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Basic Principles of

Mathematics I

 Prof. Massimo Guidolin


TA Asta Klimaviciene

BMAN71111 Essentials of Finance;


BMAN70211 Introductory Research Methods for A&F
Topics of Session 1
 Basic concepts of functions and equations:
 Linear
 Quadratic
 Systems of equations
 Powers, exponents
 Logarithms
 Concepts of limits
 Differentiation
 Application of first and second derivatives:
 Maxima, minima
 Concavity, convexity

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Functions and Equations
 Function:
 y = 2x
 f(x) = 2x
-+ ++
 Linear function:
 y = a + bx
 a – intercept -- +-
 b – slope, gradient

 Simple linear equation


 2x + 10 = 16
 x=3

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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.

 2(5+2y) +3y = 24 Multiply2nd by 2:


 y=2 2x – 4y = 10
 x = 5+2x2 = 9 Subtract:

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

 n – index, exponent, logarithm


 a – base
 an – exponential form, power
 Rules of indices: m
1
m 1
a m ⋅ a n = a m+n a
= a m− n a −n = n a =a 2
n
am = 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

 3 basic concepts are necessary:


 Coordinate geometry
 Slope
 Limit

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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
lim1 +  = 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

 Example: maximize f(x)=x3-3x


 F.O.C. f’(x)=0
f’(x)=3x2-3=0
x1= 1, x2= -1
 S.O.C. f’’(x)<0
f’’(x)=(3x2-3)’=6x
f’’(1) = 6 >0 – local minimum
f’’(-1) = -6 <0 – local maximum
 Max f(x)=f(-1)
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Next review sessions
 Fri 5 October, 12:00-13:00
 Basic principles of mathematics II
 Integrals
 Taylor expansions
 Geometric progression

 Basic principles of statistics


 Fri 5 October, 15:00-16:00

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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

 Bancroft and O’Sullivan “Quantitative Methods for


Accounting and Business Studies”, 3rd ed., 1997.
The McGraw-Hill Companies
 Huang, D.S. “Introduction to the Use of
Mathematics in Economic Analysis”, 1964. John
Wiley & Sons, Inc.

 Any other textbook titled ‘mathematics for


economics / business’
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