ECON 213

ELEMENTS OF MATHS FOR

ECONOMISTS

Lecture 1– Nature of Mathematical

Economics

Lecturer: Kwame Adjei-Mantey

Contact Information: kadjei-mantey@ug.edu.gh
  Instructors for Econ 213:
 Kwame Adjei-Mantey
 Course Email Address
 Course Outline
 Other Announcements
 Dr. Monica Lambon-Quayefio
 Dr. Bernardin Senadza
 Course outline Econ 213 course outline 2017-18.docx

 Office Hours: Tuesdays, 2:30pm-4:30pm

 Interim Assessment (TBA)

Slide 2
 Lecture Objectives
Overview
 This lecture introduces students to approaches used to solve economic
problems. Specifically, the use of mathematical concepts will be
introduced to students in this lecture.
Objectives
 Understand the differences between mathematical and non-
mathematical economics
 Understand the differences between mathematical economics and
econometrics
 Understand economic models and the components of same

Slide 3
 Mathematical vs Nonmathematical
Economics
 Mathematical economics is not a distinct branch of economics
as is the case of public finance, international economics, or
health economics etc.
 It is an approach to economic analysis where mathematical
symbols are used in stating economic problems and known
mathematical theorems are employed to aid reasoning.
 Mathematical economics is also described to go beyond simple
geometry which presents the visual aspect of analysis. [Recall:
demand curve as drawn in a 2 dimensional plan]
 Mathematical economics as an approach does not differ from non
mathematical approach to analysing economics in any fundamental
way.
Slide 4
 Mathematical and Nonmathematical
Economics
 The purpose of any theoretical analysis is:
 to use the process of reasoning to derive conclusions or theorems from a
given set of assumptions or postulates….
 Irrespective of the approach used.
 The main difference between mathematical and non mathematical
economics is:
 in mathematical economics, the assumptions and conclusions are formally
stated in mathematical symbols and equations
 nonmathematical economics words and sentences
• Advantage: symbols are more convenient to use in deductive reasoning
than words and sentences.
 Symbols and equations are also more conducive to conciseness and
preciseness of statements.
 Mathematical and Nonmathematical
Economics
 In summary, the mathematical approach offers the following
advantages over nonmathematical approach to analysis:
 The ‘language’ ie. Symbols, equations etc. is more concise and
precise.
 The approach taps into the wealth of mathematical theorems that
exists for its analysis.
 The mathematical approach also strictly requires economists to
make their assumptions explicit at every stage of reasoning.
 This way, the analysts clearly states all assumptions;
 No room for unintentional adoption of unwanted implicit assumptions
 The approach also helps the analyst to treat the general n-variable
case. [upper hand over geometry….eg 2 commodity case in IC
analysis]
 Mathematical Economics vs
econometrics

Slide 7
 Mathematical Economics Versus
Econometrics
 Mathematical Economics is sometimes confused with a related
term called Econometrics.
 Econometrics is mainly concerned with the measurement of
economic data while mathematical economics is mainly
concerned with the application of mathematics to the purely
theoretical aspects of economic analysis
 little or no concern about statistical problems such as errors of
measurement of the variables under study.
 Mathematical Economics Versus
Econometrics
 This course focuses more on the application of mathematics to
deductive reasoning which deals primarily with theoretical rather
than empirical material.
 It should however be noted that theoretical and empirical analysis are
often mutually reinforcing.
 For example, theories can be tested against empirical data for validity
before they are applied with confidence.
 Meanwhile, statistical work needs economic theory as a guide and an
underpinning to determine the most relevant and fruitful direction
of research.
 Mathematical Economics Versus
Econometrics: Illustration
 A classic illustration of the complementary nature of theoretical and
empirical studies is found in the theory of the aggregate consumption
function.
 The theoretical work of Keynes on the consumption function led to the
statistical estimation of the propensity to consume.
 Statistical findings from Kuznets and Goldsmith regarding the relative long-
run constancy of the propensity to consume in turn stimulated the
refinement of the aggregate consumption theory by Friedman and others.
 In one sense, mathematical economics may be considered as the more basic
of the two.
 This is because, to have a meaningful statistical and econometric study, a
good theoretical framework usually based on mathematical formulation is
necessary.
 Economic models

Slide 11
 Economic Models
 Like any theory, economic theory is an abstraction from the real
world.
 The complexity of the real economy makes it impossible to
understand or study all the interrelationships at once.
 The practical thing to do therefore is to pick out what appeals to
our reason as the primary factors and the relationships relevant to
the problem we wish to study and focus our attention on such
factors or relationships alone – this is what an economic model
basically does.
 An economic model is a deliberately simplified analytical
framework used to enhance our understanding of the actual
economy.
 Components of a Mathematical Model
 An economic model is merely a theoretical framework.
 If it is a mathematical one, it will usually consist of a set of
equations designed to describe the structure of the model.
 Relevant mathematical operations and formulae can then be
applied to these equations to derive a set of conclusions which
follow logically from the assumptions stated.
 Variables, Constants and Parameters
 A variable is something whose magnitude can change ie.
Something that can take on different values.
 Examples of variables frequently used in economics include
price, revenue, cost, national income, consumption,
investment, imports, exports etc.
 Since each variable can assume various values, it must be
represented by a symbol instead of a specific number.
 For example: we may represent price by P, profit by
𝜋, revenue by R, cost by C and national income by Y..
 When we write P=3 or C= 8, we are keeping these variables at
specific values. (for the time)

Slide 14
 Variables, Constants and Parameters
 When properly constructed, an economic model can be solved to give us the solution
values of a certain set of variables such as the market clearing level of price or the profit
maximizing output level.

 Such variables whose values are provided within the model are known as endogenous
variables.

 Sometimes, the model may also contain certain variables that are assumed to be
determined by external forces outside the model whose values are accepted as given data .
These variables are called exogenous variables.

 It should be noted however that, a variable which is endogenous in one economic model
may be exogenous in another economic model.

 For example: In an analysis of the market determination of rice price (P), the variable P is
definitely endogenous. However, in the framework of a theory of consumer expenditure, P
would become an exogenous variable since P is instead a datum for the individual
consumer.
Slide 15
 Variables, Constants and Parameters
 Variables usually appear in combination with fixed numbers or constants as in the
expressions 9P or 0.2Y.
 A constant is defined as a magnitude that does not change. When a constant is
joined to a variable, it is called the coefficient of that variable.

 Sometimes, the coefficient may be symbolic rather than numerical. For instance
the symbol a can stand for a given constant and used in the expression such as αP
instead of 7P in a model in order to attain a higher level of generality.

 The symbol α is a special case- it is supposed to represent a constant but yet it is a

variable.

Slide 16
 Variables, Constants and Parameters
 Due to its special feature, it is given a distinctive name parametric constant or
simply a parameter.

 It must be emphasized that even though parameters can take on different values in
a model, they are treated as datum in the model . In this regard, parameters
resemble exogenous variables since they are both treated as givens in the model.

 Parametric constants are normally represented by symbols such as a, b, c or their

counterpart Greek alphabets: 𝛼, 𝛽 𝑎𝑛𝑑 𝛾

Slide 17
 Equations and Identities
 In economic applications, we may distinguish between three types of equations
namely:
 Definitional equations
 Behavioural equations
 Equilibrium equations

 A definitional equation sets up an identity between two alternate expressions

that have exactly the same meaning. For such an equation , the identical –equality
sign, ≡, is often employed in place of the = although that is also acceptable.

 Example: Total Profit is defined as the excess of total revenue (R) over total cost (
C). We can therefore express total profit as : 𝜋 ≡ 𝑅 − 𝐶

Slide 18
 Equations and Identities
 A behavioural equation specifies the manner in which a variable behaves in
response to changes in other variables.
 This may involve human behaviour ( eg. Aggregate consumption and how it
relates to national income) or non human behaviour ( eg. How total cost changes
with changes in output levels)
 Ex. C = a + bY; C = 40 + 25Q2

 Equilibrium or conditional equations: conditions are only relevant if the model

involves the notion of equilibrium. If it does, then the equilibrium condition is
an equation that describes the pre-requisite for attainment of equilibrium.

 Ex: quantity demanded = quantity supplied : 𝑄𝑑 =𝑄𝑠

 Intended Saving = Intended Investment : S= I

Slide 19