Chapter 1: Preliminaries

Economics Calculus 1
The Nature of Mathematical Economics

Mathematical Economics: Uses symbols, equations,

mathematical operations

Literary Economics: Uses words, descriptions

Advantages:
1. More concise and precise
2. There is a wealth of mathematical theorems
available at your disposal.
3. Avoid unwanted implicit assumptions
4. n-variable cases are acceptable
 Economic Models
An economic model describes a complex phenomenon
using a simplified, often mathematical, framework.

Economic models use equations (made up of variables,

constants, and parameters) to describe the structure of
a model.
 Ingredients of a Mathematical Model

1. Variable – Value is varying; can be exogenous

(independent) or endogenous (dependent)
2. Constants – Fixed/set values
3. Parameters – Variables treated as constants

Example: Demand function: Qd = a – bP

Supply function: Qs = -c + dP
 Types of Equations
1. Definitional equations = States identities
Example: Profit = Total Revenue – Total Cost

1. Behavioral equations = Defines the manner in

which a variable behaves
Example: Y = 2x + 1; VC = Q2 – 1

3. Conditional equations
Example: QD = QS (equilibrium condition)
SET THEORY
 Sets and Elements
A set X is any collection of objects.
The objects are called the elements or
members of the set.

If x is an element of a set X, then we denote

this as x ÎX and is read as “ x is an element of
X ”. Otherwise, x Ï X and is read as “ x is not an
element of X ”.
 Set-Builder Notation
Well-defined sets are characterized by
stating a property of the elements of the set.
{ }
We denote this as X = x Î X | P(x) and is
read as “ X is defined as the set of all x such
that P about x is true”.

This notation is sometimes called the set-

builder notation.
 Example
Let A be the set of even numbers between 1
and 10, then A = {2,4,6,8,10} and in set-
builder notation, A = {2n | n = 1,2,3,4,5}.
 Special Sets and Set Equality
A universal set W is a fixed set of all elements
under consideration.
An empty set or null set Æ is a set containing no
elements.
A singleton {x} is a set containing only one
element.
Two sets A and B are said to be equal if and only
if they have the same elements.
A = B if and only if "x ÎA Û x ÎB
 Subsets
A subset A is a subset of a set X if and only if
all elements of A belong to X.

We denote this as A Í X and is read as “A is

contained in X” or “X contains A”.

A Í X if and only if x ÎA Þ x ÎX
Note that for any set A, A Í W.
 Subsets
Further note that:
• If Set A Í Set B and Set B Í Set A, then Set
A = Set B.
• The null or empty set is a subset of any set.
• Any set is a subset of itself.
 Exercise
Show that A = {2,3,4,5}is not a subset of
the set of all even numbers, denoted as B.
 Union
Let A and B be sets. The union of A and B,
denoted as A ∪ B, is the set of all elements
belonging to either A or B, that is:

A ∪ B = {x | x Î A or x ÎB}
 Intersection
Let A and B be sets. The intersection of A
and B, denoted as A ∪ B, is the set of all
elements common to both A and B, that is:

A ∪ B = {x | x Î A and x ÎB}

Two sets are

pairwise disjoint if:
A∪ B = Æ
 Exercise
Consider the sets A = {1,2,3,4,5} and
B = {2,3,6,7,8}. Find A ∪ B and A ∪ B.
 Set Difference
Let A and B be sets. The set difference of A
and B, denoted as A \ B, A ~ B , or A - B, is
the set of elements which belong to A but which
do not belong to B, that is:
A \ B = {x | x Î A and x ÏB}
 Complement
The complement of a set A, denoted as Ac or
~A, is the set of elements which belong to the
universal set W but does not belong to A, that is:

A = {x | x ÎW and x Ï A} = W \ A
c

or, in general, Ac = {x | x Ï A}.

 Exercise
Consider the sets: A = {1,2,3}and B = {1,4,9}.
Find A \ B.

Let W = {1,2,3,4,5,6,7,8,9,10} be our

universal set and A = {2,4,6,8,10}. Find Ac.
 Algebra of Sets I
Let A, B, and C be sets, then:

1. Commutative Property:
a. A∪ B = B∪ A
b. A∪ B = B∪ A

2. Associative Property:
a. A∪ (B∪ C ) = (A∪ B )∪ C
b. A ∪ (B∪ C ) = (A∪ B )∪ C
 Algebra of Sets II
3. Distributive Property:
a. A∪ (B∪ C) = (A∪ B)∪ (A∪ C)
b. A∪ (B∪ C) = (A∪ B)∪ (A∪ C)

4. De Morgan’s Law
a. (A ∪ B)c = Ac ∪ Bc
b. (A ∪ B)c = Ac ∪ Bc
 Exercise
Let W = {1,2,3,4,5,6,7,8,9,10} be our
universal set and consider the sets:
A = {1,2,3}, B = {1,4,9}, and C = {4,5,6}.
Verify that:
1. A ∪ (B ∪ C ) = (A ∪ B )∪ C
2. A ∪ (B ∪ C ) = (A∪ B )∪ (A∪ C )
3. (A ∪ B )c = Ac ∪ Bc
 Exercise
A survey of students at a film school revealed the following
information: 51 like animated films, 49 like comedy films, 60
like dramatic films, 34 like animated and comedy films, 32
like comedy and dramatic films, 36 like animated and
dramatic films, 24 like all three types, and 1 does not like any
of the three types.

1. How many like only one of the three types of films?

2. How many like animated and comedy but not dramatic?
3. How many like either animated, dramatic or comedy?
4. How many like dramatic and comedy?
5. How many students were surveyed?
THE NUMBER SYSTEM
 ( )
Integers ∪ Rational Nos. ∪( ) Irrational Nos. ( ∪ ')

Terminating
Positive natural decimal numbers Numbers like p and
numbers: like 0.3 even 2 whose
1, 2, 3, … decimals do not
Non-terminating follow a pattern and
decimal numbers
0 extend indefinitely
like 0.33333…

Negative Numbers that can

natural be expressed in the
numbers: form p/q, where p
-1, -2, -3, … and q are integers
and p is not equal
to zero
 Real Numbers
The set of real numbers ∪ is the union of the
set of rational numbers and the set of irrational
numbers, that is:

∪ =∪ ∪ ∪ '
We define the subsets: ∪ + as the set of
nonnegative real numbers, and ∪ as the set of
++
positive real numbers.
 Absolute Value
If x is any real number, the absolute value
of x is a nonnegative real number denoted
by | x | and is defined as:
 Exercise
Evaluate the following:
1. | -3|
2. | 3- 4 | + |8 - 2 |
3. - |8 - 20 | + | 3- 6 |
4. |8 -10 | - | -5- (-5) |
æ - | 240 | ö æ | 3- 9 | ö
5. ç
è |15 | ÷ø çè | 5 - 8 | ÷ø
Properties of the Absolute Value
Let x, y Î∪ , then:

1. | x |= a Û x = ±a
2. If y ³ 0 , then | x |£ y Û - y £ x £ y
3. | xy |=| x || y |
4. | -x |=| x |
 Exercise
Solve for x from the following:
1. | 2x - 5|= 3
2. | x - 5|< 2
3. 7 | 2x - 2 | -3 = 53
4. x- | 2x -1|= 7
 Triangle Inequality
Let x, y Î∪ , then | x + y | £ | x | + | y |.
 Exercise
Consider the real numbers: 3.12 and -2.89.
Validate the Triangle Inequality.
 Interval
Let a,b Î∪ . Then we call the set of numbers
that lie between a and b an interval.

We call a and b the boundary (endpoints)

of an interval.
 Interval
An open interval between a and b is defined as an
interval that does not contain its boundary
(endpoints), that is:

(a,b) = {x Î∪ | a < x < b}

A closed interval between a and b is defined as
an interval that does contain its boundary
(endpoints), that is:

[a,b] = {x Î∪ | a £ x £ b}
 Neighborhood
Let e denote a small positive real number. Then,
the neighborhood around the number a is defined
to be the interval I e (a) = {x Î∪ | | x - a |< e }.

From property 2 of the absolute value, this implies

that a - e < x < a + e or (a - e ,a + e ). That is, for any
, x ÎIe (a) a - e or + e close to a.
< x <isavery
Relations and Functions
 Ordered Pair
An ordered pair (a, b) is an ordered list consisting
of two objects a and b.

This definition implies that for any two ordered

pairs: (a, b) and (c, d), we have (a, b) =Û
(c, d) a = c
and b = d. Also, (a, b) =Û (b, a) a = b and b = a.

In general, an ordered n-tuple is an ordered list of n

elements (a1,…, an).
 Cartesian Product
Let A and B be sets. The set of all ordered pairs (a,
b) such that a Î A and b ÎB is called the
Cartesian Product and is defined by:

A ´ B = {(a,b) | a Î A and b ÎB}

In general, if A1, …, An are sets, then the Cartesian
product is defined by:
n

Õ A = {(a ,..., a ) | a Î A }
i=1
i 1 n i i
 Cartesian Plane
2
The Cartesian Plane ∪ is
a set of ordered pairs of
real numbers such that:
∪ = {(x, y) | x, y Î∪ }
2

n
The Cartesian Space ∪ is
a set of ordered n-tuples of
real numbers such that:

∪ = {(a1 ,...,an ) | ai Î∪ }
n
 Relations
Let A and B be sets. A binary relation or, simply,
a relation from A to B, denoted as aRb, is a
subset of A ´ B, that is: aRb Í A ´ B.
Example: Let A = {Manila, Kuala Lumpur, Seoul,
Beijing, Tokyo} and B = {South Korea, Japan,
Philippines, Malaysia, China}. Then the relation
aRb = {(Manila, Philippines), (Kuala Lumpur,
Malaysia), (Seoul, South Korea), (Beijing, China),
(Tokyo, Japan)} expresses “is the capital of”.
 Functions
Let X and Y be two sets. A function f from X to Y
is a relation from X to Y with the property that for
each x Î X, there exists a single element
y ÎY. We denote this as f : X ® Y and is read
as “f is a function from X to Y” or “f maps X to Y”.

In other words, a function f is a rule that assigns

each element x in a set X to one and only one
element y in a set Y.
 Functions
We call the set X as the domain of f and the set
Y as the codomain of f.

We refer to y as the image of x under f , and

write y = f(x) and the set of all images of x under f
as the range of f, defined as:

f ( X ) = { f (x) | x Î X}Í Y
 Example
Let f be a function from A to B defined by the
figure below. Then the image of a Î A under f
is s; that is, f(a) = s and the range of f is f(A) =
{r, s, u}. Note that f ( A) Í B .
 Exercise
State whether or not each figure defines a
function from A = {a, b, c} to B = {x, y, z}.
 Exercise
Find the domain and range of the following functions:
1
1. y = f (x) =
(x + 1)2
1
2. y = f (x) =
x
1
3. y = g(x) =
x -1

4. y = f (x) = 1- x 2
 Graph of a Function (of One Variable)
Let f be a real-valued function with domain D in ∪ . The
set of all ordered pairs (x, y) for all x in D and y = f (x) is
called the graph of f.
Example: Sketch the graph of y = f (x) = x 2 with domain
D = {x Î∪ | -3 £ x £ 3}
 Exercise
Sketch the graphs of:

1. y = f (x) = 1- x 2
1
2. y = f (x) =
x
3.

4.
 Real-Valued Function
A function is a real-valued function if the
function f maps an arbitrary set X to the set
of real numbers ∪ , that is:

f :X ®∪
 Example
Consider the linear function defined as
follows: f (x) = a + b x where a , b , x Î∪ and a
is called the intercept and b is called the
slope. The linear function maps the set of
real numbers to itself and, hence, can be
written as f : ∪ ® ∪ . Note that the linear
function is said to be upward sloping if b > 0 ,
downward sloping if b < 0 , and constant if
b = 0.
 Vertical Line Test
To check if a mapping f : ∪ ® ∪ is a function,
we do the vertical line test: we draw vertical
lines at any part of the graph of f. If every line
crosses the graph of f exactly at one point, then
f is indeed a function.
 Example
Consider the linear function: f (x) = a + b x
 Even and Odd Functions
An even function is symmetric with respect to the y-
axis. That is, f is an even function if, for every x in the
domain of f, f (-x) = f (x).

An odd function is one that is symmetric with respect

to the origin, i.e. f is an odd function if, for every x in
the domain of f, f (-x) = -f (x).
 Example
The function y = f (x) = x2 is an even function.
The function y = f (x) = x3 is an odd function.
 Composite Functions
If f is a function from X to Y and g is a
function from Y to Z, their composition is the
function from X to Z denoted as or g(f (x))
which we call a composite function.
 Exercise
Let f (x) = 2x +1 and g(x) = x .
2

Solve for g( f (x)) and f (g(x)).

Polynomial and Rational Functions
Polynomial Functions:
• Defined as: y = f (x) = an x n + an-1x n-1 + ...+ a1x + a0 where n
is called the degree of f

Constant Functions:
• Defined as: y = f (x) = a0
Polynomial and Rational Functions
Linear Functions:
• Defined as: y = f (x) = a1x + a0 . It is customary to write the
linear function as y = mx + b.
1 1
Example: Sketch the graph of y = f (x) = x - .
2 2

Slope of the non-vertical

line:
Dy 0 - (-0.5) 1
m= = =
Dx 1- 0 2
 To form the equation of a line:

Form Needed Information Equation

Slope-intercept Slope: m y = mx + b
form y-intercept: b

Point-slope form
Point: (x1, y1) y = m(x - x1 ) + y1
Slope: m

y2 - y1
Point: (x1, y1) y= (x - x1 ) + y1
Two-point form x2 - x1
Point: (x2, y2)
 Examples of Linear Functions
Linear Cost Functions

• The cost C of producing a quantity x of a product consists of a

fixed cost (FC) and a variable cost (VC). Thus,
C(x) = FC +VC(x)
If the cost of producing one unit is c, then:
C(x) = FC + cx
Thus, the fixed cost FC is the vertical intercept while the unit
cost c is the slope.
 Examples of Linear Functions
Breakeven Analysis

• A small manufacturing firm sells all its output q at a given

market price p. Total revenue TR is then given by: TR = pq,
and the firm’s total cost function is: TC = FC + cq .

The profit function is also linear in q:

p (q) = TR - TC
p (q) = pq - (FC + cq)
p (q) = ( p - c)q + FC
Examples of Linear Functions
The breakeven point is attained when total revenue equals
total cost or where p (q) = 0. Denoting by q* the breakeven
output, we have:
p (q*) = ( p - c)q *-FC = 0
Solving for q*, we get:
FC
q* =
p-c

The corresponding breakeven revenue is given by:

p(FC)
TR* = pq* =
p-c
 Examples of Linear Functions
Budget Constraints
• A consumer purchases x units of good X and y units of good Y
whose prices are px and py, respectively. If her budget is B,
then the line represented by the equation
px x + p y y = B
is called a budget line or a budget constraint. We may rewrite
the budget line equation as:
px B
y=- x+
py py
which is now reminiscent of a linear function of the form
y = mx + b
 Exercise
A consumer with a budget of Php 1,000 purchases x units of
good X and y units of good Y whose prices are Php 10 and
Php 5, respectively.

1. What is the consumer’s budget constraint?

2. What is the slope of the budget line?
3. Interpret the slope obtained above.
Polynomial and Rational Functions
Quadratic Functions:
• Defined as: y = f (x) = a2 x 2 + a1x + a0 where a2 ¹ 0. Normally,
the quadratic function is written as: f (x) = ax 2 + bx + c.
The graph of the quadratic function is called a parabola
which opens downward when a < 0 and upward when
a > 0.
 Exercise
Suppose a ball is thrown upward at a point 20 feet above
the ground with a velocity of 76 feet per second. The
distance h from the ground t seconds after being thrown is
given by:
h = s(t) = 20 + 76t -16t 2

1. How high is the ball after 1 second?

2. How long does it take for the ball to hit the ground?
Polynomial and Rational Functions
Cubic Functions:
• Defined as: y = f (x) = a3x 3 + a2 x 2 + a1x + a0 where a3 ¹ 0

Generally, a polynomial of degree n has at most n – 1

turning points. .
 Example of Cubic Functions
Cubic Cost Function
• Consider the cubic polynomial function

y = f (x) = 0.6x - 3x + 6x +1
3 2

where y is the total cost (in thousand pesos) of producing

an output of x units (in thousands) of a commodity. It is
called a cost function, which is divided into the fixed cost
(i.e. 1) and the variable cost (i.e. 0.6x 3 - 3x 2 + 6x).
 Example of Cubic Functions
When output is zero, we
have y = f (0) = 1,
representing fixed cost. As
production increases, so
does the variable cost.
Initially, cost increases
rapidly and then slows down
as economies of scale set in.
Then production reaches a
level when bottlenecks start
to occur and cost rises at a
fast pace again.
Polynomial and Rational Functions
Rational Functions:
• Defined as a quotient of two polynomial functions, i.e. f is
a rational function if f (x) = g(x) / h(x) , where g and h are
polynomial functions
The domain of a rational function f (x) = g(x) / h(x) is the
set of real numbers except those values of x for which h(x)
= 0.
Every polynomial function is a rational function.
 Example of Rational Functions
Average Cost Function
• Consider the cost function stated previously:

y = f (x) = 0.6x3 - 3x 2 + 6x +1
For positive x, the average cost, AC(x), is defined as:

C(x) 0.6x 3 - 3x 2 + 6x +1
AC(x) = =
x x
Thus, if C(x) is a cubic polynomial function, then AC(x) is a
rational function that is not a polynomial.
 Power Functions
Power Functions:
• A function f is called a power function if it is given by the
rule f (x) = x a , where a is a constant. The number x is
called the base, and a is called the exponent.
Includes positive integral powers, such as x1 , x 2 , x 3 ,... ,
zero and negative integral powers, such as
-1 1 -2 1
x = 1, x = , x = 2 ,...
0

x x
1
and non-integral power functions, such as x 2 = x
 Exponential Functions
Exponential Functions:
• A function f is called an exponential function if it is given
by the rule f (x) = bx, b > 0,b ¹ 1 where b is called the
base and x is called the exponent. The natural domain of
an exponential function is the set of real numbers, while
its range is the set of positive real numbers.

Properties of the exponential function:

1. The graph passes through (0, 1).
2. If 0 < b < 1, then bx decreases to zero as x moves from left
to right but does not touch the x-axis.
 Exponential Functions
3. If b > 1, then bx increases as x moves from left to right,
but decreases to zero as x moves from right to left;
however, it does not touch the x-axis.
 Exponential Functions
The natural exponential function e:

• When the base of the exponential function is the number e, we

write: y = f (x) = ex = exp(x).

• To get an idea of what the number e is, we look at the function:

x
æ 1ö
f (x) = ç 1+ ÷
è xø
The following table and graph of f shows that as x increases,
f (x) increases by smaller and smaller amounts and appears to
approach 2.718 to 2.719. As x increases to infinity, f (x)
approaches a certain number.
Exponential Functions
 Exponential Functions
Discrete and continuous growth:
nt
æ rö
• Discrete growth: P(t) = P0 ç 1+ ÷
è nø
• Continuous growth:
rt
æ rö
nt
æ 1 ö
( n/r )(rt )
éæ 1 ö
n/r
ù
P(t) = P0 ç 1+ ÷ = P0 ç 1+ = P0 êç 1+ ú
è nø è n / r ÷ø êë è n / r ÷ø
úû

As n goes to infinity, the expression inside the square bracket

approaches e. Hence, we have:

P(t) = P0ert
 Example
Say P0 = P(0) = 1 and t = 1. The pattern of discrete growth as the
frequency of compounding n increases is summarized in the table
below, which also contains continuous compounding at the end.

If one peso earns an interest of 100% per annum compounded

continuously, then its year-end value is e (or 2.72) pesos.
 Exercise
At the age of 40, a manager of a call center company wants
to invest an amount that is expected to grow continuously
at an annual rate of 5%. He wants to have Php 1,000,000 at
the age of 65 when he is mandated by law to retire. How
much should he invest?
 One-to-one Functions
A function f : X ® Y is one-to-one if it always
assigns different images to different elements of
X. That is, if " x, x' Î X ,

f (x) = f (x') Þ x = x'

In other words, f always maps distinct elements

in X to distinct elements in Y.
 Exercise
Consider the functions f : A ® B, f2 : B ® C,
1
f3 : C ® D, and f4 : D ® E defined by the figures
below. Evaluate whether each function is one-to-
one.
 Exercise
Show that the linear function is one-to-one.
 Inverse Functions
Let f be a function from X to Y. A function f -1 from
f(X) to X is called the inverse function of f, provided
that for every x Î∪ and y Î f ( X ) ,

y = f (x) Û x = f -1 ( y)
Theorem: A function f : X ® Y is invertible if and
only if f is a one-to-one function.
 Horizontal Line Test
To check if a function f : ∪ ® ∪ has an inverse
f -1, we do the horizontal line test: we draw
horizontal lines at any part of the graph of f. If
every line crosses the graph of f at exactly one
point, then f -1 exists.
 Example
Consider again the linear function f (x) = a + b x .
 Monotonic Functions
Let f be a function such that f : ∪ ® ∪ . The function
f is increasing if for any x, y Î∪ and x £ y , then
f (x) £ f ( y), and strictly increasing if the signs hold
at strict inequality.
The function f is decreasing if for any x, y Î∪ and
x £ y , then f (x) ³ f ( y) , and strictly decreasing if
the signs hold at strict inequality.
A function is monotonic if it is increasing or
decreasing throughout its domain.
 Monotonic Functions
Theorem: Strictly monotonic functions are one-
to-one functions and, hence, their inverse exists.
If the monotonic function is strictly increasing
(decreasing), then its inverse is also strictly
increasing (decreasing).
 Example
Consider the function y = f (x) = 2x +1.
-1 x -1
Its inverse is: y = f (x) = .
2

The points (0, 1) and (0.5, 2) lie

on the graph of f , while the
points (1, 0) and (2, 0.5) like on
the graph of f -1.
 Example: Demand Function
A market demand function Q(p) describes the
aggregate quantity Q that consumers willingly
demand at any given unit price p, assuming that all
other determinants of demand are held constant.

By the Law of Demand, the market demand

function is a strictly decreasing function such that:
for any p, p' Î∪ , p < p', then Q( p) > Q( p'); that is,
the lower the unit price, the higher the aggregate
demand.
 Example: Inverse Demand Function

Since the market demand function is a strictly

monotonic function, its inverse exists and it is called
the inverse demand function p(Q), which describes the
unit price the market is willing to purchase for any
given quantity.
 Exercise
Evaluate whether the linear function f (x) = a + b x
with b > 0 is strictly increasing or not.

Determine its inverse function.