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Mathematics I
9/28/2007 2
Functions and Equations
Function:
y = 2x
f(x) = 2x
-+ ++
Linear function:
y = a + bx
a – intercept -- +-
b – slope, gradient
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Functions and Equations
Quadratic equation:
ax2 + bx + c = 0
D = b2 – 4ac
−b± D
x1, 2 =
2a
Example: x2 + 9x + 18 = 0
D = 92 – 4x1x18 = 9
−9+ 9 −9−3
x1 = = −3 x2 = = −6
2 2
Quadratic function:
y = x2
y = ax2 + bx+ c
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Systems of Equations
2 x + 3 y = 24
x − 2y = 5
Method I: Method II:
x = 5+2y Add/subtract/etc.
3y-(-4y)=24-10
Verification: y=2
2x9+3x2=24 x – 2x2=5 , x = 9
9-2x3=5
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Powers, Exponents
a n
= a142
⋅ a ⋅ ...43
⋅a
n
an a
(a m ) n = a m⋅n n
a = 1, a ≠ 0
0
a an
= n
b b
Examples: 1
−2
7 3 ⋅ 7 2 27 : 23 3 16 2
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Logarithms
23=8, 3 – logarithm (index), 2 – base
The log to base 2, which gives 8 is 3
log28 =3
bp = n equivalent to logbn=p, n , b > 0 , b ≠ 1
Properties of logs:
M
logaMN = logaM + logaN log a = log a M − log a N
N
logaMk = klogaM
Special cases of logs:
Common logs: log10 ≡ lg
Natural logs: log e ≡ ln
What is e?
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Natural logarithms (ln)
Irrational number e:
1 1 1 1
e = 1+ + + + + ... ≈ 2.71828...
1 1⋅ 2 1⋅ 2 ⋅ 3 1⋅ 2 ⋅ 3 ⋅ 4
Fundamental role in finance and
economics (think π in geometry) !!!
Calculating compound interest
Logarithmic transformation in finance,
economic data analysis, advanced statistics…
Exponential function: y=ex
Logarithmic function: y=lnx
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Why derivatives?
Economic applications:
Marginal concepts
Elasticities
Maximization, minimization
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Limits
1
f ( x) =
x
What happens as x gets larger and larger
(approaches infinity)?
Has a limiting value (limit) of zero
Notation: lim 1 = 0
x→ ∞ x
x −1
Examples: lim
x →∞ x + 2
=1
y = x2, lim y = 4
x →2
n
1
lim1 + = e
n →∞
n
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Derivatives
Requirements for functions:
Continuous (unbroken)
Smooth
All linear, exponential, logarithmic, power
functions and their combinations
Differentiation: process of finding the
slope of the graph at a point
f’(x) Dxf(x)
y’ dy
dx
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Some rules of differentiation
c’=0 y=2, y’=2’=0
u’=1 y=x, y’=x’=1
(cu)’=c y=5x, y’=5 ′
1 1
(un)’=nun-1 y=x3, y’=3x2 = −
u u2
(u+v)’ = u’ + v’ ′
u u ' v − uv'
(uv)’ = u’v + uv’ = 2
v v
Chain rule: derivative of the outside times
the derivative of the inside dy = dy ⋅ du
dx du dx
Example: y = 4x + 3
y’ = (4x)’ + 3’ = 4 + 0 = 4
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Some rules of differentiation
c’=0 u’=1 (cu)’=c
(un)’=nun-1 (u+v)’ = u’ + v’ ′
(uv)’ = u’v + uv’ ′ 1 1
u u ' v − uv' = −
= u u2
v v2
Chain rule: derivative of the outside times the
derivative of the inside
dy dy du
= ⋅
dx du dx
Example: f(x)=x4+2x3
(x4)’+(2x3)’=4x3+6x2
f’(0)=0 f’(2)=4x8+6x4=56
Example: y=(x2+5x)3
y ' = 3( x 2 + 5 x) 2 ⋅ ( x 2 + 5 x)' = 3( x 2 + 5 x) 2 ⋅ (2 x + 5)
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Some rules of differentiation
Logarithm rule:
(log b u )' = 1 log b e ⋅ u ' (ln u )' = 1 ⋅ u '
u u
y=lnx4 = 4lnx
1 4
y ' = 4 ⋅ (ln x )' = 4 ⋅ =
x x
Exponential rule:
u ′
(b ) = ln b ⋅ b u
⋅ u' (e )′ = e
u u
⋅ u'
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Second order derivatives
Higher order derivatives: f’’(x), f’’’(x)…
Second order derivatives:
f’’(x), y’’, d2y
dx 2
Example:
y = 3x4
y’ = 12x3
y’’ = 36x2
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Application of derivatives
1st order derivative:
Rate of change
Slope / gradient of the curve
Meaning of signs:
f’(x0)>0 – increasing function
f’(x0)<0 – decreasing function
f’(x0)=0 – stationary point (local max or min)
Example: f(x)=y3
f’(x)=3y2 >0 for all x, function is increasing
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Application of derivatives
2nd order derivative:
Slope of the slope
Ex: increasing/decreasing marginal revenue
Meaning of signs:
f’’(x)<0 – local maximum
f’’(x)>0 – local minimum
f’’(x)=0 – point of inflection
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Application of derivatives
Maximization:
First order condition (F.O.C.): f’(x)=0
Second order condition (S.O.C.): f’’(x)<0
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Suggested reading
Jacques, I. “Mathematics for Economics and
Business”, 5th ed., 2006. Pearson Higher
Education
Renshaw, G. “Maths for Economics”, 2005. Oxford
University Press