Introduction and the Role of Mathematics in Economics

Is Economics a Science?
Mathematics is for Describing Human Behavior in Economics

Is Economics a Science?

Etymology:

Adam Smith

The XIX Century

Is Economics a Science?

Physics:

Descriptive science

Galileo: How and How much

Economics:

Descriptive part Normative part

What ought to be: how things should be Assumptions about what is right

Deontological Teleological

Neville Keynes
Scope and Method of Political Economy

Is Economics a Science?

Physics:

Descriptive science

Galileo: How and How much

Economics:

Descriptive part Normative part

What ought to be: how things should be Assumptions about what is right

Deontological Teleological

Lionel Robbins
1932. An Essay on the Nature and Significance of Economic Science. The economist is not concerned with ends as such. He is concerned with the way in which the attainment of ends is limited. The ends may be noble or they may be base. They may be material or immaterial if ends can be so described. But if the attainment of one set of ends involves the sacrifice of others, then it has an economic aspect (Robbins, 1932, p. 25).

The Difference between Economics and Management

Economics The economist is not concerned with ends as such. He is concerned with the way in which the attainment of ends is limited. The ends may be noble or they may be base. They may be material or immaterial if ends can be so described. But if the attainment of one set of ends involves the sacrifice of others, then it has an economic aspect (Robbins, 1932, p. 25).

Management Ends:

Profit Share of consumers Prestige

The Role of Mathematics in Economics

Mathematics is for Describing Human Behavior in Economics

Case Behavior 1:

Case Behavior 2:
A student has 500 for her monthly expenditures

Cleanliness

Toothpaste, Soap, Dish cleaning, 1 T-shirt (20), 1 trousers (20), 1 pullover (20)

20 60 70

200
R o o m

Clothes

150
F o o d

150
Others

Entertainment 2*movie (30), 3*Shamrock (40)

52
VWLBook

30
Friends Happy B

How to manage the budget?

A Comparison

P(

) P(
1

)
2

=
x

P(
2 1 2 # Sheep

)=

Clothes: Movie:

31 21

Save 40 Save 15

Shamrock:
Food:

31

Save 25

150 140 Save 10

Similarities

Scarcity European lacks sheep, African lacks tobacco The student doesnt have enough money Allocation and Reallocation Two sticks less for one sheep One sheep less for two sticks The student tries to reallocate the goods acquired with money Satisfaction The European feels better with one sheep and two less sticks The African feels better with one sheep less but two sticks The student tries to preserve her level of satisfaction with small changes. She reduces just marginally the levels of consumption of some goods.

Decisions at the Margin and Satisfaction

Exchange at the Margin

The European has many tobacco sticks and is willing to give two sticks.

The African has some sheep and is willing to give one sheep.

Reallocation at the Margin

The student is willing to reduce to some extent the consumption of some goods for other uses of money.

Satisfaction

The European and the African try to increase their levels of satisfaction with a marginal exchange. The student tries to maintain her level of satisfaction with a marginal decrease of the consumption of some goods.

Decisions at the Margin and Mathematical Language (Exchange)

Exchange

Scarcity Allocation Max. Satisfaction

U(Eur)
U(Goods) U(B)

U(B) - U(A)
U(A)

* (B - A) U(B) - U(A) = * (B - A)
U(B) = U(A) + U(A) = U(B) -- A) (B

B-A

Sheep

Decisions at the Margin and Mathematical Language (Exchange)

A more general (and formal) approach

Given that U (the function of satisfaction) has a form (equation), what is the marginal increase in the satisfaction at any given point of U?

I.e. what is the form of the function for any point A?

U(A) = U(B) -- A) (B

is a tangent!

U(Eur) U(Goods) U(B)

U(B) - U(A)
U(A)

B-A

Sheep

Decisions at the Margin and Mathematical Language (Exchange)

is more than a tangent

U(A) = U(B) -- A) (B The process of decreasing the horizontal distance in order to find the right value of the tangent is represented by a limit. A

is the derivative of U
Decisions at the margin are represented by derivatives Calculus is the mathematical language of Economics

Lim
BA

U(B) - U(A) = (B - A)

= U

Limit when B tends to A of

Decisions at the Margin and Mathematical Language (Reallocation)

Scarcity (re)allocation max. satisfaction The reallocation of Entertainment

Let denote
x

= units of movie, y = units of party

y U1>U0 U2>U1 yk y1 xk (x1,y1) U0 x1 x U2

The Problem:
Given an initial allocation (x1,y1) for party and movie, find the set (x2,y2) that less decreases the current level of satisfaction.

U1

Decisions at the Margin and Mathematical Language (Reallocation)

The Problem:

To reallocate resources without changing the level of Satisfaction To make infinitesimal reallocations

The Strategy:

xU1 = yU1
y2

(x2,y2) y1

(x1,y1)
U1 x1 y1 x2

x1