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Economics 101

Math Review Handout


1 Concepts

This is a list of the basic tools from calculus and mathematics that will be used throughout the course. We will review the areas marked with an asterisk in lecture; please review the other concepts independently if you are not already familiar with them. Most of these concepts are reviewed in Perlos Calculus Appendix and the relevant section of the Appendix is listed; I have included brief notes for those concepts that are not covered in Perlo. 1. Functions and Properties of Functions (Perlo A.1 - A.2) Monotonicity Continuity Concavity and Convexity Logarithmic functions Homogeneous functions* 2. Derivatives (Perlo A.3, can skip Eulers Homogenous Function Theorem) How to take a derivative Product and Quotient Rules Chain Rule Partial derivatives 3. Elasticity* (see below) 4. Level curves of functions* (see below) 5. Solving optimization problems (Perlo A.5, A.6) Unconstrained optimization: nd the extrema of a function (maxima / minima) Constrained optimization: Lagranges method* The Envelope Theorem* Comparative statics of solution functions* Comparative statics of optimal value functions*

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2.1

Additional Notes
Elasticity

Suppose a variable y depends upon a variable x according to the function y = f (x) and we want to measure the responsiveness of y to changes in x. One measure would be to look at the slope of the function, f (x), which is called the derivative. This measures the absolute change in y relative to the absolute change in x. A dierent measure of responsiveness is the percentage change in y relative to the percentage change in x. We call this the elasticity of a function, and write: Ey,x = dy x dx y x y

= f (x)

Note that the elasticity is a dierent measure of responsiveness than the slope. A function may have a constant slope, but a changing elasticity, or a constant elasticity but a changing slope. To see this, consider the following functions: 1. f (x) = 3x has a constant slope of f (x) = 3 for all x, and a constant elasticity of Ey,x = 1. In fact, any linear function f (x) = ax for some contant a has an elasticity of 1. 2. f (x) = 3x + 1 has a constant slope of f (x) = 3 for all x, and an elasticity of Ey,x = which is obviously not constant with respect to x.
3x 3x+1

3. f (x) = x2 has a slope of f (x) = 2x, which is obviously not constant with respect to x. However, the elasticity is contant at Ey,x = 2.

2.2

Level Curves of Functions

Let f (x1 , x2 ) be a function of two variables. Then a level curve of f is a set of points (x1 , x2 ) such that the function takes on the same value c at all points. For example, consider f (x1 , x2 ) = x1 + 2x2 . Then the level curve of f such that x1 + 2x2 = c is described by the set of points {(x1 , x2 ) : x2 = (1/2) (c x1 )}. We use this concept in economics when studying consumers utility functions and rms prot and cost functions. It lets us address questions like what is the set of combinations of apples and oranges that give consumers the same utility? and what combinations of labor and capital inputs will yield that same cost of production for a rm?

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