Department of Distance and Continuing Education

University of Delhi
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B.A. (Hons.) Political

B.A.(Programme) Major Science
Paper-I
DSC-1 (A/B)
Semester-I
Course Credits-4
Course Credit-4
BASIC MATHEMATICS FOR ECONOMICS ANALYSIS
UNDERSTANDING POLITICAL THEORY
(Department of Economics)
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UGCF-2022
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Basic Mathematics for Economics

Editorial Board
Prof. J. Khuntia, Devender, Amit Kumar Jha,
Shikhar Kumar

Content Writers
Taramani, Divya Dua, Parul Jain,
Puneet Kumar Arora, Preety Sharma

Academic Coordinator
Deekshant Awasthi

© Department of Distance and Continuing Education

ISBN : ...........................
1st edition: 2022
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 Basic Mathematics for Economics

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Basic Mathematics for Economics

Major Paper-I, DSC-1 (A/B)

BASIC MATHEMATICS FOR ECONOMICS
Study Material : Lesson 1-11

TABLE OF CONTENT
Name of Lesson Content Writers Page No
LESSON 1 Number System Preety Sharma 1-15
LESSON 2 Set and Set Operation Divya Dua 16-36
LESSON 3 Relation and Function Divya Dua 37-55
LESSON 4 Graphs Taramati 56-75
LESSON 5 Functions of One Real Variables-I: Polynomials and Parul Jain 76-94
Powers
LESSON 6 Functions of One Real Variable-II: Exponential and Parul Jain 95-120
Logarithmic Functions
LESSON 7 Sequences, Series and Limits Parul Jain 121-144
LESSON 8 Single Variable Differentiation Puneet Kumar Arora 145-159
LESSON 9 Further Topics in Differentiation Puneet Kumar Arora 160-174
LESSON 10 Applications of Continuity and Differentiability Parul Jain 175-193
LESSON 11 Equilibrium Analysis in Economics Preety Sharma 194-207

ABOUT CONTRIBUTORS
Contributor's Name Designation
Taramati Guest Faculty, Kirori Mal College, University of Delhi
Divya Dua Guest Faculty, NCWEB, Sri Guru Gobind Singh College of Commerce,
University of Delhi
Parul Jain Assistant Professor, Sri Aurobindo Collage, University of Delhi
Puneet Kumar Arora Assistant Professor (Economics), Delhi Technological University, Delhi
Preety Sharma Assistant Professor, Bharti College, University of Delhi, Delhi

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 Basic Mathematics for Economics

LESSON 1

NUMBER SYSTEM

STRUCTURE
1.1 Learning Objective
1.2 Introduction
1.3 Concept of Number System
1.3.1 What are Numbers?
1.3.2 Types of Numbers
1.3.3 Number System and Simplification
1.4 Fundamental of Fractions
1.4.1 Types of Fractions
1.4.2 Decimal Representation of Rational Numbers
1.4.3 Identities of Irrational Numbers
1.4.4 Inadequacy of Rational Numbers
1.5 Multiples and Divisibility
1.5.1 Divisibility Rules
1.6 Summary
1.7 Answer to In-Text Questions
1.8 Self- Assessment Questions
1.9 References
1.10 Suggested Readings

1.1 LEARNING OBJEVTIVES

The objective of this chapter is to illustrate the extension of number system from natural
numbers to real numbers, it helps to identify different types of numbers expressed in the form
of integers and rational-irrational numbers, it also inculcates the performance of four
fundamental operations on real numbers and enable you to:
• Understand the concept of types of numbers and its representation on number line
• Recognizes number written in fractions and decimals
• Develop a skill in the four fundamental operations of whole numbers
• Classify whole numbers as even numbers, odd numbers, prime numbers and composite
numbers.

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1.2 INRODUCTION
From time immemorial human beings have been trying to have a count of their belongings –
goods, ornaments, jewels, animals, trees, sheep/ goats, etc. by using various techniques
- Putting scratches on the ground/stones
- By storing stones – one for each commodity kept/taken out
This was the way of having a count of their belongings without having any knowledge of
counting.
One of the greatest inventions in the history of civilization is the creation of numbers. You
can imagine a confusion when there were no answers to questions type “How many?”, “How
much?” and the like in the absence of knowledge of numbers. And then the development of
natural numbers and counting is one of the most fascinating discoveries of mankind. The idea
of counting is abstracted from the idea of ‘collection ‘of numbers.

1.3 CONCEPT OF NUMBER SYSTEM

A number system is a method of writing for expressing numbers. It is the mathematical
notation for representing numbers of a given set by using digits or other symbols in a
consistent manner. It provides a unique representation to every number and represents the
arithmetic and algebraic structure of the figures. It also allows us to operate arithmetic
operations like addition, subtraction and division. There are four different types of number
system:
1. Decimal number system
2. Binary number system
3. Octal number system
4. Hexadecimal number system
Number system is an integral part of daily life counting. We use these number in the form of
calling a member of a family using mobile phone, looking like a price discounted items in a
shopping mall, telling total duration of time you spent on work or college, Computing the
interest rate you gain on your savings etc.
1.3.1 What are Numbers?
Numbers are the arithmetical value representing a particular quantity. The various types of
numbers are Natural numbers, whole numbers, Integers, Rational Numbers, Irrational
numbers, Real Numbers etc.

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 Basic Mathematics for Economics

Real
Numbers

Rational Irrational
Numbers Numbers

Non- Integers
Integers
Rational Numbers

Negative Whole
Numbers Numbers

Natural
Zero
Numbers

Fig 1 Real Number chart

1.3.2 Types of Numbers
Natural and Whole Number
The ten symbols 0, 1,2,3,4,5,6,7,8,9 is called digits, which can represent any number.
Natural Number are those numbers which starts from 1 and goes till infinity. The natural
numbers are those numbers used for counting and ordering. They can be counted on fingers
and are denoted by letter N. Numbers used for counting are called cardinal numbers, and
numbers used for ordering are called ordinal numbers. There are infinite natural numbers and
the smallest natural number is one (1).
Whole Number are Natural numbers with an addition of number 0 (zero). Thus, set of
numbers which starts from zero (0) and goes till infinity is known as Whole number. For
example: 0, 1,2,3……….
Integers – Set of all the positive numbers (natural numbers), negative numbers including
zero is known as integers. All integers are rational numbers, and it is denoted by Z. For
example: (2-3), (3-7), (9-20) etc. are all not possible in the system of natural numbers and

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whole numbers. Thus, it required another extension of N umbers which allow such
subtractions.
Thus, we extended whole numbers to include negative natural numbers such as -1 (called
negative 1), -2 (negative 2) and so on such that
1+ (-1) = 0, 2 + -(2) = 0, 3 + -(3) = 0….., 99 + (-99) = 0, …..
Thus, we have extended the whole numbers to another system of numbers, called integers.
The integers therefore are ………, -7, -6, -5, -4, -3, -2, -1, 0,1,2,3,4,5,6,7, ……….
Representing Integers on the Number Line
Number line is the graphical representation of all the positive number, negative number and
zero on a single straight line. We extend the number line used for representing whole
numbers to the left of zero and mark points -1, -2, -3, -4, …… such that 1 and -1, 2 and -2, 3
and -3 are equidistant from zero and are in opposite directions of zero. Thus, we have the
number line as follows:

- …………. -4 -3 -2 -1 0 1 2 3 4 ………….. 
We note here that if an integer a>b, then ‘a’ will always be to the right ‘b’, otherwise vice-
versa. Thus, for finding the greater (or smaller) of the two integers a and b, we follow the
following rule:
i) a>b, if a is to the right of b
ii) a<b, if a is to the left of b

Even and Odd Number

Numbers which are multiple of 2 are called even numbers whereas the numbers which could
not be divided by 2 to get whole integers are known as odd numbers.
Example of even numbers are 2,4,6,8,10 ……………………
Example of odd numbers are 1.3.5.7.9………………… ….
Note: Every even number ends with 0, 2, 4, 6 or 8. And the sum of any number of even
numbers is always even.

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 Basic Mathematics for Economics

Prime Number
Let us find all the possible factors of 2,3,5
1 =1x2
2 =1x3
5 =1x5
The possible factors of 2 are 1 and 2. The possible factor of 3 are 1 and 3. The possible factor
of 5 are 1 and 5. These numbers have only two factors.
Can you suggest a name for such numbers which have only two factors?
Yes, such numbers are called Prime numbers.
We conclude that ‘the numbers which have only two factors, 1 and the number itself, are
called Prime Numbers’.
For example, 2.3.5.7.11.13 etc. are Prime Numbers. Since 1 has only one factor, we do not
call 1 as Prime Number.
The factors of 12 are 1,2,3,4,6,12 has more than one factors so we called them composite
number.
Two numbers which have only 1 as the common factor are called Co-prime Numbers.For
example, (4 and 7), (5, 7, 9) are co-prime numbers.
The pairs of Prime Number which differ by two have only one composite number between
them are called Twin Prime Numbers.

Points to Remember

• 1 is neither a prime number nor a composite number

• 1 is an odd integer.
• 0 is neither positive nor negative number
• 0 is an even integer.
• 2 is prime and even both.
• All prime number (except 2) are odd.

1.3.3 Number System and Simplification

Rounding off (Approximation) of Decimals – There are some decimals in which numbers
are found upto large number of decimal places. For example: 3.4578, 21.358940789.

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But many times, we require decimal numbers up to a certain number of decimal places.
Therefore, If the digit of the decimal place is five or more than five, then the digit in the
preceding decimal place is increased by one and if the digit in the last place is less than five,
then the digit in the precedence place remains unchanged.
Operations – The following operations of addition, subtraction, multiplication and division
are valid for real numbers.
a) Commutative property of addition:
a+b=b+a
b) Associative Property of addition:
(a + b) + c = a + (b + c)
c) Commutative property of multiplication:
axb=bxa
d) Associative Property of multiplication:
(a x b) x c = a x (b x c)
e) Distributive Property of multiplication with respect to addition:
(a + b) x c = a x c + b x c
Counting Number of Zeros – Sometimes we come across problems in which we have to
count the number of zeros at the end of factorial of any numbers. For example – Number of
zeros at the end of 10!
10! = 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
Here basically we have to count the number of fives, because multiplication of five by any
even number will result in 0 at the end of final product. In 10! We have 2 fives thus total
number of zeros are 2.
IN- TEXT QUESTION
1. Encircle the even no - 7, 10, 12, 15, 24,36
2. Encircle the odd no – 5, 8, 12,17,21,38,36
3. Which of the following is a pair of twin prime number
(a) 3,5

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(b) 15,17
4. Write all the prime number between 11 to 41.
5. Find the approximation value of the following numbers correct to 2 places of decimals:
(i) 0.338
(ii) 3.924
(iii) 3.14159
(iv) 3.1428

1.4 FUNDAMENTALS OF FRACTIONS

Real Numbers – Any number which can be represented on number line is a Real Number
(R). It includes both rational and irrational numbers Every point on the number line
represents a unique real number.
Examples of real numbers include - -15, 3,14,25,22/7 and so on.
Real numbers are denoted by R.
R + = Positive real numbers and
R - = Negative real numbers.
Real Number = Rational Numbers + Irrational Number
Rational Numbers – Any number that can be put in the form of p/q where p and q are
integers and q ≠ 0, is called a rational number. The set of rational numbers is denoted by Q.
Every integer is a rational number.
Zero (0) is also a rational number. The smallest and largest rational numbers cannot be
determined (lies at negative infinity and plus infinity respectively). Every fraction (and
decimal fraction) is a rational number.
𝑃 (𝑁𝑢𝑚𝑒𝑟𝑎𝑡𝑜𝑟)
Q = 𝑞(𝐷𝑒𝑛𝑜𝑚𝑖𝑛𝑎𝑡𝑜𝑟)

Irrational Numbers – The numbers which are not rational, or which cannot be put in the
form of p/q, where p and q are integers and q ≠ 0, is called irrational number.
It is denoted by Q’ or Qc.

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For Example: √2, √3, √5, 2 + √3, 3- √5, 3√3are irrational numbers.
Complex Number – A number of the form a + bi, where a and b are real number and i =
√−1 (imaginary number) is called a complex number. i is known iota and set of complex
numbers is denoted by C.
For example – 5i (a = 0 and b = 5), √5 + 3i (a = √5 and b = 3) are complex numbers
Perfect Number – A number is said to be a perfect number if the sum of all its factors
excluding itself (but including 1) is equal to the number itself.
For example, 6 is a perfect number because the factors of 6, i.e., 1,2 and 3 add up to the
number 6 itself.

Fraction – A fraction is a quantity which is expresses a part of the whole.

𝑁𝑢𝑚𝑒𝑟𝑎𝑡𝑜𝑟
Fraction =
𝐷𝑒𝑛𝑜𝑚𝑖𝑛𝑎𝑡𝑜𝑟

Types of Fractions:

a) Proper Fraction - If numerator is less than its denominator, then it is a proper fraction:
2 6
For example: ,
5 18
b) Improper Fraction – If numerator is greater than or equal to its denominator, then it is an
improper fraction.
5 18 13
For example: , ,
2 7 13

c) Mixed Fraction – It consist of an integer and a proper fraction.

1 2 5
For example: 12 , 33 , 79

Note: If in a fraction, its numerator and denominator are of equal value then fraction is
equal to unity i.e., 1 and this is called Equivalent or Equal Fractions.
Mixed fraction can always be changed into improper fraction and vice-versa.

1.4.2 Decimal Representation of Rational Numbers

The decimal representation of a rational number is the process of converting a rational
number into a decimal number. The converted decimal number should be equal to the given
rational number. This process can be done with the help of the long division method. Once
the rational numbers are converted into decimal values, we can easily represent them on the
number line.

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Decimal expansion of Rational and Irrational Numbers

The decimal expansion of a rational number is either terminating or non-terminating and
recurring.
For Example: ½ = 0.5, 1/3 = 3.333….
The decimal expansion of an irrational number is non- terminating and non-recurring.

For Example: √2 = 1.41421356…...

Expressing Decimals as Rational Numbers
Case 1 Terminating Decimal
For Example: Express 0.625 into rational number (p/q form)
Let x = 0.625
Step 1: If the number of digits after the decimal point is y, then multiply and divide the
number by 10y. Here, there are three digits after decimal, so 103=1000.
So, x = 0.625 x (1000/1000) = 625/1000.
Step 2: Reduce the obtained fraction to its simplest form
Hence, x = 5/8
Case 2 Recurring Decimal
If the number is non- terminating and recurring, then we will follow the following steps to
convert it into a rational number:
For Example – 1.042
Step 1: Let x be the given recurring decimal
Let x = 1.042……………...(1)
Step 2: Multiply the first equation with 10y, where y is the number of digits that are recurring.
In this question, multiply both sides of (1) by 100.
Thus, 100x = 104.242 ………….(2)
Step 3: Subtract equation (1) from equation (2)
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On subtracting equation (1) from (2), we get

= 99x = 103.2
= x = 103.2/99 = 1032/990
Which is the required rational number.
Step 4: Reduce the obtained rational number to its simplest form
Thus, we get x=172/165.

1.4.3 Identities of Irrational Numbers

The following are the four properties of irrational numbers:
i) Negative of an irrational number is an irrational number.
ii) Sum and difference of a rational and an irrational number is always an irrational
number
iii) Sum, product and difference of two irrational numbers is either a rational or an
irrational number.
iv) Product of a rational number with an irrational number is either rational or
irrational
Arithmetic identities of Irrational Numbers
• Rational and irrational will give an irrational number Example: 2 x √3= 2√3i.e.,
irrational
• Irrational and irrational will give a rational or irrational number. Example: √3x
√3 = 3 which is a rational number
If a and b are real number, then:

• √(𝑎𝑏) = √𝑎√𝑏
• (√𝑎 + √𝑏 )(√𝑎 − √𝑏) = a-b
• (√𝑎 + √𝑏 )2 = a + 2√(𝑎𝑏) + b
• (√𝑎 + √𝑏 )(√𝑐 + √𝑑) = √𝑎𝑐 + √𝑎𝑑 + √𝑏𝑐 + √𝑏𝑑
• (√𝑎 + √𝑏 )(√𝑐 − √𝑑) = √𝑎𝑐 - √𝑎𝑑 + √𝑏𝑐 - √𝑏𝑑

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Rationalization – The rationalization is process of converting an irrational number into a

rational number.

For example, the rationalization of 1/√2 is:

1/√2 x √2√2 = √2/2

We know that √2 = 1.414

Hence, we can write it as
= 1.414/2, which can be easily represented on the number line.

1.4.4 Inadequacy of Rational Numbers

Can we measure all the lengths in terms of rational numbers? Can we measure all weights in
terms of rational number?
Let us examine the following situation:
Consider a square ABCD, each of whose sides is 1 unit. Naturally the diagonal BD is of
length √2 units.
A B
It can be proved that √2 is not a rational number,
as there is no rational number, whose square is 2.
[ Proof is beyond the scope of this lesson].
We conclude that we cannot exactly measure the
lengths of all line-segments using rational, in D One unit C
terms of a given unit of length. Thus, the inadequacy of rational
numbers necessitate the extension of rational numbers to irrational numbers (which are not
rational).

IN- TEXT QUESTION

6. Write a fraction whose numerator is 22 + 1 and denominator 32 - 1.
7. From the following pick out:

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(i) Natural Numbers

(ii) Integers which are not natural numbers
(iii) Rational which are not natural numbers
(iv) Irrational numbers
-3, 17, 6/7, -3/8, 0, -32, 3/14, 11/6,√2 , 2 + √3
8. Represent the following decimals in p/q form:
(i) 2.4
(ii) -0.32
(iii) 8.14
(iv) 3.24
(v) 0.415415415……
9. Write an irrational number between the following pairs of number:
(i) 1 and 3
(ii) √3 and 3
(iii) √2 and √5
(iv) - √2 and √2
10. Is 2331024 divisible by 12.

1.5 MULTIPLES AND DIVISIBILITY

When we multiply any two or more numbers, we get a product. The product is called a
multiple of each of the number multiplied. This is called a common multiple of the two-given
number.
Divisibility Rules:
In a number of situations, we will need to find the factors of a given number. Some of the
factors of a given number can, in a number of situations, be found very easily either by
observation or by applying simple rules. Now, we will look at some rules for divisibility of
numbers.
Divisibility by 2: A number is divisible by 2 if its unit digit is even or 0.
Divisibility by 3: A number is divisible by 3 if the sum of its digit are divisible by 3.

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Divisibility by 4: A number is divisible by 4 if the last 2 digits are divisible by 4, or if the last
two digits are 0’s.
Divisibility by 5: A number is divisible by 5 if its unit digit is 5 or 0.
Divisibility by 6: A number is divisible by 6 if it is simultaneously divisible by 2 and 3.
Divisibility by 7: We use osculator (-2) for divisibility test
99995 : 9999 - 2 x5 = 9989
9989 : 998 – 2 x 9 = 980
980 :98 – 2 x 0 = 98
Now 98 is divisible by 7, so 99995 is also divisible by 7.
Divisibility by 11: In a number, if difference of sum of digit at even places and sum of digit at
odd places is either 0 or multiple of 11, then no. is divisible by 11.
Divisibility by a composite number: A number is divisible by a given composite number if it
is divisible by all factors of composite number.
Factors: A factor is a divisor. We take a number, say 21. What are the divisors of 21? Clearly
1,3,7 and 21 are divisors because
1 x 21 = 21
3 x 7 = 21
Thus, 1,3,7,21 are called factors of 21.

1.6 SUMMARY
• The set of natural number is {1,2,3,4 …………..}. 1 is the smallest natural number.
There is no largest natural number.
• Our system of numeration is base ten since we use grouping by tens in counting. We
use symbols 1, 2, 3,4,5,6,7,8,9 and 0 to represent numbers. These are called digits.
• The numbers can be arranged in ascending and descending order. The order relation
for numbers 1 to 9 is
1<2<3<3<4<4<5<6<7<8<9
• The numbers which have only two factors, 1 and the number itself, are called prime
number.

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• The numbers which have more than two factors are called composite numbers. 1 is
neither prime nor composite.
• Two pairs of prime numbers which have only one composite number between then
are twin primes.
• The rational numbers can be represented on the number line.
• The rational number can be compared by reducing them with the same denominator
and comparing their numerators.
• The system of rational number is extended to real number
• The decimal representation of an irrational number is a non-terminating nonrepeating
number.
• We can find the approximation value of a rational or an irrational number up to a
given number of decimals.

1.7 ANSWERS TO IN-TEXT QUESTIONS

1. Even Number – 10, 12, 24, 36
2. Odd Number – 5, 17, 21
3. (a) 3,5 are twin primes as they differ by two.
(b) 15,17 are twin primes as they differ by two.
4. 11,13,17,19,23,29,31,37,41
5. (i) 0.34
(ii) 3.92
(iii) 3.14
(iv) 3.14
6. 5/8
7. (i) Natural Number – 17
(ii) Integers - -3,0, -32
(iii) Rational Number - -3, 6/7, -3/8, 0, -32, 3/14, 11/6
(v) Irrational Number - √2 , 2 + √2 , 2 + √3
8. (i) 12/5
(ii) -8/25

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(iii) 407/50
(iv) 107/33
(v) 415/999
9. (i) √3
(ii) 1 + √3
(iii) √3
(iv) √2 / 2
10. 12 = 4 x 3
2331024. Is divisible by 3 as (2+3+3+1+2+4) = 15 is divisible by 3 so, 2331024 is
also divisible by 4 because last two digit (24) is divisible by 4
Therefore 2331024 is divisible by 12.

1.8 SELF ASSESSMENT QUESTIONS

1) How many primes are there between 1-100?
2) Find the difference between the largest 3-digit number and the smallest two-digit
number.
3) Find the place value of 4 in each of the numeral.
40, 354, 4397,943742
4) Is 2331020 divisible by 10.
5) What is the value of M and N respectively if M39048458N is divisible by 8 and 11,
where M and N are single digit integers?

1.9 REFERENCES
• Sydsaeter, K. and P. J. Hammond, Mathematics for Economic Analysis, Pearson, 2009.
• Hoy, M., Livernois, J., McKenna, C., Rees, R., &Stengos, T. (2001). Mathematics for
economics. Prentice Hall India.

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LESSON2

SET AND SET OPERATION

STRUCTURE
2.1 Learning Objectives
2.2 Introduction
2.3 Concept of Set
2.3.1 Cardinality of Set
2.3.2 Method of specifying a set
2.3.3 Types of Set
2.4 Subset
2.4.1 Proper Subset
2.4.2 Improper Subset
2.4.4 Power Set
2.4.4 Properties of Set
2.5 Operations on sets
2.5.1 Union of sets
2.5.2 Intersection of sets
2.5.3 Difference of sets
2.5.4 Complement of sets
2.5.5 Disjunctive union
2.5.6 Partition of sets
2.6 Venn Diagram
2.7Properties of Set
2.8 Summary
2.9 Answers to In-Text Questions
2.10 Self-Assessment Questions
2.11 References

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2.1 LEARNING OBJEVTIVES

After reading this lesson, students will be able to:
1. Understand the concept of sets and its types
2. Learn the method to represent the set
3. Understand subset, proper set and power set
4. Operation on sets
5. Venn diagram and
6. Laws of Operation

2.2 INTRODUCTION
This unit is important in the sense that it will be useful for mathematical analysis and help
you understand the subsequent units in a better way. In this chapter you will understand the
concept of sets, ways to represent such types of set, subset, power set, set operation such as
union, intersection, difference and the properties of set.

2.3 CONCEPT OF SET

It is a collection of a well-defined collection of distinct objects that can be denoted by capital
letters. It can be anything like set of vowels, set of odd numbers, and set of integers. In daily
life, we confine together objects of same kinds as set of airlines companies in India; set of
goods produced by a particular firm.
A set is written in a curly bracket for example,
A: set of even numbers {2, 4,6,8,….}, B: set of vowels {a,e,i,o,u}.
An element of set is an object which is a member of a particular set, or we can state some
specific property of a set, if an item has that property, then it will be termed as an element of
set. As we have seen above in a Set B where a,e, i, o, u are the elements of a set of vowels,
we represent them in a curly bracket and separated the elements by a comma. Some more
examples we can look at, set of prime number: {2, 3, 5, 7…} here 2, 3,5,7 are the elements of
a set of prime number.
2.3.1 Cardinality of a Set
The number of elements in a set is called cardinality of set. If X is a set, then its cardinality is
denoted by |X|. For example, if X is the set of days in a week, then its cardinality is 7. Y is a
set of consonants in English Alphabet then its cardinality is 21.
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Set Membership
Sets are generally represented by a capital letter i.e., X, Y,Z whereas smallcase letters are
used to represent the elements of set i.e. x,y,z. If ‘P’ is a set and ‘p’ is an element of this set P,
then we can write, p ∈ P where ‘∈’ implies ‘belongs to’. So, p∈ P⇒ pbelongs to set P. If it is
written as q∉ P, it means q does not belong to set P.

2.3.2 Methods of Specifying A Set

• ROSTER OR TABULAR METHOD: Under this method all the elements of a set
are listed in a curly bracket, as we discussed above. Here, order of an element does
not matter. For example: set of even number in rolling some dice is {2,4,6}. It does
not matter whether we write elements as {2,4,6} or {6,2,4}, both represents the same
set.
• DEFINING PROPERTY OR SET BUILDER METHOD: Under this method we
write the condition or rule which determined what elements to be part of the set. We
use this method, because sometime numbers of elements in a set are infinite and to
write all elements is not possible. So, it would be better to write the properties that
determined the elements of a set.
NOTE: Not just infinite set are represented this way, finite set can also be represented.
For example, A: {y|y is a positive even integer less than 10}. It is read as “A is a set of those
elements y such that y is a positive even integer less than 10, y denotes any one elements of
the set A.
B: {1, 4,9…...,100} = (x|x=n2 where n is natural number less than equal to 10}
N: {1, 2, 3, 4……...} = Set of all-natural number
W: {0, 1, 2, 3…….} = Set of whole number

2.3.3 Types of Set

There are two types of sets:

• FINITE SET: In this set, we can count the elements of a set i.e., they are finite or
limited. As we have seen the vowels, it is a finite set as we can count the number of
elements in a set.
A = {2, 4, 6}

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B= {5, 10, 15…...,5000}

• INFINITE SET: In this set the elements of a set are infinite i.e., they are unlimited,
counting goes on and never end. We use dot symbol (…….) that means “so on” to
represent that counting are going and never end. For example, set of prime number {2,
3, 5, 7……}, as counting goes on and it never end. It is also not possible to write all
the elements of a set. So, we represent this infinite set using dots (…...). Such set
commonly used in economics.
W: Set of whole number; {0, 1, 2, 3……...}
Y: {y| y is a line parallel to y axis}
C: {x|x is a line passing through a fixed point}

NOTE:

• In a set, order of an elements does not matter i.e. whether we write set of even number
from 1 to 10 as {2, 4 , 6 , 8 , 10 } or { 4 , 2 , 8 , 10 , 6 } it does not change anything.
• Set: {a, b ,c } = {a , a , b , c } because repetition of some elements does not change
the set.

OTHER TYPES OF SETS

EMPTY SET / NULL SET / VOID SET = A set which contains no elements is termed as an
empty set or void set or null set. For example,
X: set of triangles with more than 3 sides. It is a null set because there is as such no triangle
which has more than 3 sides. It is represented byØor{}.
A: {x | x is a point common to two parallel lines}
B: {x2=16,x is odd}
EQUAL SET= If all the elements in the two sets are equal then it is termed as an equal set.
• X = {x|x is a positive even number up to 10}
Y = {y | y=2n where 1≤ n ≤5}
So, X = {2, 4,6,8,10} and Y = {2,4,6,8,10}
Here, both X and Y have the same elements, so the set is termed as equal set.
• If A = {1 , 2 , 2 , 5 , 6 } , B = { 1 , 1 , 6 , 2 , 5 }
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Here, 2 is repeating in set A and 1 is repeating in set B but still the elements 1, 2,6,5 is same
in both X and Y set because it is termed as an equal set.
EQUIVALENT SET= In equal set we see the two or more sets have same elements but in
equivalent sets two or more sets have same cardinality.
For example, A = {2,4,6,8} B = {1,3,5,7}
They are equivalent set because both have same cardinality i.e. 4 but they are not equal
because both containing different elements.
SINGLETON SET / UNIT SET= The set which contains only one element is termed as a
singleton set.
For example, A = { y | y∈ N , 2 <x< 4 } i.e. A = {3} only one element belongs to this set
because it is the only natural number between 2 and 4.
B = {Ø}; It is also a singleton set because it contains Øas an element.
DISJOINT SET = Two set are disjoint when they have no element in common.
For example, A = {2, 4, 6} Set of even elements in rolling a dice
B = {1, 3, 5} Set of odd elements in rolling a dice
Here Set A and B are disjoint because they have no element in common.
OPEN SET = A set is said to be open when boundaries of a set is not included in the set.
For example, A = { y : 0 <y< 2 , x∈ℝ }
Set A is an open set as the boundary point 0 and 2 are not included.
B = { z> 5, z∈ ℝ }
Set B is also an open set, as it contains all real number greater than 5 and boundary point 5 is
not included in the set.
CLOSED SET = A set is closed when boundaries of set is included in the set.
For example, Z = { 4 ≤ x ≤ 7 , x∈ ℝ }
Z is a closed set as boundary point 4 and 7 both are included in the set.
UNIVERSAL SET= It is the set which contains all the elements under the consideration in a
given context, without any repetition. It is usually represented by ‘U’.
For example, P = { 1,3,5,7,8} , Q = {2,3,5,4,9} , R = {1,3,4,6}

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Here, U = {1,2,3,4,5,6,7,8,9}.

IN-TEXT QUESTIONS
1. Classify the following as finite or infinite set:
(a) Set of all complex numbers
(b) Set of dishes on a menu
(c) Set of even numbers less than 15
(d) Set of real numbers between 9 and 10
2. Write down the given statement in set builder form:
‘The set of rational number up to 100’.
3. Give an example of any empty set.
4. Check whether the following is empty, equal, singleton or equivalents set.
(a) Set of natural number 8 < x < 9
(b) A = {1, 2 , 3 , 4 } B={1,2,6,8}
(c) X = {a, b ,c } Y={a,b,b,c}
5. Let, Z = {10, 20,30 } and Y = {8,16}
(a) Check whether:
(i) Ø∈ Z
(ii) 16∈ Y
(b) Write the cardinality of Z and Y.
6. What is the cardinality of null set.

2.4 SUBSET
A set X is a subset of Y if all the elements of X are in Y or we can say X is included in Y.
For example, A = Set of even natural number
B = Set of natural number
Here, A ⊆ B because set of even natural number is a part of set of natural number.
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2.4.1 PROPER SUBSET

A Set X is a proper subset of set Y if every element of X is in Y but there exist at least one
element in Y which is not in set X. It can be written as X ⊂ Y.
For example,
Let, X = { a , z , b } and Y = { a , z , p , d , b }be two sets
X⊂Y because elements of X i.e. a,z,b are present in Y, but Y⊄ Xbecause element of Y i.e. d,
p are not present in X. So, X is a proper subset of Y.
This can be represented by a Venn diagram which we will discuss in next section.
For example,
• A = {1,5,4} B = {4,8,12,1}
Here, A ⊄ B and B ⊄ Abecause,
All elements of A is not in B i.e. there exist at least one element which is not in B
here in this example 5 is not present in B due to which A ⊄ B.
Similarly, B ⊄ A because 8, 12 elements are not present in A.

• X={p,q,r} Z={a,c,b}
Here, X and Z are disjoint sets because there is no elements common between them.

2.4.2 IMPROPER SUBSET

A subset which contains all the elements present in the original set is known as improper
subset.
For example, X = { 2, 3, 4} is an original set
Y = {2, 3, 4}
Y is an improper subset of X as all the elements of set X and Y are equal i.e. all the elements
of set X is in set Y.

2.4.3 POWER SET

For any set A, the set of all of its subsets is known as power set of A.
Let, A = { p , q , r }

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then, Power Set of A = P(A) = {{ p } , { q } , { r } , { p , q } , { p , r } , { q , r } , { p , q , r }

,Ø}
NOTE:
• Ø i.e. null set is a subset of every set; here Ø lies in power set of A.
• If number of elements in set A is n , then number of subset = 2n,
Here n = 3 therefore number of subsets is 23i.e. 8.
2.4.4 PROPERTIES OF SET
• Every set is a subset of itself.
• Null set { } is a subset of every set.
• If number of elements in set A = n, number of subsets = 2n.
• If the number of elements in set A = n, number of proper subsets = 2n-1.
• X = Y if and only if X ⊆ Y and Y⊆ X.
• If X is a subset of Y, so we can say Y is a superset of X.

IN-TEXT QUESTION
7. Let, L ={4,8,9,2,16,29 } and M = {2,4,8,16}
a) Check whether M ⊂ L or L ⊂ M.
b) Number of subsets of set M.
8. Consider, A= {6 , 10 , 0 }
Write power set of set A.

2.5 OPERATIONS ON SETS

Like in number we do addition, subtraction, here in set we use operation such as union of set,
intersection of set, difference of set, complement of set and partition of set-in details.

2.5.1 UNION OF SETS

If there are two sets A and B, then its union is equal to set which contains all the elements of
either of set A or B (possibly both) but the common elements of set A and B is taken only
once. It is denoted by ‘∪’.

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Z = A ∪ B = { a | a∈ A or a∈ B }
For example,
X = { 2 , 3 , 9 , 16 , 15 }
Y = { 5 , 10 , 15 , 9 , 20 }
Therefore, X ∪ Y = { 2 , 3 , 9 , 10 , 15 , 16 , 20 }
In this example 9 , 15 common in both set X and Y but we take them only once.

2.5.2 INTERSECTION OF SETS

Intersection of sets means the elements which are common in those sets. So, if X is the
intersection of two sets A and B it means it contains the elements which are common in both
the sets.
X = A ∩ B = { c | c∈ A and c∈ B }
For example,
• A = { a , b , c ,w } B={c,d,h,r}
A∩B={c}
• X = { 2 , 4 , 6 , 8 , 10 , 12 } Y={1,3,5,7,9}
X ∩ Y = Ø = {}
Here, X and Y are disjoint set because it contains no common elements.
The relation between union and intersection is :n (A ∪ B ) = n ( A ) + n ( B ) – n (A ∩ B)
Let’s take an example based on this formula,
Example: 1. In class 30 students play football, while 25 students play basketball. The
numbers of students who play either football or basketball are 40. Then find the number of
students who plays both football and basketball.
Solution: Let
X = students who play football
Y = students who play basketball
n (X) = 30
n (Y) = 25

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n( X∪ Y ) = 40
n( X∩ Y ) = students who play both football and basketball
n( X∪ Y ) = n ( X ) + n ( Y ) – n ( X ∩ Y )
40 = 30 + 25 – n( X∩ Y )
n( X∩ Y ) = 55 – 40
n( X∩ Y ) = 15 i.e. 15 students play both football and basketball.

2.5.3 DIFFERENCE OF SETS

If there are two set A and B then (A – B) i.e. difference of set refers to set of elements that
belongs to A but not to B. It contains uncommon elements of set A.
A – B = {y | y∈ A and y ∉B }
It can also be written as A / B.
For example, A = { 1 , 3 , 6 , 5 , 8 , 12 }
B={2,4 ,6 ,7,8 ,9,5}
A – B = { 1 , 3 , 12 }
B–A={2,4,7,9}

2.5.4 COMPLEMENT OF SETS

It refers to all the elements of a universal set excluding the given set, it is denoted by AC or
A′.
A′ = { x∈ U | x∉A } i.e. difference between universal set and A.
( A′ )′ = A i.e. double complement of set A is itself.
For example, U = { a , c , e , g , i , j , l , n , p }
A={a,e,i,l}
A′ = {c,g,j,n,p}

2.5.5 DISJUNCTIVE UNION

It is the set which contains elements present in both set X and Y except the elements which
are common in both. It is also known as symmetric difference of two set. It is represented by
‘∆’.

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For example, X = { 4, 8, 12, 16, 20} and Y = { 6, 8, 12}

X ∆ Y ={ 4, 16, 6, 20}

2.5.6 PARTITION OF SETS

A partition of a set A is a set of one or more disjoint non-empty subsets of A such that their
union makes the whole set A.
For example, U = { 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 }
A={2,3,4,5} B={1,6} C={7,8,9}
Here, collection of A , B , C forms the universal set therefore, they are partition of universal
set.
Example: 2. Let X = {a, b , e , i } and Y = { e , f , g , h } be two sets,
Find X ∪ Y, X ∩ Y, X – Y and Y – X.
Solution: X ∪ Y = {a, b, e, f, g ,h , i }
X ∩ Y = {e}
X – Y = {a, b, i}
Y – X = {f, g ,h }
Example: 3. Let X be set of boys in a class 10th who scored more than 80 marks.
Y be set of boys who had attendance more than 80%
So, X ∪ Y = set of boys in class 10th who scored more than 80 marks or who had attendance
more than 80%.
X ∩ Y = set of boys who had scored more than 80 marks and who also had attendance more
than 80% in class 10th.
X – Y = set of students who scored more than 80 marks but not had attendance more than
80% in class 10th.
Y – X = set of students who had attendance more than 80% but not had marks more than 80
in class 10th.
Example: 4. Let U be the universal set of all players in a college.
A denotes the set of volleyball players
B denotes the set of kabaddi players
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C denotes the set of badminton players

D denotes the set of table tennis players
So, A ∪ B consists of set of players who either play volleyball or play kabaddi
AC = U – A, consists of players who do not play volleyball
C ∩ D, consists of players who play badminton and table tennis
B – (C ∩ D), consists of kabaddi players who do not play badminton and table tennis
(A – B) ∪ (A – D), consists of either players who play volleyball but not play kabaddi or
players who play volleyball but not play table tennis.

IN-TEXT QUESTION
9. A = { 2 , 12 , 20 , 25 } B = { 5 , 20 , 25 , 18 }
Find A ∪ B , A ∩ B , A – B , B – A, A ∆ B.

2.6 VENN DIAGRAM

It is a way to represent the elements of a particular set in a closed region of the plane. Here,
the rectangle represents U i.e., universal set
• A={1,2,3}

• U – A = A′

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In this diagram the shaded portion is A′.

• A′

In this diagram the shaded portion is A′

• B′

In this diagram the shaded portion is B′

• X = {a , b , c } Y={b,d,e}
Then, X ∩ Y = {b }

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Here, shaded region is X ∩ Y

Also, X∪ Y = {a , b , c , d , e }

Here, shaded region is X ∪Y

• P = {1 , 2 } Q={1,2,3}

Here, P ⊂ Q
• A′∩ B′

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In this diagram the shaded portion is A′∩ B′. We can obtain the same Venn Diagram
for (A ∪ B) ′
• A∩B∩C

In this diagram the shaded portion is A ∩ B ∩ C

• Disjoint sets

Here, A and B are disjoint sets because there are no elements common between them.

2.7 PROPERTIES OF SET

1. COMMUTATIVE LAW
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• A∪B=B∪A
• A∩B=B∩A
2. ASSOCIATIVE LAW
• X ∪ (Y ∪ Z) = (X ∪ Y) ∪ Z
• X ∩ (Y ∩ Z) = (X ∩ Y) ∩ Z
If a parentheses position is changed, it does not change the resultant set.
3. IDEMPOTENT LAW
• A∪A=A
• A∩A=A
4. DISTRIBUTIVE LAW
• X ∪ (Y ∩ Z) = (X ∪ Y) ∩ (X∪ Z)
• X ∩ (Y∪Z) = (X∩ Y) ∪ (X∩ Z)
5. DE-MORGAN’S LAWS
• (A ∪ B)′ = A′ ∩ B′
• (A ∩ B)′ = A′ ∪ B′
Example: 5. X = { 1 , 2 } Y={2,4} Z={2,4,6}
X∩Y={2} (X∩Y)∩Z = { 2 }
Y∩Z={2,4} X∩(Y∩Z) = { 2 }
Therefore, associative law is verified i.e. (X ∩ Y) ∩ Z = X ∩ (Y ∩ Z)
Example: 6. X = { 5 , 10 , 15 } Y = { 10 , 20 } Z = { 5 , 25 }
X∩Y = { 10 } X ∩ Z = {5}
(X∩Y) ∪ (X∩ Z) = { 5 , 10 }
Y ∪ Z = { 5 , 10 , 20 , 25 }
X ∩ (Y ∪ Z) = { 5 , 10 }
Therefore, distributive law is satisfied i.e. X ∩ (Y∪Z) = (X∩ Y) ∪ (X∩ Z)
From VENN DIAGRAM we prove this De-Morgan’s law

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➢ (A ∪ B) =

➢ (A ∪B)′ =

➢ A′

➢ B′

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➢ A′∩B′

From the diagram, we have proved that (A ∪ B)′ = A′ ∩ B′

IN-TEXT QUESTION
10. Using the Venn diagram, proof that (A ∩ B)′ = A′ ∪ B′
11. Check whether the following formula are true or false.
A ∪ (B ∩ C) = (A∩B) ∪ (A∩C)
If false, correct the formula and prove it using the example.

2.8 SUMMARY
In this chapter we discussed about the definition of set, its types, and ways to represent set.
Then we look at subsets and performed operation such as union, intersection, complement,
difference of set and these will be useful in the further chapters. We also used a Venn
diagram to represent the sets in a closed region and at last we performed laws of operation.

2.9 ANSWERS TO IN-TEXT QUESTIONS

1. (a) Infinite
(b) Finite
(c) Finite
(d) Infinite

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2. A = { x | x is a rational number up to 100}

3. Natural number between 3 and 4
4. (a) Empty
(b) Equivalent
(c) Equal
5. (a) Yes, it belongs to
(b) Yes, it belongs to
(c) Z cardinality = 3, Y cardinality = 2
6. 0
7. (a) M ⊂ L
(b) 24
8. { {0},{6}, {10}, {0,6}, {0,10}, {6,10}, {0,6,10}, Ø}
9. A∪ B = {2 , 5 , 12 , 20 , 25 , 18}
A∩ B = {20 , 25}
A – B = { 2 , 12}
B – A = {5 , 18}
A ∆ B = {2, 12, 5, 18}
10.
➢ A∩B =

➢ (A ∩ B)′ =

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A′ =

➢ B′ =

➢ A′∪B′

Hence. Proved that (A ∩ B)′ = A′∪B′

11. False

2.10 SELF-ASSESSMENT QUESTIONS

1) Consider the following sets
X = {2 , 4 , 8 , 16} Y = {4 , 9 , 10} Z = {4 , 9 , 15}
and W = { 9 }
Find X∩Y, X∩Z, Y∩Z, Y∪Z, Y – W, Z – X, X∩Y∩Z.
2) Make a list of all subsets of set {2, 0, 4}.
3) Check whether the following formulas are correct or not.
(a) X – Y = Y – X
(b) n(A∪ B) = n(A) + n(B) – n(A∩ B)
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(c) A⊆ B implies A∪ (B – A) = A
4) Let X and Y are two disjoint sets then find X intersection Y.
5) In a class, 20 students drink tea, 15 drink coffee. There are 30 students who drink
either tea or coffee. Find the number of students who drink both tea and coffee.
6) In a group of 50 people, 25 speak English and 40 speak Hindi. Find the number of
people in a group who speak only hindi and how many people speak both.

2.11 REFERENCES
• Sydsaeter, K., Hammond, P. (2002). Mathematics for economic analysis. Pearsom
education.
• Hoy, M., Livernois, J., McKenna, C., Rees, R., Stengos, T. (2001). Mathematics
for Economics, Prentics-Hall India.

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LESSON 3

RELATION AND FUNCTION

STRUCTURE
3.1 Learning Objectives
3.2 Introduction
3.3 Ordered Pairs & Cartesian Product
3.4 Relations
3.4.1 Domain and Range of Relations
3.4.2 Types of Relations
3.4.3 Properties of Relations
3.5 Functions
3.5.1 Domain, Co-domain and RangeDomain
3.5.2 Types of Functions
3.5.3 Composite Mapping
3.5.4 Inverse Function
3.6 Summary
3.7 Answers to In-Text Questions
3.8 Self-Assessment Questions
3.9 References

3.1 LEARNING OBJECTIVES

After reading this lesson, students will be able to understand:
1. the concept of ordered pairs & cartesian product
2. the concept of relation and its properties
3. functions and its types and
4. domain, co-domain & range

3.2 INTRODUCTION
In the last chapter, we learned about set. In this chapter we will be using the concepts of sets
such as subset, power set and operation of sets. Here, we will start with introducing ordered
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pairs and cartesian products. Then we will discuss about relation, function, domain, co-
domain and range. We will also define function and its types. In subsequent chapters will
discuss about the different kinds of functions.

3.3 ORDERED PAIRS AND CARTESIAN PRODUCT

In the last chapter, we discussed about the set theory, in which we discussed that order in
which elements are written does not matter. It is same whether we write {2 , 4 , 6 } or { 4 , 2 ,
6 }. But if order matter then ( 2 , 4 , 6 ) and ( 4 , 2 , 6 ) represents two different pairs. These
are called ordered sets and it is represented by parentheses ( ).
Two ordered pairs are equal, if and only if the corresponding first elements are equal and the
second elements are also equal. Considered an ordered pair ( p , q ) where p ∈ P and q ∈ Q.
Where, P = Price of commodities in rupee ( 1 , 2 , 3 , 4 ,.....,10)
Q = Quantity demanded of commodities in kg ( 10, 9 , 8 , 7,.....,1)
So, ordered pair (1 , 2 ) represent that at price = 1, quantity demanded = 2,
Whereas, ( 2 , 1 ) represents that at price = 2, quantity demanded = 1.

CARTESIAN PRODUCT
Given two non – empty sets A and B, the Cartesian product A× B is the set of all ordered
pairs of elements from A and B i.e.
A × B = { (a , b) | a∈ A, b ∈ B}
We read A × B as A cross B.
If A = {1 , 2 , 3 } B={4,6}
A×B={1,2,3}×{4,6}
= { (1 , 4) , ( 1 , 6) , (2 , 4), ( 2 , 6), ( 3 , 4), (3 , 6) }
Here, 1st element belongs to A and 2nd element belongs to B.
IMPORTANT POINTS TO REMEMBER
• If (x , y) ∈A × B then x ∈ A and y ∈ B.
• If there are x elements in A and y elements in B, then there will be x.y elements in A ×
B.
i.e. if n(A) = xn (B) = y

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n(A × B) = x.y = n(A).n(B)

• If A × B = Ø then either A = Ø or B = Ø.
• A3 = A×A×A = { (x , y , z) : x , y ,z∈ A}
Here, ( x , y , z) is called as ordered triplet.
An = A×A×A×......×A here A is taken N time.
IN-TEXT QUESTION
1. P={a,d,f} Q={e,h}
Check whether P×Q is equal to Q×P.

3.4 RELATIONS
A Relation R from a non- empty set X to a non- empty set Y is a subset of the Cartesian
product X × Y.
A={a,b} B={x,y,z}
A × B = { (a , x) , (a , y) , (a , z) , (b , x) , (b , y) , (b , z) }
n(A×B) = n(A).n(B)
= 2.3
=6
Number of subsets = 2n = 26 = 64
R ⊆A × B
As we can take R1 = { (a , x) , (b , y) : p∈ A , q∈ B}
Example: 1. If A = { 1 , 2 , 4 } B={3,5}
A × B ={ 1 , 2 , 4 } × { 3 , 5 }
n(A × B) = 6
Number of subsets = 2n = 26 = 64
• R1 = { ( x , y ) | x ∈ A , y ∈ B such that x + y is even }
={(1,3),(1,5)}

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• R2 = { ( x , y ) | x ∈ A , y ∈ B such that x + y is an exact multiple of 4 }

={(1,3)}
• R3 = { ( x , y ) | x ∈ A , y ∈ B such that x < y }
={(1,3),(1,5),(2,3),(2,5),(4,5)}

3.4.1 DOMAIN AND RANGE OF RELATIONS

• Domain of the relation: It is the set of all first element of the ordered pairs in relation R
from set P to set Q.
• Range of the relation: It is the set of all second elements of the ordered pairs in relation
R from set P to set Q.
Example: 2. A = { 2 , 3 , 4 } B={1,5,8,4}
Let R be a relation ‘is less than ‘ from A to B. What is Domain and Range of R.
Solution: R = { ( 2 , 5 ) , ( 2 , 8 ) , ( 2 , 4 ) , ( 3 , 4 ) , ( 3 , 5 ) , ( 3 , 8 ) , ( 4 , 5 ), ( 4 , 8 ) }
Domain: {2 , 3 , 4 }
Range : { 4 , 5 , 8 }
3.4.2 TYPES OF RELATIONS
1. EMPTY RELATION: When no element of P is related to any element of P
i.e. R = Ø ⊂P × P.
2. UNIVERSAL RELATION: When each element of P is related to every element of P i.e.
R = P × P.
3. INVERSE RELATION: Let R be a relation from P to Q. Inverse relation (R-1) is a
relation from Q to P.
R={(1,2),(2,4),(3,6)}
R-1 = { ( 2 , 1 ) , ( 4 , 2 ) , ( 6 , 3 ) }

3.4.3 PROPERTIES OF RELATIONS

A relation R in a set P is called
1. REFLEXIVE: If for every p ∈ P, ( p , p ) ∈ R.
2. SYMMETRIC: For every p1 , p2 ∈ P , (p1 , p2) ∈ R implies that (p2 , p1) ∈ R.
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3. TRANSITIVE: If (p1 ,p2) ∈ R and (p2 , p3 ) ∈ R implies that ( p1 , p3 ) ∈ R for all p1 , p2 , p3

∈ R.
* EQUIVALENCE RELATION: R is an equivalence relation when it is reflexive,
symmetric and transitive.
Example: 3. Let P = { a , b , c }
R={(a,b),(b,c),(a,a),(b,b)}
Is this relation equivalence?
Solution: For relation to be equivalence it has to be reflexive, symmetric and transitive.
It is not reflexive because ( c , c ) does not belong to a set.
It is not symmetric as ( b , a ) , ( c , b ) does not belong to a set.
It is not transitive as ( a , c ) does not belong to a set because as ( a, b ) , ( b , c ) then ( a , c )
need to belong to R for relation to be transitive.
Therefore, this relation is not an equivalence relation.

IN-TEXT QUESTION
2. For B × A, find relation such that x + y is prime number.
A = { 1 , 2 , 4 } and B = { 3 , 5 }
3. X={1,2,4} Y={2,4,6,8}
R be a relation “ is 2 less than” from A to B.
Find Domain and Range.
4. R = { ( x , y ) : x , y ∈ N and x2 = y } , then what is the relation.
(a) Symmetric
(b) Reflexive
(c) Transitive
(d) None of these

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3.5 FUNCTIONS
When two or more different ordered pairs do not have the same first element then R is said to
be a function.
Function: y=f(x)
i.e. for each value of x , unique value of y exists.
Let’s understand with the help of following relation.
• R = { ( 1 , 3 ) , ( 3 , 7 ) , ( 5 , 11 ) }
It is a function because in this ordered pair first element is not same.
• R={(2,4),(1,6),(1,7)}
It is not a function because first element same in ordered pair ( 1 , 6 ) , ( 1 , 7 ) but second
element is different.
• R={(3,5),(6,0),(3,5)}
It is a function because in this if first element same in two ordered pairs, then second
element also same i.e. same ordered pair.
• R = { ( 1 , 6 ), ( 2 , 4 ) , ( -2 , 4) }
It is a function because even though second element is same in two ordered pairs ( 2 , 4 ) ,
( -2 , 4 ) but first element is different.
Example: 4. X = { 1 , 6 , 4 } Y={3,5,8}
For relation, R = { ( 6 , 8 ) , ( 4 , 3 ) , ( 4 , 5 ) }
Here for x = 4 , y = 3 and for the other elements x = 4 , y = 5 i.e. for single value of x = 4 ,
two value of y is associated i.e. 3 and 5.
Therefore, it is not a function.
3.5.1 DOMAIN , CO-DOMAIN and RANGE DOMAIN
Let y = f ( x ) or f : X → Y
Value of X at which f ( X ) is well defined i.e. always defined.
We will discuss the domain of different kinds of functions.
• CASE : 1 POLYNOMIAL FUNCTION

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For example, y = x2 + 1
y = 2x + 1
y = 5x0
here, in all cases domain is ℝ i.e. x ∈ℝ.
For any real value of X , function is well defined.
• CASE : 2 RATIONAL FUNCTION
It is a function in p/q form, where q ≠ 0.
For example, y = (x +2) / (x – 3)
Here, x – 3 ≠ 0
i.e. x ≠ 3
x ∈ℝ – { 3 }
Function is well defined for any real value of x except 3.
Consider y = (2x – 1) / x
Here, x ∈ℝ – { 0 } , for function to be well defined because denominator cannot be equal to
0.
• CASE: 3 EVEN NUMBER OF ROOTS
It is in the form of √f(x) ,∜f (x ) , {f (x)}-1/2n
Here, function is well defined when f ( x ) ≥ 0 i.e. under root value is positive.
For example: y = √ (2x + 4 )
2x + 4 ≥ 0
x ≥ -2
i.e. x ∈ [ -2 , ∞ )
Let us consider another example,
y = √ ( x2 – 6x + 8 )
function is well defined when x2 – 6x + 8 ≥ 0
x2 – 4x – 2x + 8 ≥ 0

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( x – 4 ). ( x – 2 ) ≥ 0

+ _ +
-∞ 2 4 ∞

We draw a number line to check the positive value of this term.

Therefore, ( -∞ , 2 ] ∪ [ 4 , ∞ ) in this interval function is well defined.
See, here we introduced union symbol that we discussed in last chapter i.e. set theory.
• CASE: 4 LOGARITHM FUNCTION
Here if y = f ( x ) = log x
It is well defined when x >0
For example: y = ln(ln x) [lnx = logex]
Function is well defined when
lnx> 0 i.e.logex> 0
x>e0
x>1 logax = y
Domain: (1, ∞) x = ay
RANGE:
The set of all resulting values of y = f(x) givenx∈ X.
CASE: 1 If domain ∈ ℝ or ℝ – { finite value } then we calculate first x = g ( y ) i.e. x in
terms of y. So, range would be the value of y at which g ( y ) is well defined.
CASE: 2 If domain ∈ some interval then range would be the value of y at that interval and
when f ‘ (x) = 0.
For example, y = (x +5 )/ ( x – 3 )
Here, domain is where denominator is not equal to zero.
i.e. x–3≠0
x≠3

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Domain: x ∈ℝ – { 3 }
Range : Here, case 1 applies where domain belongs to ℝ – { Finite Value }
i.e. ℝ – { 3 }
So , we need to calculate g ( y ) = x
y = ( x + 5 )/(x – 3)
xy – 3y = x + 5
x(y – 1 ) = 5 + 3y
x = ( 5 + 3y )/(y – 1 )
here, y – 1 ≠ 0
y≠1
therefore, range: y ∈ℝ – { 1 }
CO-DOMAIN:
The Co-domain is the set of all possible value of a function. The range, which is ouputs of a
function. So, range is a subset of co-domain. Will discuss more concepts related to this later
in the chapter.
Consider a function: X → Y

Here, domain is set X

co-domain is set Y
while possible value of Y is range is { 1 , 2 , 3 }
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In this case range ≠ co-domain

IMAGE: y = f ( x )
Here, y is the image of X at f
whereas x is the pre- image of Y at f.
IN-TEXT QUESTION
5. Check whether the following relation is a function or not:
A=[1,3,5} B={4,3,2}
(a) R=x+y is odd
(b) R = product of x and y is odd.
6. Find domain of the following:
(a) y = ln (2x – 1 )
1–x
(b) y = √ {(x + 1) / [ ( x – 2 ). ( x – 4 ) ] }
(c) y = √ (2x + 3 )
7. Range is always equal to co-domain.

Check whether the above statement is true or false and give explanation to your answer.
3.5.2 Types of Functions
Let A , B be two non-empty sets.
f:A→B ( A mapping B )
1. INJECTIVE FUNCTION: If all the elements of A has a unique image in B, then f is
injective or one to one.
i.e. If, f ( p ) = f ( q ) implies , p=q
f(p)≠f(q) implies , p≠q

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Here, p ≠ q i.e. f ( p ) ≠ f ( q ). It means for all elements of A there exists unique element in B.
Example: Let, y = x2

It is not a injective function, as for two different values in domain, there exists single image
for both i.e. f(2) = f(-2) = 4. Such kind of function is known as many to one function.
NOTE: when function is strictly increasing or strictly decreasing then function is injective or
one to one.
2. SURJECTIVE FUNCTION: Function is surjective if ∀ b ∈ B, there exists a ∈ A such that
f (a) = b. In other words, when all elements of B has at least one pre-image in A then f is
surjective or onto. In this case range is same as co-domain.

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Here, range = codomain

Therefore, onto function
NOTE: A function is said to be an into function when range is not equal to co-domain. In this
case, range is a subset of co-domain.

Here for 8 (i.e., element of B) there is no pre-image.

Range ≠ Codomain
Therefore, it is not a surjective function.
3. BIJECTIVE FUNCTION: The function which is both one to one and surjective then it is
a bijective function. If f (a) = b, for every b in B there exists only one a in A.

It is not a bijective function because it is not one to one function.

IMPORTANT POINTS TO REMEMBER
• y = f ( x ) ; y is a function of x.

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But we can also write x as a function of y i.e. x = f-1(y). But this can only be written
when function is one to one correspondence, but if it is not the case then it will not follow
the definition of function.
• If function is onto and one to one, then the domain of the inverse function will be Y.
• If function is into and one to one, and if we take care of domain then we can still define
inverse function.
3.5.3 COMPOSITE MAPPING
If f : A → B and g : B → C, we can define
gof : A → C such that,
c = g ( f (a) )
We put a ∈ A into f and image ‘b’ where b = f(a), we get into g to get element c ∈ C. In this
way we get a mapping from A to C.
NOTE:
➢ fog exists iff range of g ⊂ domain of f.
➢ gof exists iff range of f ⊂ domain of g.

Example: 5. If f(a) = (a + √2) / (1 - √2a), hen what is the value of f(f(a))?

Ans: f(a) = (a + √2) / (1 - √2a)
f(f(a)) = [f(a) + √2] / [ 1 - √2f(a)]

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a + √2 + √2
1 - √2a
=
1 - √2 a + √2
1 - √2a

= a + √2 + √2 – 2a
1 - √2a - √2a -2
= (-a +2√2) / (-1 - 2√2a)
= ( a - 2√2) / ( 1 + 2√2a)
Example: 6. Let f: ℕ. → ℕ
f (a) = a2 + a +1 then prove that the f is one to one but not onto.
Ans: f (a) = a2 + a + 1
Here, domain is set of natural number and co-domain is set of natural number. For every
element in domain, there exists a unique element in co-domain. For example, if a = 1, its
image is 3, a =2 its image is 7. So, for every element in domain there exist a unique image
therefore, function is one to one.
For onto:
Co-domain = ℕ
Range starts from 3 (as if you put a = 1 i.e., smallest natural number, then f(a) = 3)
Co-domain starts from 1
Therefore, co-domain ≠ range
Function is not onto.
ALTERNATIVE METHOD: To check whether function is one to one we can check
whether functions is increasing or decreasing. And for that we differentiate. We discuss this
in detail in later chapters.
If f’ (a) >0 it is increasing function
Otherwise, if f’ (a) < 0 it is decreasing function.
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Here, f’(a) = 2a + 1
Domain given is ‘ℕ’ then it will always get positive value. Therefore, function is increasing.
and we know that when function is strictly increasing then it is one to one.
Hence, proved.
Example: 7. Consider, f : { p1 , p2 , p3 } → { q1 , q2 , q3 , q4 } and
g : { q1 , q2 , q3 , q4 } → { r1 , r2 , r3 } s.t.
f(p1) = q1 ,f(p2) = q2 , f(p3) = q3
g(q1) = r1 , g(q2) = r2 , g(q3) = r3 , g(q4) = r3
then show that gof is bijective.
Solution: Function is bijective when it is one to one and onto.
gof = g(f(x))
• gof = g(f(p1))
= g(q1)
= r1
• gof = g(f(p2))
= g(q2)
= r2
• gof = g(f(p3))
= g (q3)
= r3
For every element there is a unique image therefore, function is one to one.
Range = Co-domain
Therefore, function is onto.
Function is bijective.

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3.5.4 INVERSE FUNCTION

Function ‘h’ and ‘f’ are inverse function when f(a) = b and h(b) = a.
For example, f(a) = √ (-1 + a) = b
Then inverse, g(b) = -1 + a = b2
f-1 = g(b) = a = b2 + 1; inverse off(a)
Example: 8. If f(x) = y = 3x +4. Then find inverse off(x).
Solution: f(x) = y = 3x +4
y – 4 = 3x
g(y) = x = (y – 4)/ 3
g(y) is the inverse of f(x).

IMPORTANT POINT TO REMEMBER

INCREASING AND DECREASING FUNCTION
As we said if function is increasing or decreasing, function is said to be one to one or
injective.
Let’s discuss what is increasing or decreasing function:
• If p <q then f (p) ≤ f (q)
This is the property of increasing function.
• If p <q then f (p) < f (q)
This is the property of strictly increasing function.

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• If p <q then f (p) ≥ f(q)

This is the property of decreasing function.
• If p < q then f (p) > f ( q)
This is the property of strictly decreasing function.

IN-TEXT QUESTION
8. If f: ℕ → ℕ then f(x) = 2x + 1 is what kind of function.
a) Bijective
b) Surjective
c) Injective
d) None of these
9. f:R→R
g:R→R
f( x ) = 2x – 1
g ( x ) = x3 + 6
then fog-1(x) is
a) [ (x + 11) / 2 ]1/3
b) [ (x-11)/2 ]1/3
c) ( x/2 – 11 )1/3

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d) ( x – 11/2 )1/3

3.6 SUMMARY
In this chapter, we have extended the concept of previous chapter. Here, we discuss about the
pairs where order matters, Cartesian products of sets. Then we discussed that relation is a
subset of a Cartesian product. In function we have seen the domain, range, co-domain in
different kinds of functions, how equality between co-domain and range determines whether
the function is onto or into.

3.7 ANSWERS TO IN-TEXT QUESTIONS

1. No, they represent different ordered pairs.
P × Q = {(a, e), (a, h), (d, e) , (d , h) , (f , e), (f , h) }
Q × P = {(e, a), (e, d) , (e , f) , (h , a) , (h , d) , (h , f) }
(a , e) ≠ (e , a)
2. R = { (3 , 2) , (3 , 4) , (5 , 2) }
3. R = { (2 , 4 ) , (4 , 6)}
DOMAIN: { 2 , 4}
RANGE : { 4 , 6 }
4. (d) none of these
5. (a) not a function.
(b) yes, it is a function.
6. (a) (1/2, 1)
(b) [-1, 2) ∪ (4 , ∞ )
(c) [-3/2, ∞)
7. False
8. (b) injective
9. (b) [ (x-11)/2 ]1/3

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3.8 SELF-ASSESSMENT QUESTIONS

1. Check whether relation R is set of real number
R = { (p , q) : p > q} is reflexive, symmetric and transitive .
2. Find Range of the following function:
f(a) = a2/ (1 + a2 )
3. Let f : R → R
f(a) = 3a + 4 then what is the inverse function.
4. Let f : N → N be defined as f(x) = 4x +1. What kind of function it is?

3.9 REFERENCES
• Hoy, M., Livernois, J., McKenna, C., Rees, R., Stengos, T. (2001). Mathematics for
Economics, Prentics-Hall India.

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LESSON 4
GRAPHS

STRUCTURE
4.1 Learning Objectives
4.2 Introduction
4.3 Coordinate Planes
4.4 Straight Line
4.4.1 Equation of Straight Line with One Point and a Slope equal to m.
4.4.2 Equation of Straight Line with Two Points S and T
4.4.3 Equation of straight line with Intercept p on y-Axis and Slope m.
4.4.4 Application of Straight Line in Economics
4.5 Circle
4.6 Shifting of Graph
4.6.1 Horizontal Shifting of Graphs
4.6.2 Vertical Shifting of Graph
4.7 Inequality
4.7.1 Inequality with one Variable
4.7.2 Linear Inequality with Two Variable
4.7.3 Absolute Values
4.7.4 Properties of Inequality
4.8 Summary
4.9 Answers to In-Text Questions
4.10 Self-Assessment Questions
4.11 References
4.1 LEARNING OBJECTIVES
After reading this lesson, students will be able to understand:
1. Coordinates planes
2. Distance between the two pints M(x1, y1) and N(x2,y2).

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3. Straight lines hold an important position in economics and determining the equation
of straight line is essential, so different methods to determine the equation of straight
line have been discussed.
4. Equation of circle and its derivation.
5. Graphs are an indispensable part of economics, so it is very important to learn the
shifting of graphs in great detail and
6. Inequalities have been discussed; Inequality with one and two variables, linear and
non-linear and absolute inequality and properties of inequalities have been discussed.

4.2 INTRODUCTION
As in the previous unit you have learned about sets, relation and function, logic and proof
techniques. In this unit you will learn about elementary functions, graphs, differentiation and
its application and many more. This unit is the heart of this course. To understand the
language of mathematics this chapter will make you familiar with different types of graphs,
equations and inequalities.
So, this chapter discusses coordinate planes, distance between two points. It also discusses
about straight line and makes you familiar with the equations of straight line with its
economic application i.e., equation of straight line with a point and a slope; equation of
straight line with two points; equation of straight line with intercept p on y axis and with
slope m.
The chapter discusses the circle and explains the derivation of the equation of circle. The
graphs are an indispensable part of economics and shifting of graphs holds a crucial position
in Economics. So, horizontal and vertical shifting of graphs have been discussed in great
detail. The last part of the chapter discusses about inequalities and its properties it includes
absolute inequality; inequality with one variable which include linear and non-linear
inequality; inequality with two variables have also been discussed in the chapter.

4.3 COORDINATE PLANES

A plane has two perpendicular which divides it into four quadrants. The point of intersection
of two perpendicular is origin. Point N in 1st quadrant represents OM distance on x axis and
OP distance on y axis
So, point N represents (x, y).
⃗⃗⃗⃗⃗ represent positive values,𝑂𝑌
Here ray 𝑂𝑌 ⃗⃗⃗⃗⃗ ′ represents negative values.
⃗⃗⃗⃗⃗ represents positive values and 𝑂𝑋
Similarly, 𝑂𝑋 ⃗⃗⃗⃗⃗ ′ represents negative values.

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Distance between two points

The distance between N and M where N is (x1, y1) and M (x2, y2).
NR = PQ = (x2 – x1)

MR = MQ – QR = (y2 – y1)
According to Pythagoras theorem in MRN.
NR2 + MR2 = MN2
(x2 – x1)2 + (y2 – y1)2 = MN2
√(𝑥2 − 𝑥1 )2 + (𝑦2 − 𝑦1 )2 = 𝑀𝑁

So, distance between 𝑀𝑁 = √(𝑥2 − 𝑥1 )2 + (𝑦2 − 𝑦1 )2

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4.4 STRAIGHT LINE

Straight line passes through two points and a straight line can be represented by one point and
a slope. Equation of a straight line is ax+by=c, where a,b,c are constants and x, y are
variables.
4.4.1 Equation of straight line with one point and a slope equal to m.

The slope of straight line is

𝛥𝑦
= 𝑚 = 𝑡𝑎𝑛 𝜃
𝛥𝑥

Point T represents x and y coordinates, and slope of line RV is m.

𝛥𝑦 𝑇𝑈 𝑦2 − 𝑦1
𝑚= = =
𝛥𝑥 𝑆𝑈 𝑥2 − 𝑥1
as TU = y2 – y1
and SU = x2 – x1
𝑦2−𝑦
So, the slope of line RV is 𝑥2−𝑥1 = 𝑚
1

So, the equation of line (y – y1) = m (x – x1) – from equation (1)

So, equation 1 is point slope form equation of straight line.
4.4.2 Equation of a straight line with two points S and T
Where S has coordinates (x1, y1) and T has coordinates of (x, y).

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𝑇𝑈 𝛥𝑦
𝑚= =
𝑆𝑈 𝛥𝑥

Since TU = TW – UW= y2 – y1
and SU = OW – OV
SU = x2 – x1 = WV
Since, SU = WV and TU = QR
𝑇𝑈 𝑦 −𝑦
So, slope 𝑚 = = 𝑥2−𝑥1 = 𝑚
𝑆𝑈 2 1

From equation (i) we get

y – y1 = m (x – x1)
𝑦 −𝑦
(𝑦 − 𝑦1 ) = (𝑥2−𝑥1) (𝑥 − 𝑥1 )
2 1

This is a two-point slope form equation of a line.

4.4.3 Equation of straight line with intercept p on y-axis with slope m.
Equation of straight line with one point and a slope as given in equation (1)
(y - y1) = m (x – x1)

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(y – p) = m (x – 0)
y – p = mx
y = mx + p
This is slope intercept form of equation of line.
4.4.4 Use of Straight Line in Economics
Straight lines are extensively used in economics, some important functions such as
consumption function, investment function and many other functions are used in economics.
Consumption function is a function of autonomous consumption and disposable income.

Similarly, investment function is a function of autonomous investment and negative function

of interest rate.

Increase in the interest rate leads to decrease in investment and decrease in interest rate leads
to increase in investment.
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Example: A firm finds out that 30,000 units are sold when the price is Rs. 15 and 20,000
units are sold when the price is Rs. 20 per unit.
Assuming the relation between quantity demanded and price to be linear. Find the quantity
demanded at Rs. 30.
Solution: The demand equation of the line passing through point (30000, 15) is represented as
(x1, y1) and point (20000, 20) is represented as (x2, y2).
So, the equation of demand curve will be
𝑦2 − 𝑦1
(𝑦 − 𝑦1 ) = (𝑥 − 𝑥1 )
𝑥2 − 𝑥1
We have used the equation of straight line with two points
𝑦2 − 𝑦1
(𝑦 − 𝑦1 ) = ( ) (𝑥 − 𝑥1 )
𝑥2 − 𝑥1
20 − 15
(𝑦 − 15) = ( ) (𝑥 − 30000)
20000 − 30000
−5
(𝑦 − 15) = (𝑥 − 30000)
10000
−5𝑥 5 × 3 0000
𝑦 − 15 = +
10,000 1 0000
−𝑥
𝑦 − 15 = + 15
2000

−𝑥
𝑦= + 30
2000
where y is price (P) and x is quantity demanded (Qd)

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−𝑃
𝑄𝑑 = + 30
2000
When P=30, Qd=29.99
IN-TEXT QUESTION
1. When the price of a commodity is Rs. 20 then quantity demanded, and quantity
supplied is 40 and 30 respectively. When the price of a commodity is Rs. 30 then
quantity demanded, and quantity supplied is 30 and 40 respectively. Find the
equations of demand and supply curve. Find the equilibrium price and quantity
demanded.
2. The demand for labour in the electronic industry is Ld=1400-50W and its supply is
Ls=200+50W, where L is the number of workers and W is wage rate per hour.
i. Find the equilibrium values of L and W.
ii. If the government wishes to increase the equilibrium wage to Rs.16 by offering a
wage subsidy, find the value of L, the cost of the subsidy to the government.

4.5 CIRCLE
A circle is a locus of points with constant distance from a fixed point named as center, and
fixed distance is called radius.
If the Center is at origin i.e. (0, 0) and radius (i.e., distance from the center to any point on the
circle) is represented through r. So, the equation of circle is √(𝑥 − 0)2 + (𝑦 − 0)2 = √𝑟 2
or x2 + y2 = r2
Similarly, the equation of circle with center as (a1, a2)
(𝑥 − 𝑎1 )2 + (𝑦 − 𝑎2 )2 = 𝑟 2 Equation (1)
If we expand the given equation

𝑥 2 + 𝑎1 2 − 2𝑎1 𝑥 + 𝑦 2 + 𝑎22 − 2𝑎2 𝑦 = 𝑟 2 → Equation (2)

So, we can also write the above equation
as
x2 + y2 – 2𝑎1 x – 2a2 y+ c = 0 → equation (3)
Where 𝑐 = 𝑎12 + 𝑎22 − 𝑟 2
As we can note some features from above equation

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(1) The coefficient of x2 and y2 are same

(2) There is no term having the product of x and y.
So, we can write equation (3) as
kx2 + ky2 + 2lx + 2iy + j = 0
Dividing equation (4) by k, we get.
2𝑙𝑥 2𝑖𝑦 𝑗
𝑥2 + 𝑦2 + + + =0
𝑘 𝑘 𝑘
2𝑙𝑥 2𝑖𝑦 𝑖
𝑥2 + 𝑦2 + + =−
𝑘 𝑘 𝑘
𝑙2 𝑖2
Adding, 𝑘 2 and 𝑘 2 on both sides, we get
2𝑙𝑥 𝑙 2 2𝑖𝑦 𝑖 2 −𝑖 𝑖 2 𝑙 2
𝑥2 + + 2 + 𝑦2 + + 2= + +
𝑘 𝑘 𝑘 𝑘 𝑘 𝑘2 𝑘2
𝑙 2 𝑖 2 −𝑖𝑘 + 𝑖 2 + 𝑙 2
(𝑥 + ) + (𝑦 + ) =
𝑘 𝑘 𝑘2
So, the equation of circle with center
−𝑙 −𝑖 −𝑖𝑘+𝑖 2 +𝑙2
( 𝑘 , 𝑘 ) and radius √ 𝑘2

4.6 SHIFTING OF GRAPHS

There are mainly two types of shifting. Horizontal and vertical shifts.
4.6.1 Horizontal shifting of graphs occurs when y = f(x), e is added or subtracted from x.
y = f(x + e) when e > 0 there is left ward shift in the graph.
When e < 0 there is a rightward shift in the graph.
For example, f(x) = x = y

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So, by adding 2 to x we get

y = f(x + 2) = x + 2
X 0 –2 1
Y +2 0 3

by subtracting 2 for x we get

y = f (x–2) = x – 2
x 0 2 1
y –2 0 –1

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4.6.2 Vertical shifting of graph: Vertical shifting of graphs occurs when b is added to f(x).
y = f(x) + b
When b is positive, then graphs shift upward
When b is negative, then graphs shift downward.
for eg. y = x2 and if 2 is added to f(x).
y = x2 + 2 the graph will shift upward.
when y = x2 – 2, the graph will shift downward.

# You will study Parabola function in detail in next chapter.

4.7 INEQUALITY

4.7.1 Inequality with One Variable

Inequality in the form of ax + b > c or ax2 + bx + c < d are inequalities with one variable i.e.,
x.

Linear inequality
Linear inequality is in the form of ax + b > c.

9x +3 < 4x + 2

5x. < = 1

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1
x
5

So, all the values of x less than – 0.20 are represented through thick line is the solution of the
inequality.

Non-linear inequality
Non-linear inequality is in the form of ax2 + bx + c < d.
x2 – 4x – 12 < 0
x2 – 6x + 2x – 12 < 0
x (x – 6) + 2 (x – 6) < 0
(x – 6) (x + 2) < 0
either (x – 6) > 0 and (x + 2) < 0, so, x > 6, x < –2
either (x – 6) < 0 and (x + 2) > 0, so, x < 6, x > –2
Solution is x < 6, x > –2

as x > 6 and x < –2 is not possible as the real number cannot be simultaneously greater than 6
and less than –2.
4.7.2 Linear Inequality with Two Variable
System of inequality with two variables is written as:
3x + 8y ≤ 24
9x + 16y ≤ 144

x0, y0

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X 0 8
Y 3 0

X 0 16
Y 6 0

The area bounded by 9x + 16 y = 144 is the area below the curve 9x + 16y = 144.

Similarly, the area bounded by 3x +8y = 24 is the area below the curve 3x + 8y = 24.

So, shaded regions are the common area.

IN-TEXT QUESTIONS
3. Sketch the area bounded by the following graph.

4x + 3y 24
6x +8y 48
x0,y0
2x2 +6x−8
4. solve the following inequality x + 1
𝑥+4

4.7.3 Absolute Values

|x| is defined as follows.

|x| =x if x>0
|x| =-x if x<0
|x| =0 if x=0

Example

|x+3| 2

Solution: The inequality can be written as

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- (x+3) ≤2 or (x+3) ≤2
-x≤5 or x≤-1
x-5 or x≤-1
- 5 ≤ x ≤-1
4.7.4 Properties of Inequality
(1) If a > b then a – b > 0 i.e., if a and b are two real numbers and if a is greater than b.
So, a – b is positive.
(2) If b > a then a – b < 0 i.e., if a and b are two real numbers and if b is greater than a.
So, a – b is negative.
(3) Adding and subtracting any real number c on both sides will not reverse the
inequality.
For eg. If a < b, then adding and subtracting c will not reverse the inequality.
a±c<b±c

(4) Multiplying a positive real number c on both the sides will not reverse the inequality.

For eg. If a >b then multiplying c on both the sides will not reverse inequality.

ac >bc.

(5) Multiplying a negative real number c on both sides will reverse the inequality.

For eg. If a >b then multiplying c on both the sides will reverse the inequality to ac
<bc.

(6) Inequalities are transitive. i.e., if a < b, b < c then a < c.

1 1
(7) If a < b then
b a

1 1
For eg. 3 < 4 then
4 3

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4.8 SUMMARY

A Plane is divided into 4 quadrants. And distance between any two points A as (x1,y1) and B
as (x2,y2) in a plane is represented through the given formula distance AB =
√(𝑥2 − 𝑥1 )2 + (𝑦2 − 𝑦1 )2. Straight line holds a crucial position in economics. Many
functions such as consumption and investment functions are linear function and are
represented through a straight line. So, determination of equation of a straight line is utmost
essential. The equation of straight line with a point and a slope is represented by (y – y1) = m
𝑦 −𝑦
(x – x1).Equation of a straight line with two points is represented by(𝑦 − 𝑦1 ) = (𝑥2−𝑥1) (𝑥 −
2 1
𝑥1 ), where(x1,y1) and (x2,y2) are two points respectively.Equation of straight line with
intercept p on y-axis with slope m is represented by y = mx + p.
If the Centre is at origin i.e. (0, 0) and radius is r then, the equation of circle is represented
by√(𝑥 − 0)2 + (𝑦 − 0)2 = √𝑟 2.
Horizontal shifting of graphs occurs when y=f(x+e), when e>0 there is leftward shift in the
graph and when e<0 there is rightward shift in the graph.
Vertical shifting in the graph occurs when b is added to the f(x) or y=f(x) +b when b is
positive, then graphs shift upward when b is negative, then graphs shift downward. Linear
and non-linear inequalities with one variable are of the form ax+b>c and 𝑎𝑥 2 + 𝑏𝑥 + 𝑐 <
𝑑 respectively. Linear inequality with two variables are used to solve the system of equations
to determine the feasible region.
4.9 ANSWERS TO IN-TEXT QUESTIONS

1. The equation of quantity demanded can be found by using the formula for the
equation of Straight line with two points. When the Price is Rs.20 then quantity
demanded is 40. So, the Point is (20,40) Similarly the other Point is (30, 30)

𝑦 −𝑦
So, equation of straight line with two points is (𝑦 − 𝑦1 ) = (𝑥2 −𝑥1 ) (𝑥 − 𝑥1 )
2 1

Where (x1, y1) is (20,40) and(x2,y2) is (30,30) So, by substituting the values in the
given formula
we get,
30−40
(y-40) = (30−20) (x-20)

(y-40) = (-1) (x-20)

(y-40) = -x+20

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y =- x+20+40 y=-x+60 equation 1

where y represents demand and x represents price So,

Qd = -P+60

Similarly Supply equation with (x1, y1) is (20, 40) and (X2,y2) as ( 30, 40) and
Substituting the values in equation of straight line with two points we get
40−30
(y-30) = (30−20) (x-20)

y-30= 1(x-20)

y-30 = x-20

where y is Quantity supplied and x is Price

Qs = P+10 equation 2

By solving equation 1 and equation 2 we get

In equilibrium Quantity demanded = Quantity supplied
-P+60 = P+10

-2P=-50

P=25

Qd=-25+60
Qd = 35 = Qs

So, equilibrium Price is 25 and equilibrium quantity 35.

2. (i) Equilibrium number of Workers and equilibrium Wage W are determined by

equating Ld=Ls.

1400 - 50w = 200+ w

1200 = 100 W

1200/100 = W 100

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Rs 12 = W

Ld = 1400 - 50x12

Ld = 1400 - 600

Ls = Ld = 800

So, equilibrium wages are Rs12 and the number of workers are 800.

(ii) lf the government gives the wage subsidy to increase employment

and increases the wage from 12 to 16. Then Number of labour supplied will be

LS = 200 +50w

LS = 200 +50X16

LS = 1000

and wage to be received by each labourer with 1000 labourers in the economy is

1400 - 50w = Ld

1400- 50w = 1000

400 =50w

Rs 8 = w

So, the cost of susidy to the government is the shaded region. ABCD

area ABCD = length & breadth

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area ABCD = 1000 x (16-8)

area ABCD = 1000 x 8

area ABCD = 8000

So, the cost to the government is 8000.

3. 4x+3y  24

X 6 0
Y 0 8

So, the line 4x+3y  24 passes through (6,0) and (0.8)

6x+8y  48

X 0 8
Y 6 0

Similarly, line 6x+8y  48 passes through (0,6) and

(8,0) plotting both the lines on the graph we get, the

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common area bounded by later inequality is shaded region

2𝑥 2 +6𝑥−8
Solution 4: ≤ x+1
𝑥+4

2𝑥 2 +8𝑥−2𝑥−8
≤ x+1
𝑥+4

2𝑥(𝑥+4)−2(𝑥+4)
≤ x+1
𝑥+4

(𝑥+4)(2𝑥−2)
≤ x+1
𝑥+4

2𝑥 − 2 ≤ x + 1.

𝑥≤3
4.10 SELF-ASSESSMENT QUESTIONS
1. A manufacturing unit uses two factors of Production i.e., labour and capital. The Price
of labour to Rs. 10 per hour and the price of capital is Rs.20 per hour. If the
manufacturer wishes to spend Rs 500 per hour on Production, determine the cost
equation.
2. Two Points on a linear supply relation are (45000, Rs.130) and (60000, Rs.60)
• Find the supply equation.
• What will be in the supply when Price is Rs.80.

3. Find the Coordinates of center and radius of each of the Circles with the following
equation

• 4x² +4y²+16x+8y=0

• 2x² + 4y² - 8y = 0.

4. Solve the in equalities

• 3 < x+2 <5 x+3

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• 2𝑥 2 − 7𝑥 + 4 > 0

5. Indicate the area bounded by the following system of Inequality:

• x+y4
• 2x-4 -8
• x-2y 8

4.11 REFERENCES
• Sydsaeter, K., Hammond, P. (2002). Mathematics for economics analysis. Pearson
Education.
• Hoy, M., Livernois, J., McKenna, C., Rees, R., Stengos, T, (2001). Mathematics for
Economics, Prentice-Hall India.

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LESSON 5

FUNCTIONS OF ONE REAL VARIABLES-I: POLYNOMIALS

AND POWERS

STRUCTURE

5.1 Learning Objectives

5.2 Introduction
5.3 Quadratic Functions
5.3.1 Solutions to Quadratic Equations
5.4 Applications of Quadratic Function
5.5 Polynomials & Cubic Functions
5.5.1 General Polynomial Functions
5.5.2 Integer Roots
5.6 The Remainder Theorem
5.7 Power Functions
5.7.1 Rules for Power Functions
5.7.2 Graphs of Power Functions
5.8 Terminal Questions
5.9 Summary
5.10 References

5.1 LEARNING OBJECTIVES

After reading this lesson, students will be able to:

1. Understand the quadratic functions.
2. Identify a polynomial function.
3. What is meant by ‘Remainder Theorem’?
4. Evaluate the power functions.

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5.2 INTRODUCTION
The linear functions that you studied in the previous chapter were too simple. Many
economists find it difficult to accurately model economic phenomenon with these functions.
In fact, a lot of economic models use functions that either increase or decrease until they
reach a certain minimum or maximum value, respectively. In other words, when dealing with
this non-linear relationship in which a change in x does not always result in a constant change
in y then in that case, we use polynomials. In this chapter we will learn about the simple non-
linear functions.
5.3QUADRATIC FUNCTIONS
In simple terms, a quadratic function is a non-linear function that contains a variable that is
raised to the power two (2).
For example:
Let f(x) = ax2 + bx + c = 0 … (5.1)
Where, a, b and c are constants and a ≠ 0. In the above equation if a = 0, then in that case f(x)
= bx + c, then the equation becomes a linear function. As observed, variable ‘x’ in (5.1) is
raised to power two.
Using equation (5.1), we need to find the values of x such that f(x) = 0. To begin with, we
will solve it using the method known as ‘completing the square’. Under this method, we will
divide the whole (1) by ‘a’ such that:
𝑏 𝑐
⇒ 𝑥 2 + (𝑎) 𝑥 + (𝑎) = 0 … (5.2)

𝑏 −𝑐
⇒ 𝑥 2 + (𝑎) 𝑥 = … (5.3)
𝑎

𝑏 2
Now, adding (2𝑎) to both the sides, we get

𝑏 𝑏 2 −𝑐 𝑏 2
⇒ 𝑥 2 + (𝑎) 𝑥 + (2𝑎) = + (2𝑎)
𝑎

𝑏 2 𝑐 𝑏 2
⇒ (𝑥 + 2𝑎) + 𝑎 − (2𝑎) = 0

𝑏 2 𝑏 2 −4𝑎𝑐
⇒ (𝑥 + 2𝑎) − [ ]=0 …(5.4)
4𝑎2

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Multiplying both sides by a, we get the form:

𝑏 2 𝑏 2 −4𝑎𝑐
⇒ 𝑎 (𝑥 + 2𝑎) − [ ]=0 …(5.5)
4𝑎

𝑏 2
From (5), we find that as the value of ‘x’ changes, then the value of 𝑎 (𝑥 + 2𝑎) varies. If we
b
equate this term equals to zero, then in that case x . If a > 0, it will never be less than
2a
b
zero. Given this case, if a > 0, then f(x) will attain minimum value when x , thus:
2a
−𝑏 −(𝑏 2 −4𝑎𝑐) 𝑏2
𝐹 ( 2𝑎 ) = ⇒ 𝐶 − 4𝑎 (5.6)
4𝑎

On the other hand, if a < 0 then in that case

𝑏 2 𝑏
𝑎 (𝑥 + 2𝑎) < 0 for all x≠ -2𝑎 (5.7)

b
If x , then in that case, (5.7) will become zero, thus f(x) attains maximum when
2a
b
x . Thus, we conclude that:
2a
−𝑏 𝑏2
1. f(x) = ax2 + bx + c attains minimum when a > 0, and at point ( 2𝑎 , 𝐶 − 4𝑎)
−𝑏 𝑏2
2. f(x) = ax2 + bx + c attains maximum when a < 0, at point ( 2𝑎 , 𝐶 − 4𝑎)

Graphically, the shape of the function f(x) = ax2 + bx + c will be a parabola and solutions for
this equation is determined at f(x) = 0 and the intersection of this parabola with x axis. The
graph will be U-shaped or inverted U shaped depending upon the values of ‘a’.

The maximum and minimum points are determined as the coordinates of point A.
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5.3.1 Solutions to Quadratic Equations

Example 1: Determine the roots of the following function and find maximum/minimum point
of each:
(i) f(x) = x2 + 4x – 5
(ii) f(x) = –2x2 –4x – 6
Solution:
x2 + 4x – 5 = (x2 + 4x) – 5
𝑏 2
here a = 1, b = 4 and c = –5, then from equation (), we will add and subtract(2𝑎) .

→ (x + 4x + 4) – (4 + 5) → (x + 2) – 9.
2 2

Now, this expression attains minimum value –a when x = –2.

For roots,

(x 2)2 9 (x 2) 9

x+2= ±3

So, x+ 2 = 3 and x + 2 = –3 x 1 and x 5

(b) −2𝑥 2 − 4𝑥 − 6 = −2(𝑥 2 + 2𝑥) − 6

𝑏 2
here a = –2, b = 2 and c = –6, then we will add and subtract (2𝑎)

2(x 2 2x 1 1) 6

2(x 1)2 2 6 2(x 1)2 4

Now, the expression attains minimum value –4 when x = –1.
For determination of roots,
–2(x+1)2 = 4
(x+1)2 = –2

There does not exist any root as 2 cannot be determined.

Example: Let y = 2x2 + 8x + 11. Factorize the equation and draw the graph.

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Solution: y = 2x2 + 8x + 11 can be rewritten as

y = 2 (x2 + 4x) + 11
Using the completing square method,
y = 2 (x2 + 4x + 4 – 4) + 11
y = 2 (x+2)2 + 3
y – 3 = 2(x+2)2
To sketch this function, we need to find vertex such that
y – 3 = x + 2 = 0 i.e. (–2, 3)
Now, the point where the graph intersects Y axis is a point where value of x equals zero, such
that
y = 2 (x+2)2 + 3 = 11 so coordinates (0, 11)

Example: Suppose y = –3x2 + 30x – 27. Sketch the graph.

Solution: y = +3 (–x2 + 10x – a) –3 (x2 – 10x + a)
y = –3 (x2 – 10x + 25 – 25 + 9) [ Completing the square)
⇒ 𝑦 = −3[(𝑥 − 5)2 − 16] ⇒ −3(𝑥 − 5)2 + 48
Again, from the previous example, vertex is determined at the points

3(x 5)2 0
y 48 0

(5, 48)

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We will obtain an inverted n shaped graph in this case.

The graph will also intersect x axis, where y = 0
y = –3 (x – 5)2 + 48
0 = –3 (x – 5)2 + 48
48 = 3 (x – 5)2 16 = (x – 5)2

16 x 5 x 5 4
x 5 4 or x 5 4

So, we get coordinates, x = 1 and x = 9, thus (1, 0), (9, 0).

The graph also intersects the y axis when x is zero at point (0, –27).
IN-TEXT QUESTIONS
1. Let f(x) = x2 – 7x. Using this, complete the following table:
(a)
x –1 0 1 2 3 4
f(x)

(b) Determine the maximum / minimum point

(c) Find value of x for f(x) = 0
(d) Graph table in part (a) as function of ‘f’.
2. Find roots of the following quadratic equations and determine the
maximum/minimum points:
(a) 2x2 + 8x + 11

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(b) x2 + 4x
1 2 2 8
(c) x x
3 3 3
3. Solve the following quadratic equations:
(a) x4 – 8x2 – 9 = 0
(b) x6 – 9x3 + 8 = 0
[Hint: Put x2 = k and form quadratic equation]
4. Find solution to the following equations where ‘m’ and ‘n’ are positive parameters:
(a) x2 – 6mx + 4m2 = 0
(b) x2 – (m+b) x + mn = 0
5. Find the equation of parabola that passes through three points (1, –3), (0, –6) and (3,
15).
y = px2 + qx + r
[Basically, find the value of p, q and r]
ANSWERS IN-TEXT PROBLEMS
1. (a)
x –1 0 1 2 3 4
f(x) 8 0 –6 –10 –12 –12

(b) x = 0 and x = 7
2. (a) No real solution
(b) as b2 – 4ac = 64 – 88 < 0
(c) x2 + 4x = (x + 2)2 – 4 with minimum – 4 at x = –2
1
(d) (x 1)2 3 , with smallest value –3 when x = –1
3
3. (a) x=±3
(b) x3 = 1 or x3 = 8 so x = 1 or x = 2

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4. (a) x = 2m or x = 4m
(b) x = m and x = n
5. y = 2x2 + x – 6, (1, –3) belongs to the graph if –3 = p + q + r
(0, –6) belongs to the graph if –6 = r
and (3, 15) belongs to the graph if 15 = ap + 3q + r
Thus, p = 2, q = 1 and r = –6
5.4 APPLICATIONS OF QUADRATIC FUNCTION
The majority of economic analysis focuses on optimization issues. As economics is
associated with the study of choice, economists typically model the choice mathematically in
the form of optimization problem. In this section, we demonstrate how certain fundamental
economic concepts can be illustrated using the quadratic functions.
Example 1: (Profit Maximization) suppose the firm is selling Q units of goods at a price of
Rs. 10 per unit, which is same at all levels of output and faces a cost curve C(Q)=Q2–
20Q+120. Find the level of output that maximizes profit and the corresponding level of
profit.
Solution: We know that profit is computed as total revenue (P×Q) minus cost.
(Q) = (P×Q) – cost
10Q – (Q2 – 20Q + 120) 30Q – Q2 – 120
Here
b 30
Q* 15 [ Using eq. ]
2a 2( 1)

(Q) = 30(15) – (15)2 – 120

450 – 225 – 120 Rs. 105
Example 2: (Inverse demand function) suppose the firm faces an inverse demand function of
the form:
231 Q
P
18
and supply of the form Q = 2P + 4P2
Solve for the equilibrium quantity.
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Solution: We know that in equilibrium, demand equals supply

2P + 4P2 = 231 – 18P (Q = 231 – 18P is demand)
4P2 + 20P – 231 = 0
Here, a = 4, b = 20, c = –231
We know that

b b2 4ac
P
2a

20 400 4(231)(4)
P
2(4)

20 400 3696
8

20 4096 20 64
8 8
20 64 20 64
P and
8 8
P = 5.5 or –10.5
Since P can’t be negative, we take P = 5.5 with equilibrium quantity as

Q = 2 (5.5) + 4 (5.5)2 = 132

Example 3: (Monopoly problem) Consider a market for vaccines. Suppose there is only one
seller which is selling the Covid vaccine and thus enjoys a monopoly. The firm faces a total
cost function of the form:

where Q≠0
and a and b are positive constants. Each unit of vaccine (Q) is sold in the market at a price
P=α-βQ where Q≠0
and > 0 and β≠0. Find the profit-maximizing quantity and profit.
Solution: The total revenue of the monopolist is denoted as
TR = P.Q = ( – Q). Q ... (1)

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and the profit earned by this monopolist is

(Q) = TR – C ... (2)
= ( – Q). Q – (aQ+ bQ2)
= αQ-βQ2- aQ- bQ2
= (α-a) Q –(β+b) Q2 ... (3)
Since, the monopolist wants to maximize its profit levels, then he will attain maximum at the
𝜕𝜋
point where Q equals 𝜕𝑄=0.

Using equation:
(𝛼−𝑎)
Q*= 2(𝛽+𝑏) and the resulting profit will be

(𝛼−𝑎)2
π*= 4(𝛽+𝑏)

The above equation will hold only if > a. If α=a, then the monopolist will not produce any
quantity and Q* = 0, (Q) = 0.
If suppose, the monopolist behaves like in a perfectly competitive market then,  = 0 and P =
. Here the decision about price is not affected by the quantity. Putting  = 0 and  = P in
equation (3), we get
(Q) = (P – a) Q – bQ2

then,
with P > a. If P = a, then Q* = 0 and * = 0.
P = a + 2bQ*
Now, equating this price with the demand curve of the monopolist.
P =  – Q = a + 2bQ
 – Q = a + 2bQ
α−a
Q=2𝑏+𝛽

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Thus, in this way a monopolist will behave like a perfectly competitive firm.
IN-TEXT QUESTION
1. A firm produces quantity ‘Y’ of a product A with total cost 3 + 2y. The demand
1
schedule for the product Y (11 P) , where P is the price charged for product.
2
Determine the profit-maximizing output and the profit.
ANSWER TO IN-TEXT QUESTION
1. Demand becomes
P = 11 – 2Y
8 thus revenue is P.Y = 11Y – 2Y2
(Y) = 11Y – 2Y2 – 3 – 2Y
= –2Y2 + 9Y – 3
9 57
Y , (Y)
4 8
5.5 POLYNOMIALS & CUBIC FUNCTIONS
In this section, we consider cubic functions expressed in the general form as:
f(y) = ay3 + by2 + cy + d ……. (5.8)
where a, b, c and d are constants and a 0
The solution to a cubic function is generally found by plotting the graph and finding
the points of intersection on axes. The shape of the graph varies with the changes in co-
efficient a, b, c and d. In most cases, the graph is generally S-shaped. Also, there will be
either one root or three roots of the cubic
function.
Solve the following cubic equation: x3 – 6x2 +
11x – 6 = 0
Solution: We can solve this equation by plotting
the graph.

Starting with lower values of x, let < 1, x3 also

gets negative, we begin from below x line, and it
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moves higher to the right as x gets large and x >0, then x3 is increasing. The curve intersects
the x axis thrice at points x = 1, x = 2 and x = 3. Thus, it implies that

x3 6x 2 11x 6 (x 1)(x 2)(x 3) 0

5.5.1 General Polynomial Functions
All functions such as linear, quadratic and cubic functions belong to a group of functions
called ‘polynomials”. They can be expressed as:

where a n 0 and a1, a2, a3 ........... an are constant. The equation (5.9) is known as a general
polynomial function of degree ‘n’. If suppose, n = 5, we will get
f (x) a5x5 a 4x4 a 3x 3 a 2x 2 a1x a0

that is general polynomial of degree 5.

As per the ‘fundamental theorem of algebra’ every polynomial expressed as (5.9) can be
factored as a product of polynomials of first or second degree.
For example:
f(x) = x3 – 2x2 + x – 2
=x2 (x – 2) + 1 (x – 2)
= (x – 2) (x2 + 1)
5.5.2 Integer Roots
While solving for the polynomial functions, we can get the roots of the function in the form
of integer. According to the integer solution of a polynomial function, if there is a function of
the form
P(x) an xn a n 1x n 1
........ a1x a0 0
(5.10)
with co-efficient an, an–1, ......... a1, a0 as integers, then all possible integer roots of the above
equation must be factor of the constant term a0. A polynomial of nth degree can have at most
n roots.
Example: Find all integer roots of the equation x2 + x – 2 = 0.
Solution: According to the integer theorem, all integer roots of the equation must be a factor
of –2. As x2 + x = 2 x (x+1) = 2. Thus, it has two root x = 1 and x = –2.
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IN-TEXT QUESTION
1. Find all the possible integer roots of the following equations:
(a) x5 – 4x3 – 3 = 0
(b) 2y3 + 11y2 – 7x – 6 = 0
(c) y4 + y3 + 2y2 + y + 1 = 0
ANSWER TO IN-TEXT QUESTION
1. (a) x = –1
(b) x = –6 and x = 1
(c) Neither 1 nor –1 satisfies the equation, thus there are no integer roots.

5.6 The Remainder Theorem

The remainder theorem is associated with the division of polynomials. According to this
theorem, if there is a polynomial P(x) which is divided by a factor (x–a), then we are left with
some smaller polynomial Q(x) [degree of Q(x) is less than P(x)] and a remainder r(x). It can
be expressed as:
P(x) = Q(x) (x–a) + r(x) (5.11)
In other way,

P(x) r(x)
Q(x)
(x a) (x a)

If r(x) = 0, then P(x) is completely divisible by (x – a) and hence (x – a) is a factor of P(x).

When, r(x) ≠ 0, there exist a remainder. Suppose x = a, then
P(a) = Q(a) (a–a) + r
P(a) = Q(a) (O) + r P(a) = r
Thus, we get to the conclusion that (x – a) is the factor of P(x) if and only if P(a) = 0, i.e.
there is no remainder.
Example: Prove that polynomial P(x) = 2x3 – x2 – 7x + 2 has a zero at x = 2. Also factorize
the polynomial.
Solution: Put x = 2 in P(x) we get

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P(2) = 2(2)3 – (2)2 – 7 (2) + 2 16 – 4 – 14 + 2 = 0

Therefore, x=2 is a root of P(x).
Also,
P(x) = 2x3 – x2 – 7x + 2 = (x – 2) (2x2 + 3x – 1)
Put differently, P(x) = 2x3 – x2 – 7x + 2 = 2 (x – 2) (x2 + ax + b).
Expanding this expression: P(x) = 2x3 + (2a – 4) x2 + (2b – 4a ) x – 4b. If this equals to 2x3 –
x2 – 7x + 2, then (2a – 4) = –1, (2b – 4a) = –7 and –4b = 2. Solving this we get values of a =
3/2 & b = –1/2.
Thus, P(x) = (x – 2) (2x2 + 3x – 1)
Let us understand the remainder theorem in polynomials with the following example:
Let us divide (x2 – x – 20) by (x – 5), then

Thus, we conclude that (x2 – x – 20) divided by (x – 5) equals x + 4.

Sometimes, instead of getting zero as remainder, we are left with a remainder. Consider the
example below:
Divide x3 – x – 1 by x – 1, then

Thus, we conclude that, x3 –x – 1 = (x2 + x) (x – 1) + (–1) or alternatively,

x3 x 1 1
(x 2 x)
x 1 (x 1)

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5.7 POWER FUNCTIONS

A power function generally takes the form f(x) = axk where a and k are constants, and all x >
0. Here ‘k’ refers to exponent of the function. The power function appears quite similar to the
exponential functions, but unlike them, here in a power function the base is variable while the
exponent component remains constant.
5.7.1 Rules for power functions
While using the power functions, certain rules must be taken care of :
q
1. xp/ q (x1/ q )p ( x )p where p is an integer and q is a natural number

2. (abcd)p = (ab)p (cd)p = apbpcpdp

3. (𝑎 + 𝑏)2 ≠ 𝑎2 + 𝑏 2 where a≠ 0,1
1 1 1 1
4. (𝑎 − 𝑏 − 𝑐)𝑘 ≠ 𝑎𝑘 − 𝑏 𝑘 − 𝑐 𝑘 where 1/k ≠ 0,1
5. (𝑎 + 𝑏)0 = 1
1 1
6. 𝑥 −𝑎 = 𝑥 𝑎 and 𝑥 −𝑎 = 𝑥 𝑎

Example: Solve the following equation:

(x 8 x 9 )
y
x 4
Solution:
we know that x8 × x–9 = x8–9 = x–1
1
x
y 4
x3
x
Example: Suppose y2z5 = 32, where y and z are positive numbers. Express z in terms of y.
Solution:
y2z5 = 32
z5 = 32 y–2
z = 321/5 y–2/5 z = (2)5/5 y–2/5
z = 2y–2/5

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5.7.2 Graphs of power functions

Let us take the power function of the form y = xk which is defined for all rational number k
and x > 0. Now, we will draw this graph under the following cases:
1. If k = 0, then y = x0 and y = 1
2. If k = 1, then we have straight line y = x
3. If k > 1, then we get an upward sloping graph as the value of x increases. If x is small,
the graph will be close to x-axis while the graph is vertical for large values of x.
1 𝑘
4. For k < 0, then y = x–k or 𝑦 = (𝑥) and we obtain downward sloping graph as the
value of x increases. If x is small, the value of y increases and the graph is closer to y-axis,
for large values of x, it becomes close to x-axis.
5. If 0 < k < 1, let k = 1/2 then in this case, as value of x increases, the graph becomes
flatter. Fig – depicts all cases.

Example:
Sketch the graph of y = x0.5 and y = x–1.5
Solution: Using the calculator, we can show that
x 0 1/2 1 2 3
y=x0.5 0 0.707 1 1.41 1.73
y=x–1.5 not def. 2.82 1 0.353 0.192

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IN-TEXT QUESTIONS
1. Perform the following division

(a) (y2 y 20) (y 5)

(b) (3y8 y2 1) (y3 2y 1)

(c) (y5 3y4 1) (y2 y 1)

2. Compute the following
(a) 32–3/5
(b) 1001/5
(c) (48)–3/16
3. Simplify the expression

ax1/ 2 (x b)a1/ 2 x 1/ 2
x 0
(x1/ 2 ) 2

ANSWER TO IN-TEXT QUESTION

1. (a) y+4

5 3 2 (28y 2 36y 13)

(b) 3y 6y 3y 12y 12
y3 2y 1

4y
(c) y3 4y 2 3y 1 2
(y y 1)

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2. (a) 1/8
(b) 5.511
(c) 1/8
(b x)
3.
2ax 3/ 2
5.8 TERMINAL QUESTIONS
1. Solve the following equations by converting them into quadratic form:
𝑦
a) (𝑦−2)(5𝑦−4)
= −1
1 1
b) − 𝑦+1 = 1
𝑦−1
2.
For a given function G (z) = 72-(4+z)2- (4-pz)2, with p is constant. Determine the
value of z for which G (z) attains largest value.
3.
A piece of rope which is 40 cm long is molded into rectangle. Determine the
maximum area that can be enclosed.
1 2 1 1 2
4.
Simplify the expression: (𝑚1/3 − 𝑛3 ) (𝑚3 + 𝑚3 𝑛3 + 𝑛3 )
Answers
1. (a) 5y2-13y+8=0, 8/5, 1
(b) y2-3=0
2. z=4 (p-1)/(p2+1)
3. Let one side of rectangle be x and other side be y. Then 2x+2y=40 and y=20-x. Area
(x) = x.(20-x) with maximum area is 100 cm2.
4. m-n
5.9 SUMMARY
In this unit, we introduced different types of functions applied in economics and
mathematics. We discussed the non-linear functions which are quite different from the linear
functions. We studied polynomials that were raised to the power of two (quadratic functions),
cubic functions that were raised to the power three and general polynomial functions raised
with higher powers.

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In the following section, the unit discusses the applications of quadratic functions in
economics such as minimization of cost and maximization of profits by the firm and how to
solve inverse demand and supply equations. In the last section of the unit, we discussed the
remainder theorem wherein we looked at how division of polynomials can be done. Finally,
the power functions were introduced at the end, where the base is variable number while the
exponent is constant.
5.10 REFERENCES

• Sydsaeter, K. Hammond, P. (2009) "Mathematics for economic analysis". Pearson

Education.
• Hoy, M. Livernois, S. U, McKenna, C. (2001). Mathematics for Economics, Prentice-
Hall, India.

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LESSON 6

FUNCTIONS OF ONE REAL VARIABLE-II: EXPONENTIAL AND

LOGARITHMIC FUNCTIONS

STRUCTURE

6.1 Learning objectives

6.2 Introduction
6.3 Exponential Functions
6.4 Natural Exponential Function
6.5 Properties of Exponential Function with base e
6.6 Logarithmic Functions
6.6.1 Properties of Logarithmic Functions
6.6.2 Inverse Function g(x)
6.6.3 Differentiation & Logarithmic Function
6.7 Power Function & Logarithms
6.8 Logarithmic Function rule for base other than 'e'
6.9 Applications of Exponentials& Logarithms
6.10 Compound Interest & Present Discounted Values
6.10.1 Effective and Nominal Interest Rates
6.10.2 Present Value/Discounting
6.11 Terminal Questions
6.12 Summary
6.13 References

6.1 LEARNING OBJECTIVES

After reading this lesson, students will be able to:

1. Differentiate between exponential and logarithmic functions.
2. Calculate compound interest rates

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3. Understand the relationship between elasticity and logarithmic functions.

6.2 INTRODUCTION
In this chapter, we will introduce the exponential and the logarithmic functions. These
functions are widely used in economic analysis such as growth of income or wealth and
compound interest. We begin this chapter with exponential functions.

6.3 EXPONENTIAL FUNCTIONS

Let us define a function ‘y’ such that it has a constant base '' and is raised to a variable
component 'x' (also known as exponent). It can be expressed as:

y =  x ,  0 and   1, x  R (6.1)

This is known as the exponential function. These functions are widely used in the
determination of population growth, compounding of interest rates, rates of decay and
depreciation.

The exponential functions have the following general properties with   0 :

(1) If x = 0, then y = 1 irrespective of the base

(2) Let α> 1, the function 'y' will be increasing and for values 0 << 1 the function will
be decreasing.

(3) The exponent 'x' belongs to a set of real numbers, the range of 'y' is set of all positive
real numbers even if x < 0.

Example: Let y = 2 x . Plot the graph of y.

Solution: To graph this function, we can simply take some value of x such that

x 1 2 3 0 −1 −2 −3

y 2 4 8 1 1/2 1/4 1/8

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Example: (Doubling Time) In the case of population growth rate, we use a characteristic
known as 'doubling time' which refers to the time required for population to double given a
constant growth rate. In exponential terms, doubling time can be represented as :

F (t ) = Kk t for k  1

where K is the size of population at time t = 0. In order to determine the doubling time t*, let
us choose an arbitrary time period to with population size equals K. If at time periodt1, the
size of the population doubles, then it should be double the size of population in the previous
period, such that: -

F (t2 ) = Kk t1 = 2 K .

Then, doubling time Tdouble = t1− t0 and is independent if the year chosen as base
Now,

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Kk t1 = 2K
Dividing both sides by k, we are left with

k t1 = 2 or k t* = 2 (*)

Here, the doubling time is the power to which 'k' must be raised to get value equals to 2. If
the population of Uganda is growing at the rate of 4.2% then using (*), the doubling time will
be

(b042)t = 2

t 16.85 or 17 years.

Thus, it takes 17 years for population to double in Uganda.

Example (Compound Interest) if a person has a savings account of ₹A with rate of interest
i% each year, then after 't' years it will increase to

It i = 12% and A = `₹100, then after t years,

t
 12 
1000 1 +  = 100(1.12)
t
 100 

and if

t 1 5 10 20 30
t
100(1.12) 112 176.23 310.58 964.63 2995.99

IN-TEXT QUESTIONS

1. Sketch the graph of the following functions

(a) y = 3x (b) y = 3−x for

x −3 −2 −1 0 1 2 3

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2. How long does it take for the population to double if it is growing at the rate of 3.5%?
3. In, India, the government targets to double its per capita income over the next 10
years. What is the average annual growth rate of per capita income required to
achieve this?

ANSWER TO IN-TEXT QUESTION

1.
x −3 −2 −1 0 1 2 3

y = 3x 1/27 1/9 1/3 1 3 9 27

y= 3−x 27 9 3 1 1/3 1/9 1/27

2. t = 2.36

3. Per capita income is 7.18%.

6.4 NATURAL EXPONENTIAL FUNCTION

By definition, the exponential function is of the form y = b x where b is the positive number
does not equal to 1. Within these exponential functions, it we take the base as an irrational
number e= 2.718 then the function becomes

f ( x) = e x where e=2.718 is a constant

Thus, an exponential function to the base 'e' is known as the natural exponential function.
These functions have a property that its derivative always equals to the function itself, that is
f ( x) = e x .

However, computing powers with base e is difficult and cannot be done by hand. A scientific
calculator is used for this purpose as it has a function key with the option e x , that does
calculation easily. Graphically, y=𝑒 𝑥 can be shown as a strictly increasing function for all x
as e x  0 .

x 2 −1 0 1 2

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y 0.135 0.367 1 2.71 7.38

In this case F (0) can be interpreted as slope of the lien that is tangent to the graph
y = e x . Thus, the slopes equal 1. It supposes the function is of the form y = eh( x ) and we
need to find y  , then

dy dy dv
=  v = h( x), y = ev
dx dv dx

 ev  v  eh( x ) h( x) (6.2)

Example: Find the derivative of the following:
2
(a) y = e x (b) y = 3e7−2v

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Solution: (a) Here h( x) = x 2 and h( x) = 2 x , then

2 2
y = e x  2 x = 2 xe x

(b) here h( x) = 7 − 2v h(v) = −2

then y = 3e7−2v  (−2) = −6e7−2v

6.5 PROPERTIES OF EXPONENTIAL FUNCTION WITH BASE e

1. The natural exponent function f ( x) = e x is strictly increasing and differentiable for all
real numbers x, such that f ( x) = e x .
2. Let a and b be two exponents, then –
(i) eaeb = ea+b
ea
(ii) b = e a −b
e
(iii) (ea )b = eab
Example: Compute the following:

e4 y
(a) e5v  e2 x (b)
e7 y

Solution: (a) e5 y  e2 x = 35 y+2 x

e4 y
(b) 7 y = e4 y −7 y
e

1
= e−3 x 
e3 x

6.6 LOGARITHMIC FUNCTIONS

In the previous section we discussed the function 'f' of the form y =  x . If we interchange the
variables of this function, then we get a new function as 'g' as x =  y . Here if f (1) = 2 then
g (2) = 1 . This inverse function 'g' of the exponential function 'f ' is known as logarithmic
function with base . It can be expressed as:

Y=log𝛼 𝑥 𝛼 > 0, 𝛼 ≠ 1 (6.3)

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These functions are strictly increasing and monotonic and also concave everywhere. In
general terms, a logarithmic function defined as y= log𝑎 𝑥 it is read as 'y is the base a
logarithm of x'. Logarithmic transformation of the models’ variables is frequently used in the
economic models. A logarithmic transformation is the conversion of a variable into its
logarithm which can take on various real positive values. In our case, any positive number
except a = 1 can be the base for a logarithm. Most often, we come across log x , which is read
as exponent to which 10 must be raised to get 'x'. Like exponential functions, logarithmic
functions have certain properties.
(1) The domain of the function is the set of all positive real numbers. The range of the
function is a set of real numbers.
(2) Given the base 'a', if a> 1 then the logarithmic function is increasing and for
0 <a< 1, it is decreasing.
(3) Also, y = 0 if x = 1, independent of the choice of base.
When using the base for a logarithmic function, an irrational number 'e' is often used, that is
n
 1
e = lim 1 +  = 2.718
n→  n

For example, e x = 14

2e−2 x = 8

Here, exponential functions written as b = e x can be expressed as x = ln b which we termed

as the natural logarithmic functions. Here, lnb is the power of e need to get b. However, when
using these functions, certain points have to be kept in mind:

(i) If 'e' is raised to any variable x ( x  0) or a constant 'b' (b > 0), then function of this
variable must equal to variable or constant
such as elnb = b
eln x = x
(ii) The natural log of 'e' raised to the power of a variable or constant, must equal that
variable or constant, such as:
ln𝑒 𝑏 = 𝑏 𝑎𝑛𝑑 𝑙𝑛𝑒 𝑥 = 𝑥
6.6.1 Properties of Logarithmic Functions

Let y and z be positive real numbers, and b 1

(1) logb yz = logb y + logb z

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y
(2) logb = logb y − logb z
z
(3) logb y k = k logb y
1
(4) logb k y = logb y
k
(5) ln1 = 0 (6) ln e = 1
−1
(7) ln(1/ e) = ln e = −1
log 𝑎
(8) log 𝑏 𝑎=log𝑥 𝑏 , xϵ R
𝑥

Example: Solve the equation for x:

(a) 4ex+2 = 120

(b) 1/ 2e2 = 144
(c) e x + e− x = 2
Solution:

(a) 4ex+2 = 120

 ex+2 = 30
Taking natural log on both sides
ln ex+2 = ln30
 ( x + 2) = ln 30 (From properties)
 x = ln 30 − 2
2
(b) 1/ 2e x = 144
2
 e x = 288
Taking log on both sides
2
ln e x = ln 288
 x2 = ln 288
(c) e x + e− x = 2
If we take in both sides, then
ln(e x + e− x ) = ln 2
1
But this cannot be evaluated. Suppose p = e x and = e − x , then
p
1
 p+ = 2  p2 + 1 = 2
p
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 p2 − 2 p + 1 = 0
On solving this, we get p= 1 and hence e x = 1 and thus x = 0.

6.6.2 Inverse Function g(x)

If suppose x belongs to positive real number and we defined, eln x = x, then the function g ( x)
expressed as
g ( x) = ln x ( x  0) (6.4)
in such case one function will be the mirror image of another function. Let us take two
functions. f ( x) = e x and g ( x ) = ln x . If we graph these two functions, then

x −2 −1 0 1 2
f ( x) = e x 0.135 0.367 1 2.71 7.38

and let y = g ( x ) = ln x , then

y −2 −1 0 1 2
g ( x) 0.135 0.367 1 2.71 7.38
As, observe one function is the inverse of the other function

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From this graph, three conclusions can be drawn:

(i) The domain of f ( x ) is range of g ( x) , while the range of f ( x ) is the domain of

g ( x)
(ii) g ( x) is increasing from positive to negative value and is strictly increasing with
domain (0, ).
(iii) ln 𝑥 is positive for x>1 and negative for 0<x<1.

6.6.3 Differentiation and Logarithmic Function

Let us define a function f ( x) = e p ( x ) , where p ( x) has a derivative for all

x> 0, then

f ( x) = e p ( x)  p( x) (6.5)
Hence, the derivative of an exponential function will equal to the initial exponential function
times the derivative of that exponent.
2
For example: f ( x) = e x

Here p( x) = x2 and p( x) = 2 x, then

2 2
f ( x) = e x  2 x  2 xe x

Alternatively, if f ( x) = ln p( x) , where p( x) is differentiable and positive, then using the

chain rule,

1 p( x)
f ( x) =  p( x) =
p ( x) p ( x)

For example: f ( x) = ln 3x 2 , here p( x) = 3x 2 and p( x) = 6 x .

1 1 2
 f ( x) =  p( x) = 2  6 x =
p( x) 3x x

Example: Find the derivative of the function

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(4 x3 − y)(3x 4 + 7)
h( x ) =
(9 x5 − 2)

Solution: Taking natural log on both sides, we obtain

(4 x3 − y )(3x 4 + 7)
ln h( x) =
(9 x5 − 2)

= ln(4 x3 − y) + ln(3x4 + 7) − ln(9 x5 − 2)

h( x)
We know that ln h ( x ) derivative is , then derivative of
h( x )

1
ln(4 x3 − 7) = 12 x 2
(4 x − 7)
3

We will obtain derivatives for other terms similarly, thus

12 x 2 12 x3 45 x 4
h( x) = + −
(4 x3 − 7) 3x 4 + 7 9 x5 − 2

h( x)
So, finally becomes
h( x )

 12 x 2 12 x3 45 x 4  (4 x3 − 7)(3 x 4 + 7)
h( x) =  3 + 4 − 5 
 (4 x − 7) 3 x + 7 9 x − 2  (9 x5 − 2)

Example: Compute the derivative and find the domain

y = ln(1 − 2 x)

Solution: In this case ln(1 − 2 x) will be defined only if y = 1 − 2 x  0  x  1/ 2 . Using the

above case, let
g ( x ) = 1 − 2 x , then g ( x) = −2 . Thus,

1 −2
y =  (−2) =
(4 − 2 x) (1 − 2 x)

Example: Simply the expression

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(a) exp[ln( y )] − ln[exp( y )]

(b) ln[ y 4 exp(− y)]
Solution: (a) It can be written as eln y − ln e y . From the properties discussed in previous
section:

eln y = y and ln e y = y

Thus y− y =0

(b) ln[ y 4e− y ] . We knew that ln xy = ln x + ln y . Thus,

 ln y 4 + ln e− y

 4 ln y − y
IN-TEXT QUESTION

1. Express the following in terms of ln5

5
(a) ln25 (b) ln 5 (c) ln 52
2. Solve the following equations for y.

y ln( y + 3)
(a) log4 y = 3 (b) =0
y2 +1

(c) ln( y − 5) = 0 (d) ln( y 2 − 4 y + 5) = 0

3. Solve the following equations for 'k'

1 k2
(a) 4e3k −1.5 = 360 (b) e = 259 (use calculator)
2
4. Find the domain of the following function

 3 y −1 
f ( x) = ln( x + 1) (b) f ( y) = ln  
 1− y 
(c) f ( y ) = ln(ln y )

5. Differentiate each of the following logarithmic functions

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(b) ln(e + 1) (c) ln( x + 4)

x 2
(a) ln(1 + y )

6. Let the production function is defined as follows:

c/
 L K  
H ( ) = 0  
 L + bK  

(Where a, b, c, L and K are positive). Find H()

ANSWER TO IN-TEXT QUESTION

1. (a) ln 25 = ln 52 = 2ln 5 (b) 1 ln 5 (c) ln 52 / 5

2

2. (a) y = 64 (b) y = 0 or ln( y + 3) = 0 so y = 0 or − 2

(c) y − 5 = 1  y = 36 (d) y =2
ln 90 + 1.5 
3. (a) k= (b) K = 6.25 K =  2.5
3

4. (a) x  −1 (b) 1/ 3  y  1 (c) y  1

1 ex 2
5. (a) (b) (c)
1+ y ex +1 ( x + 4)
6. Take the logarithm of whose expression

c
ln a +   [  ln L +  ln K − ln( L + bK  )
 

 L ln L + bK  ln K 
F ( ) =  −2 F ( )  ln( L + bK  ) −  
 L + bK  

6.7 POWER FUNCTION AND LOGARITHMS

In Chapter 5, we have introduced power functions of the form f ( x) = x for all b  R On

b

b−1
differentiating, we obtained f ( x) = bx .

In a case, if b is an 'irrational' number then for all x  0 , we can define

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x = eln x

xb = (eln x )b = eb ln x (6.6)

Differentiating (6.6) using the chain rule, we get

d b d b ln x b b
(x ) = (e ) = eb ln x  = 2b   bxb−1
dx dx x x (6.7)
Hence, when 'b' is an irrational number, it can be differentiated.

6.8 LOGARITHMIC FUNCTION RULE FOR BASE OTHER THAN 'e'

In the previous section we defined an exponent with the base 'e'. However, the base of an
exponent can also be a fixed positive number. Let 'b' be that number (b> 1), and 𝑏 𝛼 = 𝑥. This
implies that  is the logarithm of x to the base b. In other words,

 = logb x

Given this, we can define logb x for every positive number 'x' such that:
𝑏 𝑙𝑜𝑔𝑥 = 𝑥
If we take log on both sides, then

log 𝑏 𝑥 . log 𝑏 = log 𝑥

1
 logb x =  log x (6.8)
log b

Here, the logarithm of x with base 'b' is proportional to lnx and multiplied by the factor 1/ ln b
. This follows the same rule as in the case of natural logarithms, Hence, the rules for an
exponent with a positive number 'b' is

(1) logb ( xy) = logb x + logb y

1
Proof: logb ( xy ) =  log( xy) (From *)
log b

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1 1 1
= [log x + log y ] =  log x +  log y
logb logb logb

= logb x + logb y

x
Similarly, other properties: (2) logb = logb x − logb y
y

(3) logb x k = k logb x

(4) logb 1 = 0 (5) logb b = 1

The function f ( x ) defined as f ( x) = logb h( x) with b > 0 and b  1 and h( x) is

differentiable and positive then in that case,

1
f ( x) =  h( x)  logb e
h( x )

1 1
 f ( x) =  h( x) 
h( x ) log b

Example: Find the derivative of f ( x) = logb (3x + 1) .

2

Solution: Here h( x) = 3x + 1 and

2
h( x ) = 6 x . From the above formulae.

1 1
f ( x) =  (6 x) 
3x + 1
2
ln b

6x
or f ( x) =
(3x + 1) ln b
2

Example: Find the derivative of y = logb x

Solution: In this case h( x) = x and h( x) = 1 . Thus

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1
y =  h( x)  ln b e
h( x )
1 1 1
y =  (1)  
x ln b x ln b

IN-TEXT QUESTIONS

1. Simplify the following expression using properties of logarithmic functions

y7 5 −4
(a) log a 4 (b) log a 3 y (c) log a x y
x
2. Find the derivative of the following:
(a) F ( y ) = logb (4 y − 3)
2
(b) G( x) = logb x 2 − 7

ANSWER TO IN-TEXT QUESTION

1. (a) 7loga y − 4loga x (b) 1/ 3loge y (c) 5loga x − 4loga y

8y x
2. (a) (b)
(4 y − 3) ln b
2
( x − y ) ln b
2

6.9 APPLICATIONS OF EXPONENTIALS AND LOGARITHMS

In economics, both exponentials and logarithms are often used to estimate the growth rates,
elasticity of demand and supply, simplification of non-linear functions and interest rate
compounding. In this section, we will look into these applications
DETERMINATION OF GROWTH RATE
Let us define the growth function as G = x = g (t ) such that

𝑔′ (𝑡) 𝑥 ′
G= = 𝑥 (6.9)
𝑔(𝑡)

This function can be determined by dividing the derivative of the function with the function
itself or by taking logarithm on both sides and then differentiating that function.

Example: Find the growth rate of A = Kert where K is constant.

Solution: By first method, using (6.9)

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A
G=  A = Kert (t ) = rKert
A

A rKert
Thus, = =r
A Kert

Also, by taking ln on both sides

ln A = ln K + ln ert

 ln A = ln K + rt
Taking derivative of this function with respect to t, then
1 dA d
G= = (ln A)
A dt dt

d
= (ln K + rt ) = 0 + r = r
dt

Example: Find the growth rate of profit at t = 8 given

1/ 3
P(t ) = 250000e1.2t

Solution: Taking log on both sides

1/ 3
ln P(t ) = ln 250000 + ln e1.2t

Taking derivative w.r.t. 't' on both sides

d P(t )
G= (ln P(t )) =
dt P(t )

ln P(t ) = ln 250000 + 1.2t1/ 3

d
 (ln 250000 + 1.2et1/ 3 )
dt

1 0.4
 0 + 1.2   t1/ 3−1 = 2 / 3
3 t

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0.4 0.4
with t = 8  G = 2/3
= = 0.1 or 10%.
(8) 4

LOG-LINEAR RELATIONS
In economic models, sometimes non-linear functions are converted into linear ones using the
logarithmic functions. Let us suppose there are two variables u and v defined as

v = Au a (A, u, v is positive)

This non-linear function can be converted into linear form by taking logarithm to any base on
both sides such that:
log v = log A + a log u (6.10)
This transformation is known as log-linear relation between v and u.
Example: Take the case of Cobb-Douglas production function

Q = BK  L
Can be re-written in the log-linear form as

ln Q = ln B + ln K  + ln L

 ln Q = ln B +  ln K +  ln L

ELASTICITIES AND LOGARITHMIC FUNCTIONS

Logarithmic functions are often used to determine elasticity. If we define the demand
function as y = D( P) , then elasticity of this function with respect to P is
p dD( p)
= = El p D
D( p ) dp
−2
Suppose D( p) = 400 p ,then using the formulae we get

p
−2
 400(−2) p −3 = −2
400 p

Other way, taking log on both sides, we get

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ln D( p) = ln 400 − 2 ln p

Taking derivative w.r.t. p.

d ln D( p)
= −2 (Slope of this log-linear function)
d ln p

'Thus, in general if u and v are two positive variables with v is differentiable function u, then

u dv d ln v d logb v
E ln v = = =
v du d ln u d logb u (6.11)
where, b is any positive base.
Example: Find the elasticity of the function

y = ex

x dy
We know that E ln y = 
y dx
or taking logs on both sides

ln y = ln e x

→ ln y = x
Using chain rules and differentiation,

1 dy dv
=1 = y ]
y dx dx

x
Now, Elxy = y=x
y
hence, the elasticity equals x.

IN-TEXT QUESTIONS

1. For country X, the national income (Y) is increasing at the rate of 1.5% per year while
the population (P) is growing at the rate of 2.5%. Determine the per-capital rate of
growth of income [Hint: Find 1/p]

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2. Estimate the growth rate of sales (S) if

S (t ) = 1, 00, 000e0.5 t
with t = 4.

3. The number of people (P) who develop corona 't' days after a group of 1000 people
has been in contact with corona infection is given by:
1000
P(t ) =
1 + 999e0.39t

(a) How many people develop corona after 20 days?

(b) Estimate the number of days when 800 people are side?
4. Find the elasticity of y = f ( x ) with respect to x:

(a) y = e e
3 2x
(b) y = x ln( x + 1)

−0.3
5. Given the log-linear relationship. y = 594,500u , or press u terms of y.

ANSWER TO IN-TEXT QUESTION

1. There will be a fall in per-capita income by 1%
2. 12.5%
3. (a) 710 (b) About 21 days

x
4. (a) 3 + 2 x (b) 1 +
( x + 1) ln( x + 1)
10 / 3
 644500 
5. ln y = ln 694500 − 0.3ln u   =  
 2 

6.10 COMPOUND INTEREST AND PRESENT DISCOUNTED VALUES

Exponential functions can be used in the applications of interest rate compounding. Let us
suppose a principal amount ` A is compounded annually with interest rate i% for a time
period 't' years. Then at the end of this time period, we will receive an amount `P given by
the exponential function as

P = A(1 + r )t where r = i/100

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If it is compounded in times a year for 't' years, then

mt
 r 
= A 1 + 
 m

here the principal is multiplied by a factor (1 + r/m)m each year. If it is compounded at 100%
interest rate for one year, then:
m
 
P = A 1 + 
 m (6.12)
m
If m → then, A lim 1 +  = A(2.718) = Ae
1
m→  m

Thus, for any interest rate i% and time period t (t ≠ 1)

P(t ) = Aert (6.13)

This is known as continuous compounding with 'r' as the rate of interest. If we differentiate
(6.13), then we obtain

P(t )
=r
P(t )

the principal increases at the constant rate 'r' with the continuous compounding of the interest
rate.
Example: Find value of `100b compounded continuously at an interest rate of 10% for two
years.

Solution: For continuous compounding, P = Aert

 P = 100e0.1(2) , r = 0.1, t = 2

 P = 100e0.2
 P = 100(1.221) = 122.1 (Using calculation)

6.10.1 Effective and Nominal Interest Rates

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In the previous example when interest rate was compounded continuously, we earned ₹122.1,
if we did it annually, we must have got ₹121 and semi-annually, that is
2(2)
100 1 +
0.1 
 = 121.55 . When an individual borrows money from any financial institution,
 2 
he must compare the various options. In this regard an ‘effective rate of interest' helps an
individual in making such comparisons. Let us define the effective rate of interest as ' re '
which compounded continuously gives the same total interest rate over the year such that
mt
 r
A(1 + re ) = A 1 + 
t
r = i /100
 m

Dividing both sides by A

mt
 r
(1 + re )t = 1 + 
 m

Taking the 't' root on both sides, we get

m m
 r  r
(1 + re ) = 1 +   re = 1 +  − 1
 m  m
m
We know that lim 1 +  = e
1
m→  m

 (1 + re ) = er (From 6.13)

 re = er − 1
(6.14)
This is the case when compounded continuously.

Example: Find the effective annual interest rate on `100 with 12% interest rate when it is
compounded quarterly and continuously.

Solution: Here, A = `1000, r = 0.12, m = 4

m
 r
re = 1 +  − 1
 m

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re = (1 + 0.12)4 − 1  (0.13)4 − 1

re = 12.55%
Thus, the yearly interest rate of 12% corresponds to an effective annual interest rate of
12.55%.
Similarly, when compounded continuously

re = er − 1  e0.12 − 1

= 1.127 −1 = 0.127 or 12.7%.

6.10.2 Present Value / Discounting
When a sum of money is deposited in a bank, then in future one receives an amount not
equivalent to the money in the present, but even a large amount at the end of the year. It at
present, a person deposits a sum of ₹100 at 12% interest compounded annually, then he must
receive a sum of ₹120 one year from new, and thus the 'present value' of this amount is ₹100
today. In general terms, if P is the amount deposited today with interest rate of r% per year
for t years, and we get an amount A after t years then
t
 r 
P 1 +  =A
 100 

 P(1 + i)t = A where i = r/100

Then P = A(1 + i)−t with yearly interest rates

and under continuous compounding present value becomes

P = Ae−rt (6.15)
This process of finding the present value P of the future payment is known as discounting.

Example: Find the present value of ₹500 to be paid in 3 years at 8% interest rate
compounded continuously.
Solution: For continuous compounding of interest rate:

P = 500e−0.08(3)

 P = 500e−0.24
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Using calculator, e−0.24 = 0.786

 P = 500(0.786) = 393.32

IN-TEXT PROBLEMS

1. Compute the future value ₹100 for 6 years at 5 percent interest rate when compounded (a)
continuously (b) annually.
2. Find the present value of ₹120 to be paid in 5 years at 9 percent interest rate compounded
(a) annually (b) continuously.
ANSWER TO IN-TEXT QUESTION
1. (a) 100e0.3 or 134.99 (b) 134.01

2 (a) 77.99 (b) 120e−0.45 or 76.52

6.11 TERMINAL QUESTIONS

1. Determine the elasticity of supply for a competitive firm with supply function given
as:
Q= Mpm + Npn
Where M, N,m,n are positive and m>n.
2. Suppose population size P and aggregate wealth W is expressed as:
W= c+at, P= Lemt
Where c,a, L and m are constants. Determine continuous growth rate of population,
wealth and wealth per head.
3. Differentiate the following:
a) ln(x4+1)
b) x/(1+ex)
4. find the inverse g(y) of the following function:
2𝑦, 𝑦≤0
f(y)={ 2
𝑦 𝑦>0
Also determine domain of the inverse function

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Answers:
1. Mmpm + Nnpn/ Mpm + Npn
𝑎 𝑎
2. Population size= m, wealth= 𝑐+𝑎𝑡 and wealth per head= 𝑐+𝑎𝑡 − 𝑚

3. (a) 4x3/ x4+1 (b) 1+ (1-x) ex/ (1+ex)2

4. The inverse function
𝑦/2, 𝑦≤0
G(y) = {
√𝑦, 𝑦 > 0

6.12 SUMMARY

In this unit, we discussed the exponential functions in which the independent variable takes
the form of an exponent. A fixed base is raised to a variable exponent under the exponential
functions. Additionally, the unit also covered the logarithmic functions. They are the inverse
of exponential functions.
The second part of the unit discusses the economic applications of exponential and
logarithmic functions. We have discussed how these functions can be applied to estimate
elasticity and growth rate of a variable over time. Lastly, we conclude this unit with the
applications of exponential function in interest rate compounding.

6.13 REFERENCES

• Sydsaeter, K. Hammond, P. (2009) "Mathematics for economic analysis". Pearson

Education.
• Hoy, M. Livernois, S. U, McKenna, C. (2001). Mathematics for Economics, Prentice-
Hall, India.

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LESSON 7

SEQUENCES, SERIES AND LIMITS

Structure

7.1 Learning Objectives

7.2 Introduction
7.3 Limits
7.4 Limits at infinity
7.5 Continuity of a Function
7.5.1 Continuous Function
7.5.2 Discontinuous Functions
7.5.3 Properties of Continuous Function
7.6 One sided Continuity
7.7 Sequences
7.7.1 Infinite sequences
7.7.2 Convergence of Sequence
7.8 Series
7.8.1 Finite Geometric Series
7.8.2 Infinite Geometric Series
7.8.3 Convergence of Series
7.9 Applications of Sequence and Series
7.10 Terminal Questions
7.11 Summary
7.12 References

7.1 LEARNING OBJECTIVES

After reading this lesson, students will be able to:

1. Define the limit of a function
2. Find the limits of sequences and series
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3. Determine the present and compound values of income streams and

4. Understand the decision on how to make investments.

7.2 INTRODUCTION

In this unit, we will introduce the theoretical concept of limits and continuity. We will also
discuss how economics can be used financially to ascertain the payment of interest, present
discounted value and compounding of interest.

7.3 LIMITS

We introduced the concept of limit in previous unit. In this section, we will further look at the
concept of limits by understanding the case of one-sided limits and limits at infinity.
One-Sided Limits

Let us consider a function f ( h ) . If h tends to 'a', then f ( h ) might tend to value 'A' for all h
sufficiently close to 'a'.

Mathematically,

lim f (h) = A or f (h) → A as h → a

h→a (7.1)

However, there exist ways in which h can tend to value 'a'. In one way h can tend 'a' from
values smaller than 'a' known as left hand side or it can tend from values greater than 'a', the
right-hand side.

In other words, if h tends from left hand side, then f ( h ) tends to value 'K', that is limit of
f ( h ) tends to 'a' from below is 'K' represented as

lim f (h) = K or f (h) → K as h → a −

h→a− (7.2)

Similarly, if h tends from right hand side, then f ( h ) tends to value A that is limit of f ( h ) as
h tends to a from above is A and expressed as :

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lim f (h) = A or f (h) → A as h → a +

h→a+ (7.3)

The above two cases are referred to as 'one-sided' limits.

6, x  0
Example: Let f ( x) = 
8, x  0
Solution:
As x → 0− , then f ( x) → 6

lim f ( x) = 6
x→0−

White x tends from above as

+
x → 0 then f ( x) → 8

lim f ( x) = 8
x →0 +

For a function to have a limit, it has to satisfy the necessary and sufficient condition that if
left-hand side and right-hand side limits exist, then they should be equal to each other,
expressed as:

lim f (h) = A  lim f (h) = A

h→0− h→0+

In a special case, if f ( h ) tends to + or −, then

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lim f (h) = (−) lim f (h) =  (or − )

h→0− h→0+

Then, we say that limit does not exist.

1
Suppose y = f ( x) =
( x − b) 2

then, lim f ( x) = 
x→b

referred to as vertical asymptote.

In this case a limit does not exist.

Graphically also, we can depict that the limit does not exist.

7.4 LIMITS AT INFINITY

Let there exist a function Y = f ( x ) and a real number L. As 'x' becomes sufficiently large, the
values of f ( x ) becomes close to L, then we say that f ( x ) has a limit at infinity

lim f ( x) = L and lim f ( x) = L

x→ x→− (7.4)
this will hold for all x  0 and x being sufficiently large. It is also known as horizontal
asymptote. Thus, if f ( x ) approaches to L as x→ or x → − , then the graph of f ( x )
approaches the line y = L . This horizontal line is known as 'asymptote'for the graph f ( x ) .

For example, y = F ( x) = 5 − 22 and

x
x→ as well as x → −

In both cases

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lim f ( x) = 5
x → +

lim f ( x) = 5
x→−

Thus, it will have a horizontal asymptote at y = 5.

Example: Examine the limit if x→ and x → −

1 − x5
(a) f ( x) = x + 1 (b) f ( x ) =
2x x4 + x + 1

Solution: (a) If we put x= then  cannot be calculated. Thus, we will divide both

numerator and denominator by the highest power of 'x' such that

1 1
1+ 1+
f ( x) = x lim f ( x) =  =1
2 x →+ 2 2

While lim f ( x) = 1 . So, the limit exists.

x→ 2

1 − x5
(b) f ( x ) = . Dividing both numerator and denominator by x5, we get
x + x +1
4

1
−1
x 5 −1
F ( x) =  lim f ( x) = = −
1 1 1 n→ 0
+ 4+ 5
x x x

 lim f ( x) = −1 = −
n→−  0

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Hence, in this case limit does not exist.

RULES FOR LIMIT

From the previous chapter, we learned about the algebraic operations on limits such as
addition, subtraction, but in the case, x tends to infinity: x→ or x →− , then the
corresponding limit properties also change.

Let f ( x ) and g ( x) be two functions with both tend to  as x as x → h, where h is any real
number,

lim f ( x) =  and lim g ( x) = 

x→h x→h

then the following rules are applicable.

1. lim [ f ( x) + g ( x)] = 
x→h

2. lim[ f ( x)  g ( x)] = 
x→h

3. lim [ f ( x) − g ( x)] =  = indeterminate case. No solution

x→h

 f ( x)  
4. lim  = Indeterminate case. No solution.
x→h  g ( x) 
 
Similarly, if lim f ( x) =  and lim g ( x) = 
x→h x→h

5. lim [ f ( x) + g ( x)] = A +  =  Indeterminate Form

x→h

6. lim[ f ( x) − g ( x)] = A −  = − Indeterminate form

x→h

 f ( x)  A
7. lim  =
x→h  g ( x) 
 
8. lim [ f ( x)  g ( x)] = A   =  = indeterminate case. No solution
x→h

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Example: Let f ( x) = x − 7 x and g ( x) = x .If x → 0 , then determine:

2

(a) f ( x) / g ( x) (b) f ( x) − g ( x) (c) f ( x )  g ( x )

f ( x) x  − 7 x
Solution: (a) = = x−7
g ( x) x

lim x − 7 = −7
x→0

(b) f ( x) − g ( x) = x 2 − 7 x − x = x 2 − 8 x

lim x 2 − 8 x = 0
x →0

(c) f ( x)  g ( x) = ( x 2 − 7 x) x = x 3 − 7 x 2

lim( x3 − 7 x 2 ) = 0
x →0

IN-TEXT QUESTIONS

1. Evaluate the following limits

y+ | y |
(a) lim
y →0 + y

(b) lim x2− 3

y → x +1

2 y3 − 3 y 2 + 3 y − 6
2. Find the asymptote of :
y2 + 1

Let f ( x) = x , g ( x) = 1/ x . Determine lim for the following:

2
3.
x→

f ( x)  g ( x) (ii) F ( x) + g ( x) (iii) F ( x) / g ( x)

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ANSWER TO IN-TEXT QUESTIONS

1. (a) 2 (b) Limit is not defined
2. x = 2y −3

3. (i)  F ( x) =  as x → 

(ii)  G ( x ) = 0 as x → 

(iii) 

7.5 CONTINUITY OF A FUNCTION

Continuity describes changes that occur over a period rather than suddenly. Thus, a function
Y = f ( x ) is said to be continuous if changes in independent variable (x) brings about changes
in the function value (y). Geometrically, a function is continuous if its graph is connected,
and it has no breaks. However, if there exists a break in the graph, then function is said to be
discontinuous. This suggests that the value of the function that passes through a point, there is
a sudden change in the value of the function. Graphically, both cases can be depicted as:

Continuous Function (a) Discontinuous function (b)

In the graph above, there is a smooth line in the case of continuous function (a), while there is
a break in the graph in discontinuous case (b).

7.5.1 Continuous Function

A function f ( x ) is said to be continuous at a point 'h if the graph of f ( x ) has no break at

point 'a'. Thus, if f ( x ) has a limit as x tends to a in its domain, and f ( x ) tends to f ( a )
when x = a, then function is said to be continuous at 'a'.

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f ( a ) is continuous at x = a if lim f ( x) = f (a)

x→a (7.5)

However, for f ( x ) to be continuous at x = a, it must satisfy the following conditions:

(i) F ( x ) must be defined at x = a

(ii) As x→a limit of f ( x ) must exist

(iii) Limit of f ( x ) must equal to f ( a )
lim f ( x) = f (a)
x→a

Unless all the above conditions are satisfied, f ( x ) will be discontinuous at x = a.

7.5.2 Discontinuous Functions

If a function f ( x ) does not satisfy all the conditions of continuity, then the function will be
discontinuous. In general, there are two types of discontinuity that can arise:

(i) Irremovable discontinuity: If there exist no limit of the function f ( x ) when x tends
to a, then irremovable discontinuity arises.
(ii) Removable discontinuity: If there exist, limit of function f ( x ) as x→a and is equal
to K, but lim f ( x)  f (a) , then f ( x ) is discontinuous at x = a. This is considered as
x→a

removable discontinuity, as f ( a ) can be simplified and refined as K.

x2 − 4
Example: Discuss the continuity of the function f ( x) = at x = 2.
x−2

4−4 0
Solution: Given x = 2  f ( x) = = is not defined. The function becomes
2−2 0
discontinuous, having removable discontinuity. However, further simplification yields.

( x − 2( x + 2)
f ( x) = = x+2
( x − 2)
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Thus, f (2) = 2 + 2 = 4 and lim x + 2 = 2 . Thus, limit of function exists, and function is
x→2

defined. The first two conditions for a function to be continuous are satisfied.

The last condition states that limit of f ( x ) must equal to f (2) .

0
Now, lim f ( x) = an indeterminate form
x→2 0

Thus, function f ( x ) is undefined at x = 2.

Example: Determine at what value of x, the given function is continuous.

x+4
f ( x) =
( x + 1)( x + 2)

Solution: The function will be continuous for all values of x, except the case when,
( x + 1)( x + 2) = 0 . Thus, f ( x ) will be continuous for all x except x = −1 and x = −2.

7.5.3 Properties of Continuous Function

Using the limits rules that we established in the previous section; we apply these rules in the
case of continuous functions.

Let f ( x ) and g ( x) be two continuous functions at h, then

(i) f ( x )  g ( x ) will be continuous at h.

(ii) f ( x ) + g ( x ) and f ( x) − g ( x) are continuous at h.

f ( x)
(iii) will be continuous at h if g ( h)  0
g ( x)

(iv) [ f ( x)]a / b is continuous at 'h' if [ f (h)]a / b is defined.

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Apart from these properties, if we take a composite function i.e., a function where two
functions are combined to form a new function. Suppose f ( x ) and g ( x) are two continuous
functions and let P( x) be a composite function, then

P ( x ) = F ( g ( x ))

Then, going by the above stated properties, if g ( x) is continuous at x = k and f () is

continuous at g (k ) , then f ( g ( x)) will be also continuous at x = k.

In general terms

"Any function that can be constructed from continuous functions by combining one or more
operations of addition, subtraction, division or multiplication (except zero), and composition
is continuous at all points where it is defined."

Sydsater& Hammond, 2009

Example: For what values of p, the following function is continuous for all x?

 px − 1 for x  1
F ( x) =  2
3 x + 1 for x  1

Solution: The function f ( x ) is continuous for all x 1 . If x = 1 then f (1) = p − 1 . If x is

greater than 1, then f ( x) = 3x + 1 will be close to 4 and f ( x ) → 4 as x → 1+ .

2

For attaining continuity atx =1, requires that

f (1) = p − 1 = 4  p = 5 .

Thus, f ( x ) is continuous for all x, even at x = 1 given p = 5.

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7.6 ONE-SIDED CONTINUITY

Similar to the one-sided limits discussed in the section, we also have one-sided continuity. If
a function f ( x ) is defined on a domain consisting of open interval such as ( a, b] and
f ( x) → f (b) as x → b− , then f ( x ) is left continuous at b.

+
On the other hand, f ( x ) is defined on a domain [b, d ) and f ( x) → f (b) as x → b then
f ( x ) is right continuous at b.

However, previously stated f ( x ) is continuous at b if and only if f ( x ) is continuous

both from right and left side.

Sometimes, the domain of the function is defined on closed interval. Let say f ( x ) is defined
on closed interval [c, d], then f ( x) is said to be continuous in the interval
[c, d], if it is continuous at x = c, at x = d and at any point between c and d.

IN-TEXT QUESTIONS

1. Find the values of y for which the function is continuous.

1 1
(i) f ( y ) = (iii) | f | +
2− y | y|

y8 − 3 y 2 + 1
(ii) f ( y ) =
y2 + 2 y − 2
2. For what values of 'p' the function is continuous everywhere?

 px 2 + 42 − 1 x  1
g ( x) = 
 − x + 3 x 1

ANSWER TO IN-TEXT QUESTIONS

1. (i) Continuous for all y< 2

(ii) Continuous for all y, where y  3 − 1 and y  − 3 − 1

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(iii) Continuous for all y 0.

2. p = −1, the function is continuous.

7.7 SEQUENCES

We have often seen that economic data is represented in the form of sequence of numbers.
Let say the figures for Gross Domestic Product (GDP0 for India from 2010 to 2021 is

a1, a2 , a3 , a4 ,.... (7.6)

where, a1 denotes GDP in the year 2010, a2 denotes GDP in year 2011 and so on. In
mathematics, the term 'sequences' is mostly understood as 'infinite sequencers' that is going
on forever. However, the 'sequences' represents a function whose domain is the set of real
numbers. For ex: the sequence of odd numbers; 1, 3, 5, 7, ….

To be more precise, let N be set of all natural numbers and if n N, then a sequence
of real numbers will be a f unction from N to R. if 'p' is such a function then,

{ pn} = p1, p2 , p3 ,.... pn is called

the sequence and elements p1, p2 , p3 are called terms of sequence.

Example; If an = 4n for n = 1, 2, 3, 4, ….

It will give the sequence as 4(1), 4(2), 4(3, 4(4), ….

 4, 8, 16, 24, ….

Example: Let bn = 30 − 4n for n = 1, 2, 3….

then we will obtain the sequence as 30 −(1), 30 − 9(2), 30 − 9(3)….

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 21, 12, 3, …...

7.7.1 Infinite Sequences

It supposes, we defined {an } = 1 with n = 1, 2, 3, …., then we get sequence of the form
2n

1 1 1 1 1
, , , ,...., ,....
2 4 6 8 2n

then, this sequence is known as 'infinite sequence', where an infinite sequence is a function,
whose domain is the set of positive integers.

7.7.2 Convergence of Sequence

From the previous example, if we take the value of n = , then the value of last term becomes
zero, that is sequence will converge to zero. By convergence, we are basically examining the
fact that whether the subsequent terms of the series is getting closer to a value as 'n' increase.

If the sequence approaches a definite value, it is said to converge to that value. More

formally, if sequence {an } converges to a number a', if an gets closer to number 'a' for 'n'
being sufficiently large.

lim an = a or lt an = a or an → a when n→.

n→ n→

If sequence {an } does not converge to any definite value, then it is said to diverge. Let

suppose an = 100n as n tends to , an will also tend to .

Example: Determine whether the following sequences converges or not when n→.

n4 + 1
(a) an = n + 1 (b) an =
2n n3 + 2

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Solution:

1  1
(a) an = 1+ as then 1 → 0
2  n 
n→
n

Thus lim an = 1 . Thus, it is convergent.

n→ 2

1
n+
(b) an = n3 (Taking n3 common from both the numerator and denominator)
2
1+ 3
n

As n→, 1/n → 0 but n →.

Thus, lim an =  . Thus, it is divergent.

n→

IN-TEXT QUESTION

1. Examine whether the sequence converges or diverges

n3 − 1
(a) an = (b) an = 1 + 1 n (c) an = 4 − 2
n2 4 n

n 2 + 2n + 1
2. Let n = n + 1 and  n =
2n 3n 2 + 1
Determine
(a) lim n (c) lim n n
n→ n→

n
(b) lim  n (d) lim
n→ n→  n

ANSWER TO IN-TEXT QUESTIONS

1. (a) Diverges (b) Diverges (c) Converges

2. (a) 1/2 (b) 1/3 (c) 1/6 (d) 3/2

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7.8 SERIES

In this section, we will learn about finite and infinite geometric series. A series is generated

by a sequence { an } which is a summation of first n terms of a sequence such that sn,

n
sn =  ar
r =1

Example: Let {ar } = n + 1 with n = 1, 2, 3, 4. Find sn

2

Solution: {ar } =  1 + 1  +  2 + 1  +  3 + 1  +  4 + 1  = 7
 2   2   2   2 

7.8.1 Finite Geometric Series

Let us consider a sequence of 'n' numbers such that

a, at , at 2 , at 3 ,....at n−1

where each term is obtained by multiplying the previous term by a constant 't'. Then, the
summation of these sequences is:

sn = a + at + at 2 + at 3 + ... + at n−1 (7.6)

This sum is known as finite geometric series with quotient 't'. To find the sum of the series,
let us multiply both sides of (7.6) by the constant 't', to get:

tsn = at + at 2 + at 3 + at 4 + ... + at n−1 + at n (7.7)

Now, if we subtract (7.7) from (7.6)

sn − tsn = a − at n (7.8)

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Assume, t = 1 then in that case from (7.6)

sn = an

and if t 1, then from (7.8),

(1 − t ) sn = a − at n

a − at n
sn =
(1 − t )

Thus, the summation formulae for a finite geometric series is

 n
a + at 2 + at 3 + at 4 + ... + at n−1 = a 1 − t  , t 1
 1− t  (7.9)

7.8.2 Infinite Geometric Series

From the previous equation (7.6), if the geometric series is infinite such that

a + at 2 + at 3 + ... + at n−1 + .... (7.10)

If in this case n tends to , n→, we know sn of first n terms of (7.10),

 n
sn = a 1 − t  , (t  1)
 1− t  (7.11)

Here only t n depends on 'n', then as n→,

a
(i) t n → 0 if − 1  t  1 and sn =
1− t
(ii) If t > 1 or t −1 then t n does not tend to any limit.

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Example: Let t = 1/5, then (1/5)n as n →, t → 0. Here the value of 't' lies between −1 < t <
1. If t = 5 then (5)→ then their exist no value.

7.8.3 Convergence of Series

Let {an } be the sequence and {sn } be the series generated from it. If sn approaches to a limit

s as n→, we say that series { sn } is convergent. In our case,

 n
sn = a 1 − t 
 1− t  (7.12)

If −1 <t< 1, then t n → 0 as n→

1 − 0  a
lim sn = a  =
n→  1 − t  1 − t (7.13)

If | t |  1 , then the series is divergent.

IN-TEXT QUESTIONS

1. Does the sequence

3n 2
un = 3 tends to a limit?
n +3
2. Find the sum of finite geometric series
1 1 1 1
1 + + 2 + 3 + .... + n−1
5 5 5 5

In n →, what limit does sn tends to?

3. Examine whether the following series converges or diverge

5 + 8n 2 n2
(i) sn = (ii) sn =
2 − 7n2 5 + 2n

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 n
 1
(iii)  − 
 4
n =1

4. Find the sum of the series

 −n
 k 
 a 1 +
 100 
 k 0
n =1

ANSWER TO IN-TEXT QUESTIONS

1. Diverges

5 1
2. sn = [1 − (1/ 5)n ] as n → ,  n−1 = 5 / 2
2 n=1 5

3. (i) 8/7 converges (ii) Diverges

(iii) Geometric series with quotient − ¼ converges to 1/5.

−1
It has quotient 1 +
k 
4.  and sum.
 100 

a  100 
−1 
= a 1 + 
  k   k 
1 − 1 +  
  100  

7.9 APPLICATIONS OF SEQUENCES AND SERIES

The concept of sequences can be used in economic applications to determine the present
value' of a sum of money to be received in future at some point in time. Suppose an
individual wants to invest an amount of. 100 at an annual interest rate of 10%. Then the
amount received at the end of the year is equivalent to.100

(1+ 10/100) = `100. This corresponds to saying that the present value of amount A to be
A
received in one year's time is y = , where r is the rate of interest (rate of return). In our
(1 + t )
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example, `100 is the 'present discounted value' of `110 and 10% is the discount rate, while
`100/`110 is the discount factor (1/(1 + r)).

Let us suppose, an individual has to make four annual payments, such that it receives `100
after the 1st year, `150 in the second, `200 in third and ` 250 in fourth year. We need to
determine the amount that must be invested today with a given interest rate of 11%. In other
words, we need to ascertain the present value of these four payments. Thus, in year 1, to
receive `100, he must deposit `A1 such that:

 11  100
` A1 1 +  = 100  A1 =
 100  1.11

Similarly, for year 2, 3 and 4, we have

2
 11  150
A2 1 +  = 150  A2 =
 100  (1.11)2

3
 11  200
A3 1 +  = 200  A3 =
 100  (1.11)3

4
 11  250
and A4 1 +  = 250  A4 =
 100  (1.11) 4

Thus, the total present value of the four annual payments is amount A that must be deposited
today

100 150 200 250

A = A1 + A2 + A3 + A4 = + + +
(1.11) (1.11) (1.11) (1.11)4
2 3

This will equal to 90.09 + 121. 743 + 146.238 + 374.5 = 737.57.

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In general, if n successive payments must be made with A1 after year 1, A2 after two years,
A3 after 3 years and so on, then the present value of all these payments with an interest rate of
r% per year would be:

A1 A2 An
Pn = + + ... +
(1 + r /100) (1 + r /100) 2
(1 + r /100)n

or equivalently

n
Ai
Pn = 
i =1 (1 + r /100)i
(7.14)

A
Using the concept of finite geometric series, with first term as and
(1 + r /100)

1
t= , then
(1 + r /100)

a 1 − (1 + r /100) − n 
An =  
(1 + r /100)  1 − (1 + r /100) −1 

Let r/100 = p, then

a 1 − (1 + p)− n  a  1 
An =  −1 
= 1 −
(1 + p)  1 − (1 + p)  p  (1 + p)n 
(7.15)

a 1 
Thus, the present value of 'n' installments with r% rate of interest is given by 1−
p  (1 + p)n 


with p = r/100.

In a special case, if p> 0 but n→, then

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a 1  a
1− =
(1 + p)n  p
lim
n→ p 
(7.16)

Example: Determine the present value of 15 annual deposits of `50,000 if the first payment
has to be made one year from now with interest rate of 8% per year?

50000  1 
Solution: Here, A15 = 1−
0.08  (1.08)15 


 A15 = 50,000  8.55948

= ` 4, 27,974.

INTERNAL RATE OF RETURN

Internal rate of return is the discount rate used to estimate the profitability of investments. It
is defined as an interest rate that makes the present value of all the payment equal to zero.

Thus, if the investment projects for 'n' time period give the returns I0 , I1, I 2 ,....I n−1 , then the

internal rate of return is '' such that, I 0 being initial investment:

(7.17)

If there is a choice between two investments with a different internal rate of return, then the
investment that has a higher rate of internal return should be preferred.

IN-TEXT QUESTIONS

1. What is the present value of 10 annual deposits of ` 1000 each with first deposit is made
1 year from new at interest rate of 14% per year?
2. A firm wants to invest in machinery with three payment options:
(a) Pay ` 67,000 in cash

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(b) `12,000 per year for 8 years, where the first installment has to be paid once.
(c) ` 22000 in cash payment now `27000 per year for 12 years with first installment to be
paid after one year.
If a firm has `67000 cash available and interest rate is 11.9%, determine which option is
least expensive?

ANSWER TO IN-TEXT QUESTIONS

1. `5216.12
2. Option you have to pay `67000

Option b has present value 12000(1 + 0.115) (1 − (1.115)−8 )

0.115
= `67644.42
(1.115)12 − 1
While option c = 22000 + 7000 = `66,384.08
0.115(1.115)12
Thus option 'c' is the least expensive

7.10 TERMINAL QUESTIONS

Determine the values of real number m and n such that the function y=f(x) is continuous.

𝑥 + 𝑚2 𝑖𝑓 𝑥 ≤ 2
(a) f(x)= {
𝑥 − 𝑛2 𝑖𝑓 𝑥 > 2
𝑚𝑥 3 𝑖𝑓 𝑥 ≤ 2
(b) f(x)= { 2
𝑛𝑥 𝑖𝑓 𝑥 > 2
1. Let
𝑥 2 𝑖𝑓 𝑥 < 1
G(x) ={ 3 − 2𝑥 𝑖𝑓 1 ≤ 𝑥 ≤ 2
𝑥 3 − 8 𝑖𝑓 𝑥 > 2
Is the function continuous at x=0 and x=1?

2. Given the infinite series

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2𝑥 2𝑥 2𝑥
1+ + ( 3 )2 + ( 3 )3 + − − − − − −
3

For what values of x does the series converge? Find the sum of the series if x=1.2.

Answers:

1. (a) m=n=0
b) Any value of m and n such that n=2m
2. Yes, continuous at both x= 0 and 1.
3
3. x ϵ (-3/2, 3/2) and series will converge to value 3−2𝑥. For x=1.2 its value is 5.

7.11 SUMMARY

The unit introduced the concept of 'limit' which is associated with approaching to a value. We
discussed the concepts of right-hand and left-hand limits and the properties of limits. After
limits, we extend discussion to continuity. A function was said to be continuous, it there is no
break in the graph. The unit focuses on properties of continuous functions and different types
of discontinuity.
After that, we introduced a function called sequences. From these sequences, we derived the
series. A sequence represents a mapping of numbers (natural numbers) to the set of elements.
Subsequently, the unit discussed the concept of series, which was obtained by adding the
terms of the sequence. The concept of convergence and divergence of both series and
sequence were also analyzed.
Lastly, the unit discussed the applications of sequences and series in economic applications
such as calculation of present discounted value and internal rate of return.

7.12 REFERENCES

• Sydsaeter, K. Hammond, P. (2009) "Mathematics for economic analysis". Pearson

Education.
• Hoy, M. Livernois, S. U, McKenna, C. (2001). Mathematics for Economics, Prentice-
Hall, India.

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LESSON 8

SINGLE VARIABLE DIFFERENTIATION

STRUCTURE

8.1 Learning Objectives

8.2 Introduction
8.3 Geometric Interpretation of the Derivative of a Function
8.3.1 Other Notations for Derivatives
8.4 Rules for Differentiation
8.5 Higher-order Derivatives
8.6 Applications of Derivatives in Economics
8.7 Derivatives and Rates of Change
8.8 Summary
8.9 Glossary
8.10 Answers to In-Text Questions
8.11 Terminal Questions
8.12 References
8.1 LEARNING OBJECTIVES
After reading this lesson, students will be able to :

1. Discuss the geometric interpretation of the derivative of a function.

2. Obtain the derivative of the sums, products and quotients of functions.
3. Apply the generalized power rule and chain rule to find out derivatives and
4. Identify the applications of derivatives in economics.

8.2INTRODUCTION

A key question in most disciplines, including economics, is how quickly the value of a
variable changes over time. In other words, we are often interested in finding out rates of
change of variables. In economics, the rate of change is an essential component of
comparative statistics, which compares different equilibrium states of a variable. For
instance, given an initial equilibrium level of income 𝑌 ∗ , we might be interested in finding
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out the change in this income level due to an increase in an exogenous variable such as the
amount of government expenditure.

Mathematically, the rate of change of a function (of one or more variables) is described by
finding its derivative, a key concept in differential calculus developed by Isaac Newton and
Gottfried Leibniz. In this lesson, we will first discuss the geometric interpretation of the
derivative of a function, followed by some rules for calculating derivatives of functions of
different types. The lesson will also take a deep dive into the economic applications of
derivatives.

8.3 GEOMETRIC INTERPRETATION OF THE DERIVATIVE OF AFUNCTION

Geometrically, the derivative of a function at a given point is nothing but the slope of the
tangent to the graph of the function at the point. For example, consider the graph of a
function shown in 𝐹𝑖𝑔𝑢𝑟𝑒 1.

𝐅𝐢𝐠𝐮𝐫𝐞 𝟏

In Figure 1, the derivative of the function at point A is given by the slope of the tangent to the
graph at A and we denote this number by 𝑓 ′ (𝑥1 ) (read as f dash 𝑥1 or f prime 𝑥1 ).

Let us now discuss in detail what we mean by the tangent to a curve at a point. For this, let us
consider point A a fixed point on the curve and let B be a nearby point on the curve.

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𝐅𝐢𝐠𝐮𝐫𝐞 𝟐

The straight line passing through A and B is called a Secant. If we let B move along the curve
towards T, the secant will rotate around B. The limiting straight-line AT towards which the
secant tends is called the tangent to the curve at A.

We now wish to find out the slope of this tangent to the curve at point A. Consider Figure 3.
Here, the coordinates of point A are (𝑎, 𝑓(𝑎)).

Figure 3

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Point B is another point on the curve which lies close to point A. The Coordinates of point B
are (𝑎 + ℎ, 𝑓(𝑎 + ℎ)) where h is a small number ≠ 0.The slope of secant AB is then given
by

(𝑓(𝑎 + ℎ) − 𝑓(𝑎))
𝑚𝐴𝐵 =
(𝑎 + ℎ) − (𝑎)

𝑓(𝑎 + ℎ) − 𝑓(𝑎)
𝑚𝐴𝐵 =
ℎ
This fraction is often called Newton (or Differential) quotient of 𝑓.

Figure 3 shows that as ℎ tends to 0, point B tends towards point A. Hence, the slope of the
tangent to the curve at point A is the number that 𝑚𝐴𝐵 approaches as h tends to 0.

Hence, the derivative of the function 𝑦 = 𝑓(𝑥) 𝑎𝑡 𝑥 = 𝑎

𝑓(𝑎+ℎ)−𝑓(𝑎)
𝑓’(𝑎) =lim (1)
ℎ→0 ℎ

Once we have found 𝑓’(𝑎), it is easy to find the equation for the tangent at (𝑎, 𝑓(𝑎)).

The same is given by:

𝑦 − 𝑓(𝑎) = 𝑓’(𝑎) (𝑥 − 𝑎)

8.3.1 Other Notations for Derivatives

A general notation for the derivative of a function 𝑦 = 𝑓(𝑥) is 𝑓’(𝑥). We can also denote the
same by 𝑦’ (y prime or y dash).

The other notation is the differential notation. Note that the slope of the secant AB in figure 3
was given by

𝑓(𝑎 + ℎ) − 𝑓(𝑎) ∆𝑦 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑦

𝑚𝐴𝐵 = = [ ]
(𝑎 + ℎ) − (𝑎) ∆𝑥 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑥
𝑓(𝑎+ℎ)−𝑓(𝑎)
Since 𝑓’(𝑎) = lim
ℎ→0 ℎ

∆𝑦 𝑑𝑦
= lim =
ℎ→0 ∆𝑥 𝑑𝑥

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𝑑𝑦
The term or 𝑑𝑦⁄𝑑𝑥 is the differential notation of the derivative of a function. Since 𝑦 =
𝑑𝑥
𝑑𝑦 𝑑(𝑓(𝑥)) 𝑑
𝑓(𝑥), 𝑑𝑥 can also be written as or 𝑑𝑥 𝑓(𝑥).
𝑑𝑥

Letting 𝑎 = 𝑥 in equation (1), we get

𝑓(𝑥 + ℎ) − 𝑓(𝑥) 𝑑𝑦
𝑓’(𝑥) = lim = = 𝑦′
ℎ→0 ℎ 𝑑𝑥
If this limit exists, we say that the function is differentiable at 𝑥. The process of finding the
derivative of a function is called differentiation.

IN-TEXT QUESTIONS

1. Given 𝑓(𝑥) = 4𝑥 2 + 20. Then,𝑓’(𝑎)is given by:

4(𝑎 + ℎ)2 + 20 − (4𝑎2 + 20)
(𝑎) lim
ℎ→0 ℎ
4(𝑎 + ℎ)2 − 20 − (4𝑎2 + 20)
(𝑏) lim
ℎ→0 ℎ
4(𝑎 + ℎ)2 − (4𝑎2 + 20)
(𝑐) lim
ℎ→0 ℎ
4(𝑎 + ℎ)2 − (4𝑎2 + 20)
(𝑑) lim
ℎ→0 ℎ + 20

8.4 RULES FOR DIFFERENTIATION

• CONSTANT-FUNCTION RULE
If 𝑦 = 𝑓(𝑥) is a constant function, for example, 𝑦 = 𝑘 ∀ 𝑥, then the derivative 𝑓’(𝑥) = 0.

Geometrically, the graph of 𝑦 = 𝑘 is a straight line parallel to the 𝑥 axis. Hence, the tangent
to the graph has a slope of zero at each point.

Alternatively, using the definition of derivative,

𝑓(𝑥 + ℎ) − 𝑓(𝑥)
𝑓 ′ (𝑥) = lim
ℎ→0 ℎ

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If 𝑓(𝑥) = 𝑘,

𝑘−𝑘
𝑓 ′ (𝑥) = lim =0
ℎ→0 ℎ

It is noteworthy here to distinguish between 𝑓’(𝑥) = 0 and 𝑓’(𝑎) = 0. 𝑓’(𝑥) = 0 means that
the derivative of the function is 0 for all values of 𝑥 while 𝑓’(𝑎) = 0 means that the
derivative of the function is 0 at 𝑥 = 𝑎.

We now state the remaining results without proof.

• POWER FUNCTION RULE

If 𝑓(𝑥) = 𝑥 𝑛 where n is any arbitrary constant

Then,

𝑓 ′ (𝑥) = 𝑛𝑥 𝑛−1

In differential notation,

𝑑 𝑛
(𝑥 ) = 𝑛𝑥 𝑛−1
𝑑𝑥
GENERALIZED POWER FUNCTION RULE

Let,

𝑦 = [𝑓(𝑥)]𝑛

Then,

𝑦 ′ = 𝑛[𝑓(𝑥)]𝑛−1 . 𝑓 ′ (𝑥)

• DIFFERENTIATION OF SUMS AND DIFFERENCES

a) When we take the sum of two functions:
𝐹(𝑥) = 𝑓(𝑥) + 𝑔(𝑥)

𝐹 ′ (𝑥) = 𝑓 ′ (𝑥) + 𝑔′ (𝑥)

b) When we take the difference of two functions:

𝐹(𝑥) = 𝑓(𝑥) − 𝑔(𝑥)

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𝐹 ′ (𝑥) = 𝑓 ′ (𝑥) − 𝑔′ (𝑥)

• PRODUCT RULE
𝐹(𝑥) = 𝑓(𝑥). 𝑔(𝑥)

𝐹 ′ (𝑥) = 𝑓(𝑥)𝑔′ (𝑥) + 𝑓 ′ (𝑥)𝑔(𝑥)

• QUOTIENT RULE
𝑓(𝑥)
𝐹(𝑥) =
𝑔(𝑥)

𝑓 ′ (𝑥)𝑔(𝑥) − 𝑓(𝑥)𝑔′ (𝑥)

𝐹 ′ (𝑥) =
[𝑔(𝑥)]2

• CHAIN RULE
𝐹(𝑥) = 𝑓(𝑔(𝑥))

Here, 𝐹(𝑥) is a composite function, 𝑔(𝑥) is known as its kernel and 𝑓 as the exterior
function.

Then,

𝐹 ′ (𝑥) = 𝑓 ′ (𝑔(𝑥)). 𝑔′ (𝑥)

EXAMPLE 1: Differentiate the following functions with respect to 𝑥.

9𝑥−10
a) 2𝑥−4

b) √𝑥 2 + 10

c) 𝑣 = 6𝑡 2 , 𝑤ℎ𝑒𝑟𝑒 𝑡 = 6𝑥 + 15
SOLUTION
9𝑥−10
a) 𝑓(𝑥) = 2𝑥−4
Using the quotient rule,

9(2𝑥 − 4) − (9𝑥 − 10)(2)

𝑓 ′ (𝑥) =
(2𝑥 − 4)2

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18𝑥 − 36 − 18𝑥 + 20
=
(2𝑥 − 4)2

−16
=
[2(𝑥 − 2)]2

−4
=
(𝑥 − 2)2

𝑏) 𝑓(𝑥) = √𝑥 2 + 10 = (𝑥 2 + 10)1/2

1 2 1
𝑓 ′ (𝑥) = (𝑥 + 10)2−1 . (2𝑥)
2
1 2 1
= (𝑥 + 10)−2 . (2𝑥)
2
𝑥
=
√𝑥 2 + 10

(c) 𝑣 = 6𝑡 2 𝑤ℎ𝑒𝑟𝑒, 𝑡 = 6𝑥 + 15

This is of the form

𝐹(𝑥) = 𝑓(𝑔(𝑥))

were,

𝑓 = 6𝑡 2 𝑎𝑛𝑑 𝑔(𝑥) = 6𝑥 + 15

Hence,

𝐹 ′ (𝑥) = 𝑓 ′ (𝑔(𝑥)). 𝑔′ (𝑥)

𝑓 ′ (𝑔(𝑥)) = 12𝑡 = 12(6𝑥 + 15)

𝑔′ (𝑥) = 6

∴ 𝐹 ′ (𝑥) = 72(6𝑥 + 15)

IN-TEXT QUESTIONS

2. Find the derivative of the following functions:

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𝑥 1/2 −20
a) 𝑥 1/2 +10

b) (𝑡 2 + 1)√𝑡

c) 𝑥 𝑛 (𝑎√𝑥 + 20)

d) (𝑥 4 − 𝑥 2 )(5𝑥 3 + 2𝑥 2 )

8.5 HIGHER-ORDER DERIVATIVES

𝑑𝑦
If 𝑦 = 𝑓(𝑥), then 𝑦 ′ = 𝑑𝑥 = 𝑓 ′ (𝑥) is called the first derivative of 𝑓(𝑥). If 𝑓′(𝑥) is also
differentiable, then we can find further higher-order derivatives of 𝑓(𝑥).

• SECOND-ORDER DERIVATIVE
𝑑2𝑦
′′
𝑦 =𝑓 ′′ (𝑥)
= 2 = 𝑦 (2) = 𝑓 (2) (𝑥)
𝑑𝑥
The number 2 in the parentheses denotes that we are referring to the order of the derivative
here.

Similarly,

• THIRD-ORDER DERIVATIVE
𝑑3𝑦
𝑦 ′′′ = 𝑓 ′′′ (𝑥) = = 𝑦 (3) = 𝑓 (3) (𝑥)
𝑑𝑥 3

• 𝒏𝒕𝒉 ORDER DERIVATIVE

𝑑𝑛 𝑦
𝑦 (𝑛) = 𝑓 (𝑛) (𝑥) =
𝑑𝑥 𝑛
1
EXAMPLE 3: Compute 𝑦 ′′′ for 𝑦 = 130𝑥 − 3 𝑥 3

SOLUTION:

1
𝑦 = 130𝑥 − ( ) 𝑥 3
3
1
𝑦 ′ = 130 − . 3𝑥 2
3

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= 130 − 𝑥 2
𝑦 ′′ = −2𝑥
= 𝑦 ′′′ = −2
IN-TEXT QUESTIONS

3. 𝑓 (4) (1) for 𝑦 = 500𝑥 −4 is:

(a) 2,50,000

(b) 3,00,000

(c) 3,70,000

(d) 4,20,000

8.6 APPLICATIONS OF DERIVATIVES IN ECONOMICS

In economics, we frequently encounter several “marginal” concepts such as marginal utility,

marginal cost, marginal revenue etc. In general, a marginal function is defined as the change
in the total function due to a unit change in the independent variable.

For example, marginal cost is the cost incurred when an additional unit of output is produced.
Similarly, marginal revenue is the addition to total revenue when an extra unit of output is
sold.

When the underlying total functions are continuous and differentiable, the marginal functions
can be obtained by taking the first-order derivative of the total function.

To understand this, let us take the example of Marginal revenue (MR). Now by definition,

𝑀𝑅(𝑥) = 𝑇𝑅(𝑥 + 1) − 𝑇𝑅(𝑥), that is the additional revenue obtained by selling one more
unit of 𝑥.

By the definition of derivative,

𝑇𝑅(𝑥 + ℎ) − 𝑇𝑅(𝑥)
𝑇𝑅 ′ (𝑥) = lim
ℎ→0 ℎ
Since a firm would sell many units of output (x), we can consider h=1 as a number close to 0.

Hence,
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𝑇𝑅 ′ (𝑥) = 𝑇𝑅(𝑥 + 1) − 𝑇𝑅(𝑥) = 𝑀𝑅(𝑥)

The other marginal functions can similarly be obtained as the derivative of the corresponding
total functions.

For example, marginal cost is the derivative of the total cost function with respect to output.
Marginal utility is the derivative of the total utility function.

EXAMPLE 4: Suppose the inverse demand function is given by

100
𝑝=
𝑞+5

Show that the marginal revenue is always positive. Also, show that as output increases, total
revenue increases while marginal revenue decreases.

SOLUTION:

100𝑞
𝑇𝑅 = 𝑝. 𝑞 =
𝑞+5
𝑑𝑇𝑅 100(𝑞+5)−100𝑞 500
𝑀𝑅 = = = (𝑞+5)2 which is positive for all values of q.
𝑑𝑞 (𝑞+5)2

Hence, marginal revenue is positive at all levels of output. Since marginal revenue is the
slope of the total revenue, the positive value of the marginal revenue implies that as output
increases, total revenue increases.

The slope of the MR curve is given by:

𝑑𝑀𝑅 𝑑 500 0(𝑞+5)2 −500(2)(𝑞+5) −1,000
= 𝑑𝑞 ((𝑞+5)2) = (𝑞+5)4
= (𝑞+5)3 < 0 for all q>0.
𝑑𝑞

Hence, as output increases, marginal revenue falls.

EXAMPLE 5: Suppose the total cost function of a firm is given by

𝑇𝐶 = 0.02𝑞 3 − 4𝑞 2 + 800𝑞.

Find the firm’s marginal cost and average cost functions. At what level of output is MC=AC?

SOLUTION:

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𝑑𝑇𝐶
𝑀𝐶 = = 0.06𝑞 2 − 8𝑞 + 800
𝑑𝑞

𝑇𝐶 0.02𝑞 3 − 4𝑞 2 + 800𝑞
𝐴𝐶 = = = 0.02𝑞 2 − 4𝑞 + 800
𝑞 𝑞

For AC = MC

0.06𝑞 2 − 8𝑞 + 800 = 0.02𝑞 2 − 4𝑞 + 800

0.04𝑞 2 = 4𝑞

𝑞(0.04𝑞 − 4) = 0
4
Therefore, 𝑞 = 0 𝑜𝑟 𝑞 = 0.04 = 100

IN-TEXT QUESTIONS

4. If a firm faces the following demand function for its output:

𝑥 = 20 − 2𝑝

Then, the 𝑀𝑅 curve for the firm is:

(a) 20-x

(b) 15-x

(c) 10-2x

(d) 10-x

8.7 DERIVATIVES AND RATES OF CHANGE

Instead of interpreting the derivative of a function as the slope of the tangent to its graph at a
particular point, we can also interpret it as a rate of change. Consider a function 𝑦 =
𝑓(𝑥).Suppose the value of 𝑥 changes from 𝑎 𝑡𝑜 𝑎 + ℎ. Then, the value of the function will
change 𝑓(𝑎) to 𝑓(𝑎 + ℎ).

In other words, the change in the functional value when 𝑥 changes from 𝑎 to 𝑎 + ℎ is
𝑓(𝑎 + ℎ) − 𝑓(𝑎)

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Then, the average rate of change of 𝒇(𝒙)when 𝑥 changes from 𝑎 to 𝑎 + ℎ is:

𝑓(𝑎 + ℎ) − 𝑓(𝑎) 𝑓(𝑎 + ℎ) − 𝑓(𝑎)

=
𝑎+ℎ−𝑎 ℎ
If we take the limit as ℎ → 0, then we get the derivative of 𝑓(𝑥) at x=a

𝑓(𝑎 + ℎ) − 𝑓(𝑎)
𝑓 ′ (𝑎) = lim
ℎ→0 ℎ
𝑓’(𝑎) is also referred to as the Instantaneous Rate of Change i.e., the rate of change at a
particular instant (and not the interval, as was the case in average rate of change).
𝑓 ′ (𝑎)
In some situations, we are also interested in analyzing the proportion which is also
𝑓(𝑎)
referred to as the proportional or relative rate of change.

NOTE: When the independent variable is time, we often use the dot notation for
𝑑𝑥
differentiation with respect to time like 𝑥̇ . Here, 𝑥̇ = .
𝑑𝑡

For example,

𝑥(𝑡) = 15𝑡 3 + 12𝑡 2 + 6𝑡 + 5

𝑥 ′ (𝑡) = 45𝑡 2 + 24𝑡 + 6

𝑥̇ = 45𝑡 2 + 24𝑡 + 6

8.8 SUMMARY

In this lesson, we discussed the concept of derivatives of a function. We first discussed the
geometrical interpretation of a derivative followed by the calculus definition of a derivative.
We also looked at some of the rules for calculating derivatives of functions of different types.
We then discussed some of the economic applications of derivatives. Particularly, we learnt
that in economics, derivatives are often used to find the marginal functions of given total
functions. For example, the marginal cost of function is obtained by taking the first order
derivative of the total cost function. Finally, we learnt that instead of interpreting the
derivative of a function as the slope of the tangent to its graph at a particular point, we can
also interpret it as a rate of change.

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8.9 GLOSSARY

Average Rate of Change: It measures the average change in the value of a function in a
given interval

Derivative: The derivative of a function at a given point is nothing but the slope of the
tangent to the graph of the function at a point.

Differentiation: The process of finding the derivative of a function is called differentiation.

Instantaneous Rate of Change: The rate of change at a particular instant, which is the same
as the derivative of the function at that point.

8.10 ANSWERS TO IN-TEXT QUESTIONS

1. (a)

15
2. (a) 2
(√x+10) √x
2
5t + 1
(𝑏)
2√t
1
𝑛−
𝑎𝑥 2
(c) + 𝑛(𝑎√𝑥 + 20)𝑥 𝑛−1
2

(d) 𝑥 3 (35𝑥 3 + 12𝑥 2 − 25𝑥 − 8)

3. (d)

4. (d)

8.11 TERMINAL QUESTIONS

Q1. Find the first-order derivative of each of the following:

20+𝑥 2
i. 𝑦 = 20−𝑥 2
2𝑡 3 −5𝑡+70
ii. 𝑦=
𝑡 2 +20
2𝑥+15 4
iii. 𝑦 = ( 𝑥−10 )
1 2
iv. 𝑦 = (𝑢2 + 𝑢2 )
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v. 𝑦 = 𝑥√𝑥 3 − 5
𝑑𝑦 1
Q2. Find 𝑑𝑥 when 𝑦 = −3(𝑡 + 1)5 and 𝑡 = 3 𝑥 3 .

Q3. A firm has a demand function,

𝑝 = 1200 − 9𝑞

where 𝑝 is the price and 𝑞 is the output.

Further, its production function is given by

𝑞 = 𝐿1/3

where L is the units of labour employed. Find the marginal revenue product of labour when
the firm employs 8 units of labor.

Q4. Let 𝑢(𝑡) and 𝑣(𝑡) be positive differentiable functions of 𝑡. Find an expression for 𝑥̇
𝑥

where 𝑥 = 𝜇[𝑢(𝑡)]𝑎 [𝑣(𝑡)]𝑏 , where 𝜇, 𝑎 𝑎𝑛𝑑 𝑏 are constants.

Q5. Given a function,

𝑦 = 𝑥𝑛

Prove that the 𝑛𝑡ℎ derivative of 𝑦 is given by 𝑛!.

8.12 REFERENCES

• Sydsaeter, K., Hammond, P. (2002). Mathematics for economic analysis. Pearson

Education.
• Chiang C, A., Wainright, K. (2005). Fundamental methods of mathematical
economics. McGraw-Hill
• Hoy, M., Livernois, J., McKenna C., Rees, R., Stengos, T. (2001). Mathematics for
Economics, Prentice-Hall India.

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LESSON 9

FURTHER TOPICS IN DIFFERENTIATION

STRUCTURE

9.1 Learning Objectives

9.2 Introduction
9.3 Implicit Differentiation
9.4 Differential of a Function
9.4.1 Rules for Differentials
9.5 Use of Differentials in the Approximation of Linear Functions
9.5.1 Linear Approximation of a Function
9.5.2 Quadratic Approximation of a Function
9.5.3 Higher-order Approximation of a Function
9.6 Elasticities
9.7 Summary
9.8 Glossary
9.9 Answers to In-Text Questions
9.10 Terminal questions
9.11 References

9.1 LEARNING OBJECTIVES

After reading this lesson, students will be able to :

1. Understand the concept of implicit differentiation.

2. Explain the concept of differentials and the associated rules.
3. Find the linear, quadratic, and higher order approximations to functions about the
given points and
4. Explain the concept of elasticities of functions and analyze their application in
economics.

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9.2 INTRODUCTION

In the last lesson, we introduced the concept of derivative of a function, both in terms of the
slope of the tangent to the curve and rate of change. We also discussed some of the basic
rules of differentiation. In this lesson, we will look at the differentiation of functions where
the dependent variable is not explicitly expressed as a function of the independent variable.
We will then discuss the concept of differentials, followed by the methods to approximate
functions using linear, quadratic and higher-order approximations.
The lesson will conclude with a discussion on elasticities, a concept which economists
frequently use to characterize changes in the independent variable, instead of derivatives.

9.3 IMPLICIT DIFFERENTIATION

Up until now, we have discussed how to differentiate functions of the type

𝑦 = 𝑓(𝑥)
For example:
3𝑥+5
y= 3𝑥 5 + 20, 𝑦= 2𝑥+20

These are called as explicit functions because here the variable 𝑦 has been explicitly
expressed as a function of x.
However, if we write 𝑦 = 3𝑥 5 + 20 as 𝑦 − 3𝑥 5 − 20 = 0, we no longer have an explicit
function but an equation that implicitly describes the function.
Now, if we wish to differentiate an implicit function, one way is to express 𝑦 as a function of
𝑥 and then apply the usual rules of differentiation.
However, in some cases, it may not be possible to explicitly express 𝑦as a function of 𝑥.
For example, in the case of an equation of the type 𝑥 2 + 𝑦 3 = 𝑦 5 − 𝑥 2 + 6𝑦, it is not
possible to express 𝑦 as a function of 𝑥.
In such cases, we differentiate both the left-hand and right-hand sides of the equation with
respect to 𝑥, considering 𝑦 as a function of 𝑥. We then find the expression for 𝑑𝑦/𝑑𝑥 from
the resulting equation.
𝑑𝑦
EXAMPLE 1: Find if 6𝑥 3 + 4𝑥 2 𝑦 + 5𝑥𝑦 2 + 2𝑦 3 = 0
𝑑𝑥

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SOLUTION
6𝑥 3 + 4𝑥 2 𝑦 + 5𝑥𝑦 2 + 2𝑦 3 = 0
Differentiating each term with respect to 𝑥
18𝑥 2 + 8𝑥𝑦 + 4𝑥 2 𝑦 ′ + 5𝑦 2 + 10𝑥𝑦𝑦 ′ + 6𝑦 2 𝑦 ′ = 0
𝑦 ′ (4𝑥 2 + 10𝑥𝑦 + 6𝑦 2 ) = −18𝑥 2 − 8𝑥𝑦 − 5𝑦 2

′
𝑑𝑦 −(18𝑥 2 + 8𝑥𝑦 + 5𝑦 2 )
𝑦 = =
𝑑𝑥 4𝑥 2 + 10𝑥𝑦 + 6𝑦 2
EXAMPLE2: Consider the standard macroeconomic framework
𝑌 =𝐶+𝐼
𝐶 = 𝑓(𝑦)
𝑑𝑌
where Y is income, C is consumption, and I is investment. Find an expression for and
𝑑𝐼
interpret it.
SOLUTION
𝑌 =𝐶+𝐼
𝐶 = 𝑓(𝑦)
∴ 𝑌 = 𝑓(𝑦) + 𝐼
Differentiating both sides of the equation with respect to 𝐼,
𝑑𝑌 𝑑𝑦
= 𝑓 ′ (𝑦) +1
𝑑𝐼 𝑑𝐼
𝑑𝑌
(1 − 𝑓 ′ (𝑦)) = 1
𝑑𝐼
𝑑𝑌 1
=
𝑑𝐼 1 − 𝑓 ′ (𝑦)
𝑑𝑌 𝑑𝐶
is the change in income due to a change in investment. 𝑓 ′ (𝑦) = 𝑑𝑌 is the change in
𝑑𝐼
consumption due to change in income, which is referred to as the marginal prosperity to
consume (𝑀𝑃𝐶) in economics. Generally, the value of 𝑀𝑃𝐶 lies between 0 and 1.
Hence,

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𝑑𝑌 1
=
𝑑𝐼 1 − 𝑓′(𝑦)
will be greater than 1.
𝑑𝑌
is also referred to as the Investment Multiplier.
𝑑𝐼

IN-TEXT QUESTIONS

1. Suppose 𝑀𝑃𝐶 = 0.5. Then, the investment multiplier is:

(a) 10
(b) 20
(c) 30
(d) 40

9.4 DIFFERENTIAL OF A FUNCTION

Consider a differentiable function 𝑦 = 𝑓(𝑥). Suppose the value of 𝑥 changes by a small

amount 𝑑𝑥 to 𝑥 + 𝑑𝑥.
We know,
𝑑𝑦
= 𝑓′(𝑥)
𝑑𝑥
𝑑𝑦 = 𝑓 ′ (𝑥)𝑑𝑥 (1)
Here, 𝑓 ′ (𝑥)𝑑𝑥 is called the differential of 𝑦 = 𝑓(𝑥) and is denoted by 𝑑𝑦 or 𝑑𝑓. Let us now
depict graphically the change in the value of the function 𝑦 = 𝑓(𝑥) when 𝑥 changes to 𝑥 +
𝑑𝑥.

Figure 1

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In Figure 1, as the value of 𝑥 increase by a small amount 𝑑𝑥, the functional value increases
from 𝑓(𝑥) to 𝑓(𝑥 + 𝑑𝑥).

The change in the functional value is,therefore

∆𝑦 = 𝑓(𝑥 + 𝑑𝑥) − 𝑓(𝑥)

This is shown by the length of the line BC. Using differentials, it is possible to provide an
approximate measure of this change. This approximate change is denoted by 𝑑𝑦 and is given
by
𝑓 ′ (𝑥)𝑑𝑥 (Using equation (1)). This is represented by line segment DC in the figure. Note that
the gap between BC and DC i.e, between the actual change in 𝑦(∆𝑦) and approximate change
in 𝑦(𝑑𝑦) will be small for small values of 𝑑𝑥.

9.4.1 Rules for Differentials

All the rules for differentiation discussed in the previous chapter can be expressed in terms of
differentials as well. Hence, if 𝑢 = 𝑓(𝑥) and 𝑣 = 𝑓(𝑥) are two differentiable functions of 𝑥,
then the following results hold:

(i) 𝑑(𝑎𝑢 + 𝑏𝑣) = 𝑎𝑑𝑢 + 𝑏𝑑𝑣

(ii) 𝑑(𝑢𝑣) = 𝑣𝑑𝑢 + 𝑢𝑑𝑣

𝑢 𝑣𝑑𝑢−𝑢𝑑𝑣
(iii) 𝑑 (𝑣 ) = 𝑣2

PROOF OF (i) Since,

𝑑𝑦 = 𝑓 ′ (𝑥)𝑑𝑥
𝑑(𝑎𝑢 + 𝑏𝑣) = (𝑎𝑢 + 𝑏𝑣)′𝑑𝑥
= (𝑎𝑢)′ 𝑑𝑥 + (𝑏𝑣)′𝑑𝑥
= 𝑎𝑢′ 𝑑𝑥 + 𝑏𝑣′𝑑𝑥
= 𝑎𝑑𝑢 + 𝑏𝑑𝑣
The other results can also be proved in a similar fashion.

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9.5 USE OF DIFFERENTIALS IN APPROXIMATION OF NON-LINEAR

FUNCTIONS

9.5.1 Linear Approximation of a Function

Let us assume that 𝑦 = 𝑓(𝑥) is a non-linear function as shown in Figure 2. We want to
approximate this function when 𝑥 is very close to an initial value, let us say a.

Figure 2
∆𝑦 = 𝑓(𝑥) − 𝑓(𝑎) (2)
For small 𝑑𝑥, ∆𝑦 ≈ 𝑑𝑦 = 𝑓 ′ (𝑎)𝑑𝑥
= 𝑓′(𝑎)(𝑥 − 𝑎)
(∵ 𝑑𝑥 = 𝑥 − 𝑎)
From (2)
𝑓(𝑥) = 𝑓(𝑎) + ∆𝑦
≈ 𝑑𝑦 + 𝑓(𝑎)
= 𝑓 ′ (𝑎)(𝑥 − 𝑎) + 𝑓(𝑎)
∴ 𝑓(𝑥) ≈ 𝑓(𝑎) + 𝑓′(𝑎)(𝑥 − 𝑎)

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EXAMPLE 3 Let 𝑦 = 𝑥 4 − 15. Suppose the value of 𝑥 changes from 2 to 1.99. Find the
approximate change in 𝑦 as well as the changed value of 𝑦.
SOLUTION We know, 𝑓(𝑥) − 𝑓(𝑎) = ∆𝑦 → 𝑓(𝑥) = 𝑓(𝑎) + ∆𝑦. If ∆𝑦 ≈ 𝑑𝑦 ⇒ 𝑓(𝑥) ≈
𝑓(𝑎) + 𝑓 ′ (𝑎)(𝑥 − 𝑎).
Here, 𝑎 = 2(the initial value of 𝑥)
Now,
𝑓′(𝑥) = 4𝑥 3
𝑓 ′ (𝑎) = 𝑓 ′ (2) = 4(2)3 = 32
Approximate change in y
𝑓′(𝑎)(x − a)
= 𝑓′(2)(1.99 − 2)
= (32)(−0.01) = −0.32
The new value of y
𝑓(1.99) ≈ 𝑓(2) + 𝑓′(2)(1.99 − 2)
= (24 − 10) − 0.32 = 6 − 0.32 = 5.68

1
EXAMPLE 4 Find the linear approximation of the function 𝑦 = 𝑓(𝑥) = 1+𝑥 about a=0.

SOLUTION
𝑓(𝑥) ≈ 𝑓(𝑎) + 𝑓′(𝑎)(𝑥 − 𝑎)
1 0(1 + 𝑥) − 1 −1
𝑓(𝑥) = , 𝑓 ′ (𝑥) = 2
=
1+𝑥 (1 + 𝑥) (1 + 𝑥)2
𝑓 ′ (0) = −1
1
∴ 𝑓(𝑥) ≈ 𝑓(0) + (−1)(𝑥 − 0) = −𝑥 =1−𝑥
1+0

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9.5.2 Quadratic Approximation of A Function

Suppose we want to improve the accuracy of our approximation. In that case, we can
approximate the function 𝑦 = 𝑓(𝑥) by a quadratic polynomial when 𝑥 is close to 𝑎.
The quadratic approximation is given by
𝑓(𝑥) ≈ 𝛼0 + 𝛼1 (𝑥 − 𝑎) + 𝛼2 (𝑥 − 2)2 (3)
Here,
𝛼0 = 𝑓(𝑎)
To get 𝛼1 , we will differentiate equation (3) and put 𝑥 = 𝑎
𝑓 ′ (𝑥) = 𝛼1 + 2𝛼2 (𝑥 − 𝑎)
𝑓 ′ (𝑎) = 𝛼1 + 2𝛼2 (0) = 𝛼1
∴ 𝛼1 = 𝑓′(𝑎)
To get 𝛼2 , we differentiate equation (3) twice and put 𝑥 = 𝑎.
𝑓′′(𝑥) = 2𝛼2
(𝑥)
∴ 𝛼2 = 𝑓′′
2
Hence, from (3)
𝑓′′(𝑎)
𝑓(𝑥) ≈ 𝑓(𝑎) + 𝑓 ′ (𝑎)(𝑥 − 𝑎) + (𝑥 − 𝑎)2
2

EXAMPLE 5 Find the quadratic approximation of the function 𝑦 = 2(1 + 𝑥)−1/2 about 𝑎 =
0.
SOLUTION
𝑦 = 2(1 + 𝑥)−1/2
2
y=
√1 + 𝑥

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1
0(√1 + 𝑥)) − 2. 2 (1 + 𝑥)−1/2
𝑓 ′ (𝑥) =
(√(1 + 𝑥))2
1 3
𝑓 ′ (𝑥) = − 3 = −(1 + 𝑥)−2
(1 + 𝑥) 2

3 3 3 5
𝑓 ′′ (𝑥) = (1 + 𝑥)−2−1 = (1 + 𝑥)−2
2 2
Now, we know
𝑓 ′′ (𝑎)
𝑓(𝑥) ≈ 𝑓(𝑎) + 𝑓 ′ (𝑎)(𝑥 − 𝑎) + (𝑥 − 𝑎)2
2
Here 𝑎 = 0
3
𝑓 ′ (0) = −(1)−2 = −1
3 3
𝑓 ′′ (0) = 5 =
2(1 + 𝑥) 2
2

2
𝑓(0) = =2
√1 + 0
2 3 2
∴ ≈ 2 − 1(𝑥 − 0) + 𝑥
√1 + 𝑥 2(2)
3
= 2 − 𝑥 + 𝑥2
4
9.5.3 Higher-Order Approximation of a Function
To further improve our approximation, we can use higher-degree polynomials.
For approximating a function 𝑓(𝑥) by a polynomial of degree 𝑛 when 𝑥 is close to a, we
write
𝑓(𝑥) ≈ 𝛼0 + 𝛼1 (𝑥 − 𝑎) + 𝛼2 (𝑥 − 𝑎)2 + ⋯ + 𝛼𝑛 (𝑥 − 𝑎)𝑛
Here,
𝑓 ′ (𝑎) 𝑓 ′′ (𝑎) 𝑓 𝑛 (𝑎)
𝛼0 = 𝑓(𝑎), 𝛼1 = , 𝛼2 = , … , 𝛼𝑛 =
1! 2! 𝑛!

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𝑓 ′ (𝑎) 𝑓 ′′ (𝑎) 2
𝑓 𝑛 (𝑎)
∴ 𝑓(𝑥) = 𝑓(𝑎) + (𝑥 − 𝑎) + (𝑥 − 𝑎) + ⋯ + (𝑥 − 𝑎)𝑛
1! 2! 𝑛!
The RHS of this approximation is called the 𝑛𝑡ℎ -order Taylor polynomial for 𝑓 about 𝑥 = 𝑎.
2
EXAMPLE 6: Find the third-order Taylor Approximation for 𝑓(𝑥) = 𝑥 about 𝑎 = 2.

SOLUTION: The third–order approximation of a function is given by

𝑓 ′′ (𝑎) 𝑓 ′′′ (𝑎)
𝑓(𝑥) ≈ 𝑓(𝑎) + 𝑓 ′ (𝑎)(𝑥 − 𝑎) + (𝑥 − 𝑎)2 + (𝑥 − 𝑎)3
2! 3!
Here,
2
𝑓(𝑥) =
𝑥
2 2 1
𝑓 ′ (𝑥) = − 2
⟶ 𝑓 ′ (2) = − = −
𝑥 4 2
0(𝑥 2 ) − (−2)(2𝑥) 4𝑥 4
𝑓 ′′ (𝑥) = 4
= 4= 3
𝑥 𝑥 𝑥
4 1
𝑓 ′′ (0) = =
8 2

′′′ (𝑥)
0(𝑥 3 ) − 4(3𝑥 2 ) 12
𝑓 = 6
=− 4
𝑥 𝑥
12 12 3
𝑓 ′′′ (2) = − 4
=− =−
2 16 4
2
𝑓(2) = =1
2
1 1 3
∴ 𝑓(𝑥) ≈ 1 − (𝑥 − 2) + (𝑥 − 2)2 − (𝑥 − 2)3
2 2 4
IN-TEXT QUESTIONS

Choose the correct alternative:

2. The third–order Taylor approximation of 𝑓(𝑦) = (1 + 𝑦)1/2 about 𝑎 = 0 𝑖𝑠:
1 1 1
(a) 1 + 2 𝑦 − 4 𝑦2 + 8 𝑦3

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1 1 1
(b) 1 + 2 𝑦 − 8 𝑦 2 + 16 𝑦 3

(c) 1 − 2𝑦 − 4𝑦 2 − 8𝑦 3

(d) 1 − 2𝑦 − 8𝑦 2 − 16𝑦 3

3. The radius of a spherical ball decreases from 10 to 9.8 𝑐𝑚. Then, the approximate
decrease in its volume using linear approximation is:
(a) 20𝜋 𝑐𝑚3

(b) 40𝜋 𝑐𝑚3

(c) 60𝜋 𝑐𝑚3

(d) 80𝜋 𝑐𝑚3

𝑑𝑦
4. If √𝑥 + √𝑦 = 1, then | is:
𝑑𝑥 𝑥=1,𝑦=1
4 4

(a) ¼

(b) 4

(c) ½

(d) 1

5. The quadratic approximation of 𝑓(𝑡) = (1 + 𝑡)5 about 𝑎 = 0 is:

(a) 1 + 10𝑡 2

(b) 1 + 5𝑡 + 20𝑡 2

(c) 1 + 5𝑡 + 10𝑡 2

(d) 1 − 10𝑡 − 5𝑡 2

9.6 ELASTICITIES

Economists often report elasticities instead of derivatives to report a change in a variable due
to change in some other variable. This is because while derivatives are expressed in terms of
units of the dependent and the independent variable, elasticities are unit–free.

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For example, the slope of a demand curve tells us what the change in the quantity is
demanded of a commodity due to a unit change in its price. For instance, what happens to the
demand of ice-creams if its price per unit increases by $1. While an increase of $1 in the
price of ice cream might cause a significant change in its quantity demanded, a price increase
of $1 may be inconsequential for a product such as an iPhone. Elasticities, on the other hand,
are pure numbers devoid of any units. They tell us the percentage change in a dependent
variable due to a unit change in the independent variable.
Suppose 𝑦 = 𝑓(𝑥) is a differentiable function, then the elasticity of 𝑦 with respect to 𝑥 is
given by:
𝑥 𝑓 ′ (𝑥). 𝑥
𝐸𝑙𝑥 𝑦 = 𝐸𝑦𝑥 = 𝐸𝑙𝑥 𝑓(𝑥) = 𝑓 ′ (𝑥) =
𝑦 𝑓(𝑥)
For instance, let 𝑞 = 𝐷(𝑝) be the demand function for a commodity where 𝑞 is the quantity
demanded and 𝑝 is the own price of the commodity. Then, the elasticity of demand of the
commodity with respect to its price is
𝑑 𝑝 𝑑𝑞 𝑝
𝐸𝑙𝑝 𝑞 = (𝐷(𝑝)). = .
𝑑𝑝 𝐷(𝑝) 𝑑𝑝 𝑞
𝑑𝑞
Note that for a linear demand curve, while the slope is the same at all the points along the
𝑑𝑝
curve, elasticity at all points is not the same.

EXAMPLE 7: Find the price elasticity of demand for the following function:
𝑞 = 200 − 4𝑝 , 𝑎𝑡 𝑞 = 40
SOLUTION:
𝑞 = 200 − 4𝑝

𝑑𝑞
= −4
𝑑𝑝
And,
𝑑𝑞 𝑝
𝐸𝑙𝑞 𝑝 = .
𝑑𝑝 𝑞

𝑝
= (−4).
200 − 4𝑝
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At 𝑞 = 40,
40 = 200 − 4𝑝
4𝑝 = 160
𝑝 = 40

40
∴ 𝐸𝑙𝑞 𝑝 = −4.
200 − 4(40 )
40
= −4. = −4
40

IN-TEXT QUESTIONS
8000
6. The elasticity of the demand function 𝑞 = 𝑝3/2
at p=1 is:

(a) -2

(b) -3

(c) -0.5

(d) -1.5

9.7 SUMMARY

In this lesson, we learnt how to differentiate functions which cannot be expressed explicitly
as a function of the independent variable. We then discussed the concept of differentials and
their application in linear, quadratic, and higher-order approximations of functions. Finally,
we discussed the concept of elasticities, followed by their applications in economics.

9.8 GLOSSARY

Differential: For a function 𝑦 = 𝑓(𝑥), the term 𝑑𝑦 = 𝑓 ′ (𝑥)𝑑𝑥 is called the differential of the
function. It is also denoted as𝑑𝑓.

Elasticity: Elasticity of a function is the percentage change in a dependent variable due to a

unit change in the independent variable.
Implicit functions: Functions in which the dependent variable cannot be expressed explicitly
as a function of the independent variable are called Implicit functions.

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9.9 ANSWERS TO IN-TEXT QUESTIONS

1. (b)
2. (b)
3. (d)
4. (d)
5. (c)
6. (d)

9.10 TERMINAL QUESTIONS

Q1. Given a demand function:

𝑝 = 𝑎𝑞 𝑏 (𝑎 > 0)
i. Find the 𝑀𝑅 curve.
ii. Find the elasticity of demand.
iii. When will the elasticity be unity?
iv. What restriction on b should you impose?

Q2. The national income model of a closed economy is given by:

𝑌 =𝐶+𝐼
𝐶 = 𝑓(𝑦), 𝑤ℎ𝑒𝑟𝑒, 0 < 𝑓 ′ (𝑦) < 1
Here 𝑌 is national income, 𝐶 is aggregate consumption and 𝐼 is investment.
𝑑2 𝑌
Under what condition will be positive?
𝑑𝐼 2

Q3. If 𝑝 = 𝑓(𝑥), where 𝑓 ′ (𝑥) < 0, is an inverse demand function facing a monopolist,
𝑑(𝑇𝑅)
write total revenue (𝑇𝑅) as a function of output 𝑥. Find by using chain rule and
𝑑𝑝
show that an increase in price leads to:
i. An increase in total revenue if the demand is inelastic.
ii. A decrease in total revenue if the demand is elastic.
iii. No change in total revenue if the demand is unitary elastic.

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Q4. Find 𝑑𝑦/𝑑𝑥 for the following equations:

i. 𝑥𝑦 = 100
ii. 𝑥 2 + 𝑥𝑦 − 𝑦 3 = 0
iii. 𝑥√1 + 𝑦 + 𝑦√1 + 𝑥 = 0
iv. 𝑦 3 − 6𝑥𝑦 2 = 𝑥 3 + 6𝑥 2 𝑦

Q5. Find the linear approximation of the following functions around the given points:
i. 𝑦 = 𝑥 2 + 4𝑥 + 3 𝑎𝑟𝑜𝑢𝑛𝑑 𝑎 = 2
5𝑥+2
ii. 𝑦 = 2𝑥+7 𝑎𝑟𝑜𝑢𝑛𝑑 𝑎 = −1.
Q6. If 𝑢 and 𝑣 are two differential functions of 𝑥, find:
i. 𝐸𝑙𝑥 (𝑢𝑣)
𝑢
ii. 𝐸𝑙𝑥 (𝑣 )

9.11 REFERENCES

• Sydsaeter, K., Hammond, P. (2002). Mathematics for economic analysis. Pearson

Education.

• Chiang C, A., Wainright, K. (2005). Fundamental methods of mathematical

economics. McGraw-Hill

• Hoy, M., Livernois, J., McKenna C., Rees, R., Stengos, T. (2001). Mathematics for
Economics, Prentice-Hall India.

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LESSON 10
APPLICATIONS OF CONTINUITY AND DIFFERENTIABILITY

STRUCTURE
10.1 Learning Objectives
10.2 Introduction
10.3 The Intermediate Value Theorem
10.4 The Mean Value Theorem
10.5 The Extreme Value Theorem
10.6 Approximations
10.6.1 Taylor’s Approximation
10.6.2 Binomial Formulae
10.7 L’H𝑂̂PITAL’S Rule
10.8 Inverse Function
10.9 Terminal Questions
10.10 Summary
10.11 References
10.1 LEARNING OBJECTIVES
After reading this lesson, studentswill be able to:
i. Develop an understanding for intermediate and mean value theorem.
ii. Using Taylor’s formula for polynomial approximation
iii. Evaluating limit of intermediate forms using the L’Hôpital’sRule and
iv. Compute inverse of a function.

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10.2 INTRODUCTION
In this unit we will discuss certain theorems using the applications of continuity and
differentiability. We will introduce intermediate – value theorem which forms the basis for
optimization theory. Subsequently, we will also discuss the mean value theorem which is
widely used in applications involving calculus. The later part of the unit presents Taylor’s
formulae used for approximation of polynomial and L’Hôpital’s Rule for determining the
limits of the intermediate forms. Finally, we give some details about the inverse function to
conclude this unit.
10.3 THE INTERMEDIATE VALUE THEOREM
The intermediate value theorem is used to understand the concept of continuity. In
economics, this theorem is applied to the concept of equilibrium. Now let us look at the
theorem:
“If we define a function 𝑦 = 𝑔(𝑥) which is continuous for all 𝑥 belong to the closed
interval[𝑎, 𝑏], such that 𝑎 ≤ 𝑥 ≤ 𝑏 and 𝑔(𝑥) takes every value between 𝑔(𝑎) and
𝑔(𝑏) such that 𝑔(𝑎) ≠ 𝑔(𝑏). " Sydsaeter & Hammond, 2009
This is known as the intermediate value theorem as any value that function 𝑔(𝑥) takes
between 𝑔(𝑎) and 𝑔(𝑏) must occur for at least one number 𝑥 between 𝑥 = 𝑎 and 𝑥 = 𝑏.
More formally, it can be said that:
If 𝑔(𝑥) is a function continuous in [𝑎, 𝑏] and assuming that g(a) and g(b) have different signs,
then 𝑔(𝑎) ≠ 𝑔(𝑏) then there is at least one real number 𝑐 such that 𝑎 < 𝑐 < 𝑏 and 𝑔(𝑐) = 0.
(10.1)

Figure 10.1: Illustrates the above theorem.

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This theorem will not hold in the case of discontinuous functions. Fig. 10.1 illustrates the
theorem. It is helpful in explaining the solutions to the equations where exact solutions
cannot be obtained.
EXAMPLE:Prove that the equation 𝑥 5 + 3𝑥 − 12 = 0 has at least one solution
between 1 𝑎𝑛𝑑 2.
SOLUTION: The equation 𝑔(𝑥) = 𝑥 5 + 3𝑥 − 12 = 0 is a polynomial. Further by theorem
(10.1),
𝑔(1) = (1)5 + 3(1) − 12 = −8
While,
𝑔(2) = (2)5 + 3𝑥 − 12 = 35
Thus, there exists at least one number 𝑐 𝜖 (1,2) such that 𝑔(𝑐) = 0.
IN-TEXT QUESTIONS
1. Verify the following equations have at least one solution in the given interval:
a) 𝑥 6 + 3𝑥 2 − 2𝑥 − 1 = 0 𝑖𝑛 (0,1)

b) √𝑦 2 + 1 = 3𝑦 𝑖𝑛 (0,1)

ANSWER TO IN-TEXT QUESTIONS

1. a) 𝑓(0) = −1 and 𝑓(1) = 1, there exists one solution.
b) 𝑓(0) = 0 and (1) = −1.6 , there exists at least one solution.
10.4 THE MEAN VALUE THEOREM
The mean value theorem explains the relationship between the derivatives of the functions
and the slopes of the line. The statement of the theorem is:
If 𝑔(𝑥) is continuous in the closed and bounded interval [𝑎, 𝑏] and differentiable in
(𝑎, 𝑏)such that 𝑎 𝑎𝑛𝑑 𝑏 are real numbers and 𝑎 < 𝑏, then there exists a point 𝑐 such that 𝑎 <
𝑐 < 𝑏 and
𝑔(𝑏) − 𝑔(𝑎)
𝑔′ (𝑐) =
𝑏−𝑎
This theorem can be graphically illustrated in figure 10.2

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𝐹𝑖𝑔𝑢𝑟𝑒 10.2
With the secant𝑥1 𝑥2 , there is a point C on the curve such that the tangent at this point is
parallel to the curve. Let the coordinates of 𝑥1 , 𝑥2 𝑎𝑛𝑑 𝐶 be represented as 𝑎, 𝑏, 𝑐
respectively. The slope of this tangent line is 𝑔′ (𝑐)such that
𝑔(𝑏)−𝑔(𝑎)
𝑔′ (𝑐) = (10.2)
𝑏−𝑎

thus, 𝑐 satisfies the equation. In the case where,𝑔(𝑎) = 𝑔(𝑏) = 0 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑥 ∈ (𝑎, 𝑏), then
there exists at least one root of 𝑔′ (𝑥) = 0. It is also known as 𝑅𝑜𝑙𝑙𝑒’𝑠 𝑇ℎ𝑒𝑜𝑟𝑒𝑚
EXAMPLE:Verify the equation 𝑓(𝑥) = 5 + 6𝑥 − 𝑥 2 satisfies mean value theorem in the
interval [1,3].
SOLUTION: We find that
𝑓(3) − 𝑓(1) 14 − 10
= =2
3−1 2
And, on differentiating,
𝑓 ′ (𝑥) = 6 − 2𝑥
The equation
𝑓 ′ (𝑥) = 6 − 2𝑥 = 2
⇒ 4 = 2𝑥
⇒𝑥=2
And 2 𝜖 [1,3]. Thus, the mean value theorem is satisfied in this case.
Increasing & Decreasing Functions
A function g(x) is increasing in interval I, if g(x2) ≥ g(x1) whenever x2> x1. Now using the
concept of derivatives, we can say that if g(x) is increasing and differentiable, then g′(x) ≥ 0.
The mean value theorem can be used to make this precise and to prove the converse. Let g be

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a function which is continuous in the interval I and differentiable in the interior of I (that is, at
points other than the end points). Suppose g′(x) ≥ 0 for all x in the interior of I. Let x2> x1 be
any two numbers in I. According to the mean value theorem, there exists a number x* in (x1,
x2) such that
g(x2) − g(x1) = g ′(x*) (x2 − x1)
g(𝑥2 ) − g(𝑥1 )
g ′(x*) = ( 𝑥2 −𝑥1 )

Because x2> x1 and g′ (x∗) ≥ 0, it follows that g (x2) ≥ g(x1), so g(x) is increasing. Thus, it can
be followed that:
i. If 𝑔′ (𝑥) > 0 for all 𝑥 in the interior of 𝐼, then 𝑔(𝑥) is strictly increasing in 𝐼.
ii. If 𝑔′ (𝑥) ≥ 0 for all 𝑥 in the interior of 𝐼, then 𝑔(𝑥) is increasing in 𝐼.
iii. If 𝑔’(𝑥) < 0 for all 𝑥 in the interior of 𝐼, then 𝑔(𝑥) is strictly decreasing in 𝐼.
iv. If 𝑔′ (𝑥) ≤ 0 for all x in the interior of 𝐼, then 𝑔(𝑥) is decreasing in 𝐼.

Figure 10.3: Behavior of a Function

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In order to understand the increasing and decreasing conditions of the function, let us look at
the graphs in Fig. 10.3. All the graphs above show increasing and decreasing function as we
move from left to right along the graph.
IN-TEXT QUESTIONS
1. Verify that the following equations satisfy the mean value theorem:
a) 𝑓(𝑥) = 𝑥 2 𝑖𝑛 [1,2]

b) 𝑓(𝑦) = √𝑎 + 𝑦 2 𝑖𝑛 [0,4]

1
2. Using the graph, show that mean- value theorem will hold for the function 𝑦 = 𝑥−1
in the interval [0,2].

ANSWER TO IN-TEXT QUESTIONS

3
1. a) 𝑐 = 2

b) 𝑐 = √3

2. No, it will not hold.

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10.5 THE EXTREME VALUE THEOREM

The extreme value theorem is used to determine the minimum and the maximum values of
the function in an interval. The theorem states that if a function 𝑔(𝑥) is continuous in an
interval (closed) [𝑎, 𝑏],then 𝑔(𝑥) has both minimum and maximum values on [𝑎, 𝑏].
While applying the theorem, we should keep in mind that the function should be defined on
closed and bounded interval. The figure 10.4 depicts the theorem.

𝑓𝑖𝑔𝑢𝑟𝑒 10.4
The graph is a continuous function with highest point 𝐴 and lowest point 𝐵. The tangent to
point 𝐴 and 𝐵 are parallel to 𝑥 − 𝑎𝑥𝑖𝑠. This implies that any of these two points, derivative of
the function must be zero. In other words,
Let𝑔(𝑥) be defined on the interval [𝑎. 𝑏]and let ′𝑐 ′ be an interior point on this interval, then
′𝑐 ′ can be maximum or minimum point of 𝑔(𝑥) and if 𝑔′ (𝑐) exists, then
𝑔′ (𝑐) = 0 (10.3)
EXAMPLE: Does 𝑓(𝑥) = 𝑥 4 − 3𝑥 3 − 1 attains maximum or minimum value in [−2,2] ?
SOLUTION: The function 𝑓(𝑥) is continuous on [−2,2]
And on differentiation,
𝑓 ′ (𝑥) = 4𝑥 3 − 9𝑥 2
By the theorem (10.3),
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𝑓 ′ (𝑥) = 0
⇒ 4𝑥 3 − 9𝑥 2 = 0
⇒ 𝑥 2 (4𝑥 − 9) = 0
9
⇒ 𝑥 = 0 𝑜𝑟 𝑥 = = 2.25
4
Since, 𝑥 = 2.25 is not in the interval [−2,2], the only solution is 𝑥 = 0.
The value of the function is
𝑓(0)= -1
𝑓(2) = (2)4 − 3(2)3 − 1 = −9
and 𝑓(−2) = (−2)4 − 3(−2)3 − 1 = 39
Therefore, it has minimum value as −9 at 𝑥 = 2 and maximum value is 39 at 𝑥 = −2.
10.6 APPROXIMATIONS
In the unit on differentiation, we briefly discussed the approximations of the polynomials.
The concept of approximations is widely used in mathematics and economics. Economists
built models to understand the theories and determine whether the results/ observations of
these models closely approximate the real-world scenario.
In this section, we will introduce Taylor’s Polynomial Expansion and Newton’s Binomial
Formulae.
10.6.1 Taylor’s Approximation
If we consider a function 𝑔(𝑥) which we want to approximate over an interval at 𝑥 = 𝑎 with
a 𝑛𝑡ℎ degree polynomial, then it can be expressed as:
1 ′ 1 ′′ 1
𝑔(𝑥) ≈ 𝑔(𝑎) + 𝑔 (𝑎)𝑥 + 𝑔 (𝑎)𝑥 2 + − − − − + 𝑔(𝑛) (𝑎)𝑥 𝑛 (10.4)
1! (2!) 𝑛!
Using the same formulae, we write 𝑛𝑡ℎ 𝑑𝑒𝑔𝑟𝑒𝑒 Taylor Polynomial for 𝑔(𝑥) near zero as i.e.,
𝑥 = 0 as 𝑃(𝑥)
1 ′ 1 ′′ 1
𝑃(𝑥) ≈ 𝑔(0) + 𝑔 (0)𝑥 + 𝑔 (0)𝑥 2 + − − − − + 𝑔(𝑛) (0)𝑥 𝑛 (10.5)
1! (2!) 𝑛!
However, sometimes when making approximations, we need to ascertain how good our
approximation is. In other words, we need to determine the error which is the difference

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between approximation and exact value. In equation 10.5, except at x = 0, function g(x) and
the Taylor polynomial on the RHS of 10.5 will differ.
The difference between the two depends upon the value of 𝑥 as well as 𝑛, which is known as
the remainder after n terms. It is denoted as 𝑅𝑛+1 (𝑥). Thus, equation 10.5 becomes:
1 ′ 1 ′′ 1
𝑔(𝑥) = 𝑔(0) + 𝑔 (0)𝑥 + 𝑔 (0)𝑥 2 + − − − − + 𝑔(𝑛) (0)𝑥 𝑛
1! (2!) 𝑛!
+ 𝑅𝑛+1 (𝑥) (10.6)
This leads us to a conclusion that if g is n + 1 times differentiable in an interval including 0
and x. Then the remainder 𝑅𝑛+1 (𝑥) in equation 10.6 can be expressed as:
1
𝑅𝑛+1 (𝑥) = (𝑛+1)! 𝑔(𝑛+1) (𝑐)(𝑥)𝑛+1 (10.7)

For some number 𝑐between 0 𝑎𝑛𝑑 𝑥.

This remainder formula is also known as 𝐿𝑎𝑔𝑟𝑎𝑛𝑔𝑒 ′ 𝑠 𝐹𝑜𝑟𝑚 𝑜𝑓 𝑅𝑒𝑚𝑎𝑖𝑛𝑑𝑒𝑟. It is the
remainder form of the Taylor’s expansion formula. Using 10.7 in equation 10.6, then
1 1 1
𝑔(𝑥) = 𝑔(0) + 1! 𝑔′ (0)𝑥 + (2!) 𝑔′′ (0)𝑥 2 + − − − − + 𝑛! 𝑔(𝑛) (0)𝑥 𝑛 +
1
𝑔(𝑛+1) (𝑐)𝑥 𝑛+1 (10.8)
𝑛+1!

10.6.2 Binomial Formulae

The binomial series also known as Newton’s Binomial formula, is the Taylor’s series with
the functional form as ℎ(𝑥) = (1 + 𝑥)𝑘 𝑤ℎ𝑒𝑟𝑒 𝑘 𝑖𝑠 𝑎𝑛𝑦 𝑟𝑒𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟.
Using Taylor Formulae (10.4) in the case of binomial function for 𝑥 > −1 is
ℎ′ (𝑥) = 𝑘(1 + 𝑥)𝑘−1 ℎ′ (0) = 𝑘
ℎ′′ (𝑥) = 𝑘(𝑘 + 1)(1 + 𝑥)𝑘−2 ℎ′′ (0) = 𝑘(𝑘 − 1)
Similarly,
ℎ𝑛 (𝑥) = 𝑘(𝑘 − 1) − − − − − [𝑘 − (𝑛 − 1)](1 + 𝑥)𝑘−𝑛
ℎ𝑛 (0) = 𝑘(𝑘 − 1) − − − − − [𝑘 − (𝑛 − 1)]
Using these values and substituting in equation (10.4), we get
𝑘 𝑘(𝑘 − 1) 2 𝑘(𝑘 − 1) − −[𝑘 − (𝑛 − 1)]𝑥 𝑛 ]
(1 + 𝑥)𝑘 = 1 + 𝑥+ 𝑥 −− + + 𝑅𝑛 (𝑥)
1! 2! 𝑛!

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(10.7)
Here,
𝑘(𝑘 − 1) − − − −(𝑘 − 𝑛) 𝑛+1
𝑅𝑛+1 (𝑥) = 𝑥 (1 + 𝑝)𝑘−𝑛−1
(𝑛 + 1)!
The R.H.S of the equation (1) can be expressed as generalized binomial coefficients
𝑘 𝑘(𝑘−1)−−−−(𝑘−𝑟+1)
( )= (10.9)
𝑟 𝑟!

Where, r is a Positive integer.

For Example,
1 1 1
1 (4) (4 − 1) (4 − 2) 7
(4) = =
1.2.3 128
3
Hence, the Newton’s Binomial Formulae with k being an arbitrary real number and n is a
positive integer is

(1 + 𝑥)𝑘 = 1 + (𝑘) 𝑥 + − − − (𝑘) 𝑥 𝑛 + ( 𝑘 ) 𝑥 𝑛+1 (1 + 𝑝)𝑘−𝑛−1 (10.10)

1 𝑛 𝑛+1
Where, 0 < 𝑝 < 𝑥 𝑎𝑛𝑑 𝑥 > −1.
5
EXAMPLE: Using binomial theorem, write down the expansion of √33 and take n=2.
SOLUTION: Here, 𝑥 = 1/32, 𝑘 = 1/5 and taking 𝑛 = 2, then
1
5 1 5
√33 = 2 (1 + )
32
1
1 5 1 1 1 1 2
5
∴ √33 = 1 + 2 (1 + ) = 2 {1 + (5) ( ) + (5) ( ) }
32 32 38
1 2

1 2 1 2
= 2 (1 + − × ( ) ) = 2.01
5 × 32 25 32

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In the case where binomial function takes the general form, such as ℎ(𝑥) = (𝛼 + 𝛽)𝐾 with k
as a positive integer, then the Newton’s binomial formula becomes:

(𝛼 + 𝛽)𝑘 = 𝛼 𝑘 + (𝑘) 𝛼 𝑘−1 𝛽 + (𝑘 ) 𝛼 𝑘−2 𝛽 2 + − − − − + (𝑘) 𝛽 𝑘 . (10.9)

1 2 𝑘
EXAMPLE: Find the expansion of (𝑎 + 𝑏)6 .
SOLUTION: Using the above formula,
6 6 6
(𝑎 + 𝑏)6 = 𝑎6 + (6) 𝑎5 𝑏 + (6) 𝑎4 𝑏 2 + ( ) 𝑎3 𝑏 3 + (6) 𝑎2 𝑏 4 + ( ) 𝑎𝑏 5 + ( ) 𝑏 6
1 2 3 4 5 6
= 𝑎6 + 6𝑎5 𝑏 + 15𝑎4 𝑏 2 + 20𝑎3 𝑏 3 + 15𝑎2 𝑏 4 + 6𝑎𝑏 5 + 𝑏 6

IN-TEXT QUESTION

1. Write down the binomial expansion of

a) (1 − 2𝑥)3
b) (𝑎 + 𝑏)4

ANSWER TO IN-TEXT QUESTIONS

1. a) 1 − 6𝑥 + 12𝑥 2 − 8𝑥 3
b) 𝑎4 + 4𝑎3 𝑏 + 6𝑎2 𝑏 2 + 4𝑎𝑏 3 + 𝑏 4

10.7 ̂ PITAL’S RULE

L’H𝑶

Suppose we need to calculate the limit of a function where 𝑥 → 𝑎 and both numerator and
denominator of the function tend to zero, such as
𝑔(𝑥) 0
lim =
𝑥→𝑎 ℎ(𝑥) 0
Then, we call this limit as indeterminate form of type 0⁄0 . For dealing with these
indeterminate forms, where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions, we use the L
h𝑜̂pital’s rule which comes with two versions. The simpler version states that:
If 𝑔(𝑥) and ℎ(𝑥) are differentiable at 𝑐 such that
𝑔(𝑐) = ℎ(𝑐) = 0

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And,
ℎ′(𝑐) ≠ 0
then,
𝑔(𝑥) 𝑔′ (𝑥)
lim ℎ(𝑥) = ℎ′ (𝑥) (10.10)
𝑥→𝑐

This can be easily proved by mean value theorem that 𝑔(𝑥) and ℎ(𝑥) are differentiable
function then
𝑔 (𝑥 ) ℎ (𝑥 )
→ 𝑔′ (𝑐) 𝑎𝑛𝑑 → ℎ′ (𝑥)
𝑥−𝑐 𝑥−𝑐
As 𝑥 → 𝑐 , and thus,
𝑔′(𝑥) 𝑔(𝑥)⁄𝑥−𝑐
= (10.11)
ℎ′(𝑥) ℎ(𝑥)⁄𝑥−𝑐

EXAMPLE: Using L H𝑜̂pital’s Rule, determine

(1 + 𝑦)1/3 − 1
lim
𝑦→0 𝑦 − 𝑦2
SOLUTION: Before solving the equation, we need to determine that whether it has an
indeterminate form. Let numerator 𝑔(𝑦) = (1 + 𝑦)1/3 − 1and denominator is ℎ(𝑦) = 𝑦 −
𝑦 2 . Then,
𝑔(0) = ℎ(0) = 0
Next, we will compute 𝑔′ (𝑦) and ℎ’(𝑦) separately.
1
𝑔′ (𝑦) = 3 (1 + 𝑦)−2/3 and ℎ’(𝑦) = 1 − 2𝑦

Thus,
1
𝑔’(0) = 𝑎𝑛𝑑 ℎ′ (0) = 1
3
And,
𝑔(𝑦) 1
=
ℎ(𝑦) 3

EXAMPLE: Find the following limit

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𝑥−1
lim
𝑥→1 𝑥 2 − 1

SOLUTION: Here, 𝑔(𝑥) = 𝑥 − 1 𝑎𝑛𝑑 ℎ(𝑥) = 𝑥 2 − 1

Also, 𝑔(1) = ℎ(1) = 0
𝑔′ (𝑥) = 1 , ℎ′ (𝑥) = 2𝑥
Thus,
𝑔′ (1) = 1 𝑎𝑛𝑑 ℎ′ (1) = 2
So,
𝑔(𝑥) 1
=
ℎ(𝑥) 2
The second version of L H𝑜̂pital’s rule, we will deal with a special case where ℎ′ (𝑐) = 0.
Suppose 𝑔(𝑐) = ℎ(𝑐) = 0 𝑎𝑛𝑑 ℎ′ (𝑐) ≠ 0 if 𝑥 is close but not equal to ′ 𝑐 ′ then,
𝑔(𝑥) 𝑔′ (𝑥)
lim = lim ′
𝑥→𝑐 ℎ(𝑥) 𝑥→𝑐 ℎ (𝑥)

given that the limit on the right-hand side exists. More formally,
If 𝑔 𝑎𝑛𝑑 ℎ are differentiable in the interval (𝑎, 𝑏) around 𝑐 and 𝑔(𝑥) → 0, ℎ(𝑥) → 0 𝑎𝑠 𝑥 →
𝑐. If ℎ′ (𝑥) ≠ 0 for all 𝑥 ≠ 𝑐 in (𝑎, 𝑏) then,
𝑔(𝑥) 𝑔′ (𝑥)
lim ℎ(𝑥) = lim ℎ′ (𝑥) = 𝐿 (10.12)
𝑥→𝑐 𝑥→𝑐

Where, L is a finite number.

5
EXAMPLE: Determine 𝐿 = lim ( √𝑦 5 − 𝑦 4 − 𝑦)
𝑦→∞

SOLUTION:This can be written as:

1 1/5
1 1/5 (1 − 𝑦) −1
5
√𝑦 5 − 𝑦 4 − 𝑦 = 𝑦 (1 − ) −𝑦 = 1
𝑦
𝑦

Thus, it becomes 0⁄0 form as

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1 1/5
(1 − 𝑦) −1
lim
𝑦→∞ 1/𝑦
Using L’ H𝑜̂pital’s Rule,
4
1 1 −5 1
𝐿 = lim [− (1 − ) ] =
𝑦→∞ 5 𝑦 5

In some cases, if h’(c) =0, then differentiate once more both denominator and numerator
separately until the limit is determined.
IN-TEXT QUESTIONS
1. Find the following limits:
𝑥 2 −𝑏 2
a) lim
𝑥→𝑏 𝑥−𝑏

(1+4𝑥)1/5 −1
b) lim (1+5𝑥)1/4 −1
𝑥→0

2. Evaluate the following limit:

𝑦 4 − 4𝑦 3 + 6𝑦 2 − 8𝑦 + 8
lim
𝑦→2 𝑦 3 − 3𝑦 2 + 4
ANSWER TO IN-TEXT QUESTIONS
1. a) 2𝑏
b) 0.64
2. The second derivative gives:
12𝑦 2 − 24𝑦 + 12 12
lim = =2
𝑦→2 6𝑦 − 6 6
10.8 INVERSE FUNCTION
An inverse function is a function that can reverse into another function. If say we consider a
function as 𝑝 = 𝑓(𝑥), then the inverse function will be 𝑥 as a function of p such that 𝑥 =
𝑔(𝑝).
For the existence of inverse functions, certain conditions have to be satisfied. The function
𝑓(𝑥) must be one-one. In other words, if 𝑓(𝑥) has a domain 𝐴 and range 𝐵, then every

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element of the range 𝐵 correspond to exactly one element in the domain 𝐴.The range element
should not take two different values in the domain.
Graphically, it can be shown as Fig. 10.5,

Figure 10.5: Inverse Functions

Here 𝑓(𝑥) maps from 1 to a while it’s inverse 𝑓 −1 (𝑥) maps a to 1. In general terms, the
inverse of the function is defined as:
Let 𝑔(𝑥) be a function with domain 𝐴 and range 𝐵. If 𝑔(𝑥) is one –to-one, then there exists
its inverse function ℎ(𝑥) with domain 𝐵 and range 𝐴. For 𝑔(𝑥) = 𝑦 and each 𝑦 ∈ 𝐵, then
value ℎ(𝑦) has unique number 𝑥 ∈ 𝐴.
ℎ(𝑦) = 𝑥 ⇔ 𝑦 = 𝑔(𝑥) {𝑥 ∈ 𝐴, 𝑦 ∈ 𝐵}
While representing an inverse function, we often use the notation 𝑓 −1 . However, one must
1
not confuse 𝑓 −1 with reciprocal of the other term 𝑓(𝑥).

EXAMPLE: Find the inverse function In terms of x:

a) 𝑦 = 2𝑥 + 3
3
b) 𝑦 = √𝑥 + 1
SOLUTION:Solving these equations in terms of x,
𝑦−3
a) 𝑦 = 2𝑥 + 3 ⇔ 2𝑥 = 𝑦 − 3 ⇔ 𝑥 = 2

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3
b) 𝑦 = √𝑥 + 1 ⟺ 𝑦 = (𝑥 + 1)3 ⟺ 𝑦 3 = 𝑥 + 1 ⟺ 𝑥 = 𝑦 3 − 1.
GRAPHICAL DESCRIPTION OF INVERSE FUNCTIONS
When 𝑔(𝑥)and ℎ(𝑥) are inverse of each other, then their graphs 𝑦 = 𝑔(𝑥)𝑎𝑛𝑑 ℎ(𝑥) = 𝑦 are
mirror images of each other with respect or symmetric to line 𝑦 = 𝑥
Let us consider two functions:
1 3
𝑔(𝑥) = 2𝑥 − 3 𝑎𝑛𝑑 ℎ(𝑥) = 𝑥 +
2 2
If we plot these graphs (Fig. 10.6) we will get figures like this:

Figure 10.6
DERIVATIVE OF THE INVERSE FUNCTION
Assume that both the functions 𝑔 𝑎𝑛𝑑 ℎ are differentiable, then ℎ(𝑔(𝑥)) = 𝑥 can be
differentiable with respect to 𝑥 such that
ℎ′ (𝑔(𝑥))𝑔′ (𝑥) = 1 {𝑏𝑦 𝑐ℎ𝑎𝑖𝑛 𝑟𝑢𝑙𝑒 }
1
⟹ ℎ′ 𝑔(𝑥) =
𝑔′ (𝑥)

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1
ℎ′ (𝑦) = (10.13)
𝑔′ (𝑥)
Thus, the inverse function rule states that the derivative of the inverse function is the
reciprocal of the derivative of the original function. As observed from (10.13) that 𝑔′ (𝑥) and
ℎ′ (𝑥) has same sign. This indicates that either both functions are increasing (strictly) or both
are decreasing (strictly). We can express the above conditions in a theorem.
THEOREM ON INVERSE FUNCTION
If 𝑔 is continuous and strictly increasing (or strictly decreasing) function in an interval, 𝐴,
then there exists an inverse function ℎ that is continuous and strictly increasing (or strictly
decreasing) in the interval(𝐴) .
If 𝑥1 is an interior point in the interval 𝐴 and 𝑔 is differentiable at𝑥1 with 𝑔’(𝑥1 ) ≠ 0 then ℎ is
1
also differentiable at point 𝑦1 = 𝑔(𝑥1 ) and ℎ′ (𝑦1 ) = 𝑔′ (𝑥
1)

EXAMPLE: Find the inverse function ℎ

𝑔(𝑥) = 𝑥 7 + 5𝑥 5 + 2𝑥 − 2
SOLUTION: If 𝑥1 = 0 𝑎𝑛𝑑 𝑦1 = −2 ,
We will get, 𝑔(0) = −2
And,
𝑔′ (𝑥) = 7𝑥 6 + 25𝑥 4 + 2 > 0 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑥
1
Thus, 𝑔(𝑥) has an inverse ℎ and ℎ’(−2) = 𝑔′ (0)

1
⟹ ℎ′ (−2) =
2
IN-TEXT QUESTIONS
1. The demand function faced by a monopolist is
1000 − 𝑝3
𝑞=
𝑝3
Determine the inverse function of demand function.
2. Find the inverse of the following equations:

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a) 𝑔(𝑦) = (𝑦 3 − 1)1/3
𝑥+1
b) 𝑔(𝑥) = (𝑥−2)

ANSWER TO IN-TEXT QUESTIONS

10
1. 𝑝 = (𝑞+1)1/3

2. a) ℎ(𝑦) = (𝑦 3 + 1)1/3
2𝑥+1
b) ℎ(𝑥) =
𝑥−1

10.9 TERMINAL QUESTIONS

1. Let g be defined on the interval [0,1] and g (x)= 2𝑥 2 − 𝑥 4 . Determine the range of g
and find inverse function f of g.
2. Determine whether mean value theorem holds for the function y=|𝑥 − 3| , 𝑥 ∈
[0,5].
3. Does function h satisfies the extreme value theorem with h is defined for all x ϵ (0,)
𝑥 + 1 𝑥 ∈ (0,1]
h (x)= {
1 𝑥 ∈ (1, ∞)
1
4. For f(x) = use Taylor’s expansion formula for n=2.
1+𝑥

Answers

1. Range is [0,1] and inverse function f(x) = √1 − √1 − 𝑥

2. Mean value theorem does not hold.
3. Yes, it holds.
4.
1-x+x2-(1+c)-4 x3
10.10 SUMMARY
This unit is the extension of the previous units on limits and continuity. We investigated how
intermediate value theorem can be used to determine the solutions for those equations where
exact solutions cannot be obtained. We then discussed the mean value theorem to explain the
link between the derivative of the function and slope of the line. The unit also discussed
approximations of the polynomial function using the results from Taylor’s series and
binomial series. Further, we looked howL H𝑜̂pital’s rule can be used to determine the limits
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of a function with intermediate form. Finally, we conclude this unit with a brief description of
the inverse functions.
10.11 REFERENCES

• Sydsaeter, K. Hammond, P. (2009) "Mathematics for economic analysis". Pearson

Education.
• Hoy, M. Livernois, S. U, McKenna, C. (2001). Mathematics for Economics, Prentice-
Hall, India

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LESSON 11

EQUILIBRIUM ANALYSIS IN ECONOMICS

STRUCTURE
11.1 Learning Objective
11.2 Introduction
11.3 Concept of Equilibrium
11.3.1 Interdependence in the Economy
11.3.2 Partial and General Equilibrium Analysis
11.3.3 Static and Dynamic Method of Analysis
11.4 Fundamentals of Linear Model199
11.4.1 Linear Model of Production
11.4.2 Pareto Optimum
11.5 Fundamentals of Non-Linear Model
11.5.1 Equilibrium in IS-LM Model
11.6 Summary
11.7 Answer to In-text Questions
11.8 Self- Assessment Questions
11.9 References

11.1 LEARNING OBJECTIVE

The objective of this chapter is to discuss the usefulness of general equilibrium analysis over partial
equilibrium in a pure exchanged economy. We illustrate the competitiveness of equilibrium on Pareto
efficiency conditions. And the extension of market equilibrium in a convex and continuous pareto
efficient framework. After going through this unit, you will be able to:

• Understand the concept of general and partial equilibrium for an economy

• Classification of linear and non- linear models
• Empirically evaluates the efficiency of competitive equilibrium and its quadratic formulation.
• Recognizes the different solutions of solving linear and non-linear models

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11.2 INTRODUCTION
A model is a simplified representation of a real situation. It includes the main features of the real
situation abstracted from reality. A model can be constructed at different levels of aggregation and
purposes. There are two main purposes of building a model, analysis and prediction.
Analysis implies the explanation of the behaviour of economic units, consumers or producers. And
Prediction implies the possibility of forecasting the effects of changes in some magnitudes in the
economy.
The primary goal of this chapter is to provide a mechanism for approximating complicated nonlinear
systems into a simpler linear one. It analyzes the economic model into the study of system of linear
equation and helps to translate the insights of planar and cubical geometry to higher dimensions.
In simple words, linearity is a simplifying assumption. The real world is nonlinear.

11.3 CONCEPT OF EQUILIBRIUM

Equilibrium means a state of balance or rest or position of no change. In economics, the term
equilibrium means the state in which there is no tendency on the part of consumers and producers to
change. Two factors determining equilibrium price are – demand and supply.
Thus, equilibrium price is the price at which demand, and supply are equal to each other. At this price,
there is no incentive to change.
Determination of Equilibrium Price
Equilibrium price is determined by the equality between demand and supply. At this price,

Quantity Demanded = Quantity Supplied

Prof. Marshall compared demand and supply to the two blades of a pair of scissors. A moment of
reflection will show that it is not blade alone that cuts the cloth. Both the blades together do it.
Similarly, it is not demand or supply alone that determines the price of a commodity. Together,
through interaction they determine the equilibrium price of a commodity.

In a very short period, supply is fixed. Thus, demand is more active in determining price. In the long-
run, supply plays a more active role in determining price.
The process of determination of equilibrium price has to be studied under three heading:
1. Demand
2. Supply

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3. Equilibrium between demand and supply

1. Demand: A commodity is demanded because it has utility and satisfies human want. The law
of demand states that there is an inverse relationship between price and quantity demanded of
a commodity. The aim of consumer is to maximise satisfaction. The maximum price a
consumer is willing to pay for a commodity to maximise satisfaction, is equal to marginal
utility of the commodity.
2. Supply: The law of supply states that there is a direct relationship between price and quantity
supplied of a commodity. The aim of the producer is to maximize profit. The minimum price
acceptable to the producer to maximize profit, is equal to the marginal cost of production.
3. Equilibrium between demand and supply:The forces of demand and supply determine the
price of a commodity. There is a conflict in the aim of producers and consumers. Producers
want to sell the goods at the highest price to maximize profit and consumers want to buy the
goods at the highest price to maximize profit and consumers want to buy the goods at the
lowest price to maximize satisfaction.
Equilibrium price will be determined where quantity demanded is equal to quantity supplied.
11.3.1 Interdependence in the Economy
The interdependence of markets is concealed by the partial equilibrium approach. Markets consist of
buyers and sellers. Thus, an economic system consists of millions of economic decision-making units
who are motivated by self-interest. The problem is to determine whether the independent, self-
interest, motivated behavior of economic decision-makers is consistent with each individual agent’s
attaining equilibrium.
A partial equilibrium doesn’t consider the interdependence between the two markets, that is, the
factor market and the product market.
On the other hand, A general equilibrium is defined as a state in which all markets and all markets
and all decision-making units are in simultaneous equilibrium. A general equilibrium exists if each
market is cleared at a positive price, with each consumer maximizing satisfaction and each firm
maximizing profit.
In a general equilibrium system of the walrasian type there are as many markets as there are
commodities and factors of production. For each market there are three types of functions: demand
function, supply function and a “clearing the market” function, which stipulates that the quantities
demanded be equal to quantities supplied.
A necessary (but not sufficient) condition for the existence of a general equilibrium is that there must
be in the system as many independent equations as the number of unknowns.
Since the number of equations is equal to the number of unknowns, one should think that a general
equilibrium solution exists. Unfortunately, the equality of number of equations and unknowns is

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neither sufficient nor a necessary condition for the existence of a solution. The proof of the existence
of a general equilibrium solution is difficult. Leon Walras was never able to prove the existence of a
general equilibrium.
11.3.2 Partial and General Equilibrium Analysis
In partial equilibrium analysis, we concentrate on a single market, in isolation from the rest of
the economy. We analyse in detail a particular market or a set of markets neglecting
everything else. For instance, when we want to study the market for wheat in detail, we do
not bother about other markets in the economy. Such an analysis is based on ceteris paribus
assumption. Demand and supply models of price determination of a good is based on partial
equilibrium analysis. It ignores various linkages and inter-relationships that might exist
between different markets. On the other hand, in general equilibrium analysis we analyse
simultaneously all the markets in the economy. The basic premise in such an analysis is that
“everything depends on everything else”. All the markets of the economy are interdependent
and interrelated so that a disturbance originating from any one market will have
repercussions throughout the economy. In such a situation general equilibrium analysis is the
correct approach for analysing the functioning of the economy. In fact, partial and general
equilibrium analyses are two ways of looking at the functioning of the economy.
Partial equilibrium analysis is appropriate when we want to analyse in detail the functioning
of a particular market or a particular sector of the economy. It is used when a market is self-
contained or insulated from other markets or when the market in question is relatively small,
relative to the size of the economy, or when the cross- effects generated by this particular
market are negligible and hence can be ignored. Partial equilibrium analysis makes the
analysis of a problem more manageable, unlike general equilibrium analysis which is often
difficult to comprehend. Reality is so complex that one needs a process of simplification
(abstraction) to understand it. Partial approach is one such form of simplification, where each
market is viewed in isolation. Partial equilibrium analysis was championed by Alfred
Marshall (1890) and is based on “ceteris paribus” assumption. Such an assumption abstracts
from all interconnections and inter-links that exist between the market under study and the
rest of the economy. For instance, we use demand-supply model to show how equilibrium
price and quantity is determined in each market, independently of other markets. However,
we know very well that a change originating from any market has spill over (repercussions)
effects on other markets. When these changes in other markets (sectors or industries) are
significant, the partial equilibrium analysis is inappropriate and inadequate. By taking into
account only the direct effect on price and quantity, partial equilibrium approach, “provides a
misleading measure of the total, final effect, after all the repercussions or feedback effects
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from the original change have occurred.” If and only if the market or the sector (industry)
from which the original change occurs is relatively small and has very few linkages with the
rest of the economy, the partial equilibrium analysis would be the right approach to study the
operation of market system. Otherwise, a general equilibrium approach is needed.
When market (economic) interdependencies or interrelationships are not taken into account,
or do not exist, partial equilibrium analysis is the correct approach. However, when such
interrelationships and interdependencies exist and are important, and the ignorance of which
will have serious consequences or will prove costly in terms of the quality of economic
predictions, a general equilibrium analysis must be used. It must be used whenever an event
has all pervading effect.
11.3.3 Static and Dynamic Method of Analysis
Economic analysis can be conducted either by using a static framework or a dynamic setting. Static
and dynamic modes of analysis can be differentiated in more than one ways. According to one
definition, in a static model (theory) the variables (cause- effect) are not dated. The demand-supply
model of market behaviour is a static model. The model that demand depends on own price, supply
depends on own price, with an equilibrium condition that demand must equal supply, time does not
enter into the picture at all and the variables are all undated. According to this definition, a dynamic
model would be one where the relevant variables are dated. If the demand-supply model is
restructured as follows, then the model would become dynamic according to this criterion.
Dt = f( Pt) St =g(Pt) Dt =St

where ‘t’ is the relevant time unit.

However, according to some economists, even if the variables are dated the model does not become
dynamic. A dynamic model according to this definition would be one where the variables must be
dated, and a time lag must exist in their relationships According to this criterion the following would
be a dynamic model.
Dt =f(Pt )

St =g(Pt-1)

Dt = St

There is no lag in the demand relationship. Demand in period ‘t’ depends on own price of the same
period. However, in the supply relationship a gestation lag exists which makes the model dynamic.
Supply in period ‘t’ depends on price prevailing in the previous period (t-1). The price level in
previous period (t-1) would have induced the producers to increase or decrease the supply, full impact

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of such decisions is visible in time period ‘t’ only. For market to attain equilibrium, demand in period
‘t’ must equal supply in period ‘t’.
It must be noted that if one is concerned with the equilibrium configurations of a market for a good,
one has to take recourse to a static methodology. Equilibrium is a static concept. It describes the
position of a market at rest. In contrast, disequilibrium analysis must pertain to dynamics. It brings
into focus the market adjustment process (or, market corrective process), the interplay of which would
move the market back to equilibrium. One has to analyse how the market moves through time during
the period the adjustment process is working. In a static framework, we implicitly assume that market
adjustment is instantaneous, and without any loss of time, equilibrium is or is not restored. How the
economic agent behaves in the disequilibrium situation is not the concern of static analysis. This is
where dynamic analysis sets in. It must be noted that in a static framework one might be interested in
comparing (or evaluating) two or more equilibrium positions before and after a change in some
exogenous forces. Such a method is known as comparative static. For instance, consider analysing
the
effect on price of cars when demand increases. We concentrate on two equilibrium positions, one
before change and another after the change in demand has taken place. What happens in the interim
period is not the concern of static analysis.
Let the linear demand in the isolated market model be the demand and the supply function. Then, if
numerical coefficient is employed rather than parameters, a model such as the following may emerge:
QS= -4 + 8P
QD= 26 – 2P
The supply curves slope upwards, and the demand curve slopes downwards. Therefore, the P in the
supply curve is same as the P in the demand curve. And the equilibrium in the market occurs when the
quantity supplied in the market is equal to the quantity demanded.
-4 + 8P = 26 – 2P
10P = 30
P* = 3
Q* = -4 + (8 x 3) = 26 – (2 x 3) = 20
Therefore, in this example the price of the output is Rs. 3 and the total quantity demanded is 20 unit.
Another example is to find and interpret the slopes of the following equation:
C = 55.73x/ 182,100,000
Which is the estimated cost function for the U.S.Steel corp. over the period 1917-1938 (C is the total
cost in dollars per year and x is the production of steel in tons per year)
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b)
q = -0.15p + 0.14
which is the estimated annual demand function for rice in India for the period 1949-1964 (p is the
price, and q is consumption per person).
Solution
a) The slope is 55.73, which means that if production increases by 1 ton, then the cost increases
by $55.73.
b) The slope is – 0.15, which tells us that if the price increases by 1 unit, then the quantity
demanded decreases by 01.15 unit.

11.4 FUNDAMENTALS OF LINEAR MODEL

Typical linear equations are
X1 + 2x2 = 3 and 2x1 – 3x2 = 8
They are called linear because their graph are straight lines. In general, an equation is liner if it has the
form
A1x1 + a2x2 + …... + anxn= b
The letter a1 , …..., an and b stand for fixed numbers, such as 2, -3 and 8 in the second equation. These
are called parameters. The letter x1 , …..., xnstand for variables. The key feature of the general form
of a linear equation is that each term of the equations contains at most one variable and that variable
appears only to the first power rather than to the second, third, or some other power.
There are several reasons why it is natural to begin with the systems of linear equations. These are the
most elementary equations that can arise. Linear algebra, the study of such systems, which is easy to
visualize.
11.4.1 Linear Model of Production
Linear models of production are the simplest production models to be described. Here we will
describe the simplest of the linear models. We will suppose that our economy has n + 1 goods. Each
of goods 1 through n is produced by one production process. There is also one commodity, labor
(good 0), which is not produced by any process and which each process uses in production. A
production process is simply a list of amounts of goods: so much good 1, so much good 2, and so on.
These quantities are the amounts of input needed to produce one unit of the process’s output. For
example, the making of one car requires so much steel, so much plastic, so much labor, so much
electricity, and so forth. In fact, some production processes, such as those for steel or automobiles, use
some of their own output to aid in subsequent production.
In the jargon of microeconomics, each production process exhibits constant returns to scale.
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Constructing the Model

Consider the economy of an organic fertilizer which produces two goods: corn and fertilizer. Corn is
produced using corn (to plant) and fertilizer. Fertilizer is made from old corn stalks (and perhaps by
feeding the corn to cows, who then produce useful end products). Suppose that the production of 1 ton
of corn requires as inputs 0.1 ton of corn and 0.8 ton of fertilizer. The production of 1 ton of fertilizer
requires no fertilizer and 0.5 ton of corn.
We can describe each of the two production processes by pairs of numbers (a,b), where a represents
the corn input and b represents the fertilizer input. The corn production process is described by the
pair of numbers (0.1, 0.8). The fertilizer production process is described by the pair of number (0.5,0).
The most important question to ask of this model is: What can be produced for consumption? Corn is
used both in the production of corn and in the production of fertilizer. Fertilizer is used in the
production of corn. Is there any way of running both processes so as to leave some corn and some
fertilizer for individual consumption? If so, what consumptions of corn and fertilizer for consumption
are feasible?
Answers to these questions can be found by examining a particular system of linear equations.
Suppose the two production processes are run so as to produce xc tons of corn and xFtons of fertilizer.
The amount of corn actually used in the production of corn is 0.1xc – the amount of corn needed per
ton of corn output times the number of tons to be produced. Similarly, the amount of corn used in the
production of fertilizer: xc – 0.1xc – 0.5xF, or 0.9xc – 0.5xFtons. The amount of fertilizer needed in
production is 0.8xc tons. Thus, the amount left over for consumption is xF– 0.8xc tons.
Suppose we want our farm to produce for consumption 4 tons of corn and 2 tons of fertilizer. How
much total production of corn and fertilizer will be required? Put another way, how much corn and
fertilizer will the farm have to produce in order to have 4 tons of corn and 2 tons of fertilizer left over
for consumers? We can answer this question by solving the pair of linear equation
0.9xc - 0.5xF= 4,
-0.8xc - xF= 2
This system is easily solved. Solve the second equation for xFin terms of xc :
xF= 0.8xc + 2

Substitute this expression for xF into the first equation:

0.9xc - 0.5(0.8xc + 2) = 4
And solve for xc:
0.5xc =5, so xc = 10
Finally, substitute xc = 10 back into (2) to compute

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XF = 0.8 . 10 + 2 = 10
In the general case, the production process for good j can be described by a set of input-output
coefficient {a0j , a1j……...,anj}, where aij denotes the input of good I needed to output one unit of good j.
Keep in mind that the first subscript stands for the input good and the second stands for the output
good.
11.4.2 Pareto Optimum
Pareto optimality is the point where someone can only be made better- off by making someone else
worse off. The locus of point of tangency of the indifference curve is known as contract curve. At this
curve,
MRSXYA = MRSXYB
Pareto optimality will always lie on the contract curve, which implies that there are no leftovers.
However, there is no unique solution to the contract curve. Efficiency in the production exchange is
achieved when the slope of the iso-revenue curve becomes equal to the slope of the budget line . In
such a case, the production possibilities, pareto optimality is achieved when
Slope of Indifference curve (MRS) = Slope of PPC (MRTSLK)

Assumptions:

• Factor prices are known

• Technology is given
• Prices are given
• Consumers and producers are rational

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Points to Remember

• Pareto optimality is a point where someone can only be made better off by making
someone else worse off.
• It is an ordinal measure of utility.
• It is free from value judgement.
• Concept of pareto optimality is free from comparison.

First Order Condition in Pareto Optimality

a. MRSXYA = MRSXYB.
b. MRTSLKM = MRTSLKN
c. MRTXY = MRSXYA = MRSXYB
d. Optimum degree of specialization which implies MRTXYA = MRTXYB
e. Optimum relationship between factor of production: MPLA = MPLB
f. Optimum allocation of factors: Marginal rate of substitution between work and leisure should
be equal to Marginal rate of transformation of labour time and output.
g. Optimum allocation of money essence: Interest at which money is lent is equal to the
marginal product of the borrower.
Second Order Condition in Pareto Optimality – These are related to the slope.
a. Indifference curve is downward sloping and convex to the origin
b. The product’s possibility curve is concave to the origin.

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IN- TEXT QUESTION

1. If demand function is given by Qd= 50 – 0.5P and the supply function is Qs = -10 + P, find
out equilibrium price and quantity.
2. Which of the following equations are linear?
i) 3x1 - 4x2 + 5x3 = 6
ii) x1x2x3 = -2
iii) x2 + 6y = 1
iv) (x + y) (x – z) = -7
v) x + 3 1/2z = 4
vi) xx = 1
3. Find the equation of the line through (-2,3) with slope -4. Then find the point at which the line
intersects the x-axis.

11.5 FUNDAMENTALS OF NON-LINEAR MODEL

A central goal of economic theory is to express and understand the relationship between economic
variables. These relationships are described mathematically by functions. If we are interested in the
effect of one economic variable (like government spending) on one other economic variable (like
gross national product), we are led to the study of functions of a single variable – a natural place to
begin our mathematical analysis.
The key information about these relationships between economic variables concerns how a change in
one variable affects the other. When such relationships are expressed in terms of linear functions, the
effect of a change in one variable on the other is captured by the “slope” of the function. For more
general nonlinear functions, the effect of this change is captured by the derivatives of the function.
The derivatives is simply the generalization of the slope to nonlinear functions.
11.5.1 Equilibrium in IS-LM Model
IS-LM analysis is Sir John Hick’s interpretation of the basic elements of John Maynard Keynes’
classic work, the General Theory of Employment, Interest, and Money. We examine a simple example
of IS-LM analysis: a linear model in a closed economy.
Consider an economy with no imports, exports, or other leakages. In such an economy, the value of
total production equals total spending, which in turn equals total national income, all of which we
denote by the variable Y. From the expenditure side, total spending Y can be decomposed into the
spending C by consumers (consumption) plus the spending I by firms (investment)plus the spending
G by government:
Y=C+I+G

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On the consumer side, consumer spending C is proportional to total income Y: C = bY, with 0 < b <
1. The parameter b is called the marginal propensity to consume, while s = 1-b is called the marginal
propensity to save. On the firm’s side, investment I is a decreasing function of the interest rate r. In
the simplest linear form, we write this relationship as:
I = IO – ar
The parameter a is called the marginal efficiency of capital.
Putting these relations together gives IS schedule, the relationship between national income and
interest rates consistent with savings and investment behavior

Y = bY + (IO – ar) + G,
Which we write as
sY + ar = IO + G
where, s = 1-b, a, IO, and G are positive parameters. This IS equation is sometimes said to
describe the real side of the economy, since it summarizes consumption, investment, and savings
decisions.
On the other hand, the LM equation is determined by the money market equilibrium condition that
money supply MS equals money demand Md is assumed to have two components: the transactions or
precautionary demandMdt and the speculative demandMds. The transactions demand derives from the
fact that most transactions are denominated in money. Thus, as national income rises, so does the
demand for funds. We write this relationship as
Mdt= mY
The speculative demand comes from the portfolio management problem faced by an investor in the
economy. The investor must decide whether to hold bonds or money. Money is more liquid but
returns no interest, while bonds pay at rate r. It is usually argued that the speculative demand for
money varies inversely with the interest rate (directly with the price of bonds). The simplest such
relationship is the linear one
Mds = M0 – hr
The LM curve is the relationship between national income and interest rates given by the condition
that money supply equals the total money demand:
Ms= mY + M0 – hr
mY – hr = Ms– M0
The parameter m, h, and M0 are all positive.

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Equilibrium in this simple model will occur when both the IS equation (production equilibrium) and
the LM equation (monetary equilibrium) are simultaneously satisfied. Equilibrium national income Y
and interest rates r are solutions to the system of equations
sY + ar = I0 + G
mY – hr = Ms– M0
The algebraic relationship comes from the solution (Y, r) depend upon the policy parameters Msand
G and on the behavioral parameters a, h, I0, m , M0 and s. This is the simplicity of linear models in
construction of a more complex model.

11.6 SUMMARY
• The two main types of simulation models are used in equilibrium theorem – Partial
equilibrium and General Equilibrium.
• Partial equilibrium is just the technical term of demand and supply analysis, where it
considers only one market at a time.
• These types of models allow us to predict changes in key economic variables of interest,
including prices, the volume of trade, revenue and measures of economic efficiency.
• Partial equilibrium studies equilibrium of individual firm, consumer, seller and industry. It
studies one variable in isolation keeping all the other variables constant.
• General Equilibrium studies a number of economic variables, their inter relation and inter
dependencies for understanding the economic system.
• A linear equation is one with the highest exponential power.
• Linear equations are linear because their graphs are straight lines.

11.7 ANSWER TO IN-TEXT QUESTIONS

1. Price = Rs. 40 and Quantity = 30 units
2. i) 3x1 - 4x2 + 5 x3 = 6
ii) x1 x2 x3 = -2
iii) xx = 1
3. The point of interaction on the x – axis is (-5/4,0)

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11.8 SELF – ASSESSMENT QUESTIONS

1. Consider the IS-LM model with no fiscal policy (G = 0). Suppose that MS = M0; that is, the
intercept of the LM curve is 0. Suppose that I0 = 1000, s = 0.2, h = 1500, a = 2000, and m =
0.16. Write out the explicit IS-LM system of equations. Solve them for the equilibrium GNP
Y and the interest rate r.
2. Let the demand and supply functions be as follows:
Qd = 51 – 3P
Qs = 6P – 10
Find the total quantity demanded and price of the commodity.
3. Find the equation of the line passing through (-1,3) and (5,-2).
4. Solve each of the following three pairs of equation graphically:
a) x+y = 5 and x-y = -1
b) 3x+y = -7 and x-4y =2
c) 3x+4y = 2 and 6x+8y = 24

11.9 REFERENCES
• Sydsaeter, K. and P. J. Hammond, Mathematics for Economic Analysis, Pearson, 2009.
• Chiang, A, Fundamental Methods of Mathematical Economics, McGraw-Hill, 2009
• Hoy, M., Livernois, J., McKenna, C., Rees, R., &Stengos, T. (2001). Mathematics for
economics. Prentice Hall India.

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