an interval I has at least one extreme value on I .

Average Rate of Change of f

The average rate of change of y = f (x) over [x1 , x2 ] is y f (x2 ) f (x1 ) = . x x2 x1 Example: C = 200 + 0.8I , [100, 200] C 200 + 0.8 200 [200 + 0.8 100] = = 0.8 I 200 100 Exercise: Show that the average rate of change of a linear function is constant and equal to its slope. Example: y = (1/2)x 2 , [0, 2] : [0, 4] : y 20 = =1 x 20 y 80 = =2 x 40

The Theory and Practice of Economics 178703 Otto Reich

Bacic Concepts Properties of Functions Types of Functions

Average Rate of Change of f

We can depict the average rate of change using the secant line; the straight line connecting the points on the graph of f which correspond to the endpoints of the interval. Graphically illustrate... Any (x , y ) on the secant line satises (y y1 ) = f (x2 ) f (x1 ) (x x1 ). x2 x1

The Theory and Practice of Economics 178703 Otto Reich

Bacic Concepts Properties of Functions Types of Functions

Example: continued (x1 , y1 ) = (0, 0) [0, 2] : y = [0, 4] : y = f (x2 ) 2 x = x =x x2 2 f (x2 ) 8 x = x = 2x x2 4

Concavity and Convexity of a Function

Applications:
Diminshing marginal utility of consumption Increasing marginal cost Decreasing marginal product of capital

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Bacic Concepts Properties of Functions Types of Functions

Concavity or Convexity of a function f is reected in the shape of its graph. The secant lines of a strictly concave function lie entirely below its graph. The secant lines of a strictly convex function lie entirely above its graph. Remark: The property of strict concavity is consistent with the function being strictly increasing, strictly decreasing or non-monotonic.

Concavity and Convexity of a Function

f is strictly concave on an interval I , if for any x1 , x2 I , x1 = x2 , and (0, 1) f (x1 + (1 )x2 ) > f (x1 ) + (1 )f (x2 ). Graphically illustrate... f is strictly convex on an interval I , if for any x1 , x2 I , x1 = x2 , and (0, 1) f (x1 + (1 )x2 ) < f (x1 ) + (1 )f (x2 ). Example: y = f (x) = x 2 , [0, 2]. For any (0, 1) f (0+(1)2) = 4(1)2 < 4(1) = 0+(1)f (x2 ) because (0, 1). Exercise: Show that the function y = f (x) is strictly convex using the above denition. Denition of Concavity and Convexity: Replace strict with weak inequality. Allows for linear segments of f .

The Theory and Practice of Economics 178703 Otto Reich

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Necessary and Sucient Condition

The notion of necessary and sucient conditions will pop up repeatedly in the context of logical reasoning. Let P and Q be two statements. The statement PQ is read if P then Q, or P implies Q, or P only if Q. We say that Q is a necessary condition for P, or alternatively, that P is a sucient condition for Q. Example:
Let P be the statement x is a NZ falcon, and let Q be the statement x is a bird of prey. The statement P Q is true.

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The converse of the statement P Q, is the statement Q P. Example: continued. Q P is not true.

Necessary and Sucient Condition

The contrapositive of statement P Q is the statement Q P. where Q is the negation of Q. Example: continued. Q P is true. The contrapositive of a statemtent always has the same truth value as the original statement. Implications can run in both directions: Instead of P Q and Q P we write P Q, which is read P if and only if Q, P is equivalent to Q, or P is necessary and sucient for Q. Example: continued. P Q is not true.

The Theory and Practice of Economics 178703 Otto Reich

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Necessary and Sucient Condition

Denitions come in the form of an equivalence statement. Example: The denition of a concave function is f is concave f (x1 + (1 )x2 ) f (x1 ) + (1 )f (x2 ) [0, 1]. Exercise: Consider the following statement f is strictly increasing f is strictly monotonic Determine its truth value.

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Power Functions
Power Function: y = f (x) = kx p , where k and p are constants, and p is the exponent. The parameters k and p determine the shape of the graph of f . Example:
For k > 0, p 2 and p even, the graph of f is a parabola (U-shaped). For k < 0, p 2 and p even, the graph of f is an inverted U. For k > 0, p < 0, p I , the graph is hyperbolic with a vertical asymptote at x = 0.

The Theory and Practice of Economics 178703 Otto Reich

Bacic Concepts Properties of Functions Types of Functions

Exercise: Consider the power function for dierent values of k and p and determine whether the graph is strictly increasing/decreasing, strictly concave/convex, monotonic.

Rules of Exponents

The Theory and Practice of Economics 178703 Otto Reich

x0 = 1 x1 = x 1 p x = xp n m/n x = xm x a x b = x a+b xa = x ab xb a b (x ) = x ab x a y a = (xy )a xa x a = ya y

Bacic Concepts Properties of Functions Types of Functions

Polynomial Functions
Polynomial Function: y = f (x) = a0 + a1 x + a2 x 2 + . . . + dn x n ,

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ai R and the exponents are positive integers. Degree of polynomial is determined by the highest exponent (polynomial of degree n). Example: linear, quadratic, and cubic functions are polynomials of degree 1, 2 and 3. Remark: The roots of a polynomial satisfy f (x) = 0. A polynomial of degree n has at most n distinct roots, and its graph at most n 1 bends. Exercise: Solve for the roots of the quadratic function y = f (x) = a + bx + cx 2 in completing the square.

Properties of Functions Types of Functions

Exponential Functions
Exponential Function: y = f (x) = kbx , where k is a constant, b > 0 is referred to as the base, and the argument of f is the exponent. We have f (0) = 0 sign(f (x)) = sign(k) b>1:
x

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lim f (x) = 0

1/bx = (1/b)x is a reection of bx across the y -axis. b (0, 1) :

x

lim f (x) = 0