MATHEMATICS, Lecture 1

Carmen Herrero

Master Program, 2015

Mathematical Economics
Why describe the world with mathematical models?
Maths is a concise, parsimonius lenguage.
With mathematical tools and theorems we can make general
statements
It forces to make specic assumptions, preventing from using
hiding ones
Multidimensionality is easily dealt with.
Maths has become a common language for most economists.
Warning: we have to be able to communicate with the rest of the
world

Mathematical models make strong assumptions and use theorems

to derive insightful conclusions, but,
Theorem: Let C the set of conclusions that follow from the set of
assumptions A. Let Aa small perturbation of A. Then there exist
A such that delivers a set of conclusions Csuch that
C \ C 0 = ?.
Insightfullness of C depends on the plausibility of A.
Plausibility of A depends on empirical validity: constant discourse
between theory and econometrics
You focus on the most important relationships a priori to
understand a phenomenon. This is an abstraction of the world.
Gives rise to a MODEL

Economic Models: Ingredients

Equations.
Denitions: Y = C + I + G + X

Behavioral/Optimization: q d =

Equilibrium:

qd

qs

Parameters: ,
Variables: q d , p
A mathematical model takes the form F (, X , Y ) = 0, where F is
a functional form; a set of parameters; Y endogeneous variables,
X exogeneous variables

Equilibrium analysis

A models equilibrium is a constellation of selected, interrelated

variables, so adjusted to one another that no inherent tendency
to change prevails
Since all variables are at rest: static
Change in the parameters: comparative statics
Equilibrium: is Y that solves F (, X , Y ) = 0, for given and X
It could have no solution, a single solution or multiple solutions.
The most interesting (and useful) case: single solution.

Numbers

Natural: N, 0, 1, 2, ...
Integer: Z, .....
Rational: Q,

n
d,

2,

1, 0, 1, 2, .....

where both n, d are integers, d 6= 0

Irrational: I, they cannot be written as rationals, eg,

Real, R = Q [ I, the real line ( , +)

Sets
A set is a collection of objects. The objects are the elements of the
set. x 2 S. A set S 0 made out of some elements of S is a subset
of S. S 0 S. If S 0 6= S, it is a proper subset
The empty (null) set, ? S, for any set.
We can describe a set by enumeration or by description:
S = f1, 2, 3, 4g = fx 2 N j x < 5g
In relation with the amount of elements a set can be nite or
innite.
Innite sets are characterized by the property that they can be put
in a one to one correspondence with a proper subset. Z and N
Not all innite sets are of the same kind, nonetheless: denumerable
(as N, Z, Q), and nondenumerable (as R).

Operations on sets

Union: A [ B = fx 2 A, or x 2 B g
Intersection: A \ B = fx 2 A and x 2 B g
Complement w.r.t : A = fx 2 : x 2
/ Ag
Dierence: AnB = fx 2 A : x 2
/ Bg
Cartesian product: A B = f(a, b ) : a 2 A, b 2 B g

Properties of set operations

Conmutative: A [ B = B [ A; A \ B = B \ A
Associative: (A [ B ) [ C = A [ (B [ C );
(A \ B ) \ C = A \ (B \ C )
Distributive: A [ (B \ C ) = (A [ B ) \ (A [ C );
A \ (B [ C ) = (A \ B ) [ (A \ C )
De Morgan: A [ B = A \ B; A \ B = A [ B

Binary relations

A binary relation between two sets A, B is a subset R of the

cartesian product A B. If (a, b ) 2 R, we write aRb
If we consider a single set, a binary relation on A is a subset of
A A.Important binary relations on a set: equivalence relations,
order relations.
Properties
Reexive: 8a 2 A, aRa
Symmetric: aRb ) bRa
Asymetric: aRb ) No bRa
Transitive aRb, bRc ) aRc

Let F be a binary relation, between X and Y . If, for any x 2 X

there is a unique y 2 Y : xFy , then F is called a function or a
mapping F : X ! Y .
If xFy ,then y = F (x ), and y is called the image of x.
Important functions
polinomial, logaritmic, exponential, trigonometric, etc.

Linear spaces and euclidean spaces

We are interested in two structures that a very important family of
sets, Rn , enjoy.
One is an algebraic structure, that of vector space.
Ingredients: A set V , an external eld (normally R), and two
operations, one internal (sum), + : V V ! V (v + w 2 V ),
and one external R V ! V (v 2 V ).
Elements in V are called vectors.
The other one is a topological structure, that of euclidean
space
Ingredients: A distance, d : V
metric, and then a topology.

V ! R+, that allows to dene a

Linear spaces

Properties
Associative: 8v , w , z 2 V , (v + w ) + z = v + (w + z )
Commutative: 8v , w 2 V , v + w = w + v
Null element: 90 2 V : 8v 2 V , v + 0 = v
Inverse element: 8v 2 V , 9( v ) 2 V : v + ( v ) = 0
External: 8 2 R, 8v , w 2 V , (v + w ) = v + w
8, 2 R, 8v 2 V , ( + )v = v + v
8, 2 R, 8v 2 V , ()v = (v )
8v 2 V , 1v = v

Linear independence
Let V be a vector space. A set fv1 , ..., vn g V is linearly
independent if whenever we have a linear combination
1 v1 +
n vn = 0, then 1 =
= n = 0
Dimension of V : Is the maximum number of linearly independent
vectors. Let us call dim(V ) = n
Basis of V : Is any set of n linearly independent vectors
(maximum number). Basis are not unique.
If B = fv1 , ..., vn g is a basis of V , then, any w 2 V can be written
as w = 1 v1 +
n vn . Then, (1 , . . . , n ) are called the
coordinates of w w.r.t. B.
Coordinates depend from the basis. Change of basis (to be seen
later).
Subspaces. W
V , W 6= V , is a subspace whenever it is also a
vector space. dim(W ) < dim(V )

Linear mappings

If V , W are vector spaces, and f : V ! W , f is a linear mapping

if 8, 2 R, 8v , v 0 2 V , f (v + v 0 ) = f (v ) + f (v 0 )
Im(f ) = fw 2 W : 9v 2 V , f (v ) = W g W is a subspace of W
Ker (f ) = fv 2 V : f (v ) = 0g V is a subspace of V
dim Im(f ) + dim Ker (f ) = dim(V ).
Main advantage of linear mappings: We only need to know the
images of the vector in a basis to have full information on the
function (elaborate)

Distance and metric

A distance, d : S S ! R+ fullling the following properties:

8a, b 2 S, it happens that d (a, b ) = d (b, a)
8a 2 S, d (a, a) = 0; d (a, b ) = 0 , a = b
Triangular inequality: 8a, b, c 2 S, d (a, b ) + d (b, c ) d (a, c )
Given a distance, we dene a topology by dening neighbourhoods
of a point as the union of open balls:
B (a, r ) = fx 2 S : d (x, a) < r g
A set A S is open if 8a 2 A, A is a neighborhood of A.

The euclidean space Rn

Elements in Rn are of the form (x1 , ...xn ), where xi 2 R for all

i = 1, ..., n. Rn is a vector space and has a distance:
Sum:(x1 , ..., xn ) + (y1 , ..., yn ) = (x1 + y1 , ..., xn + yn )
External product: (x1 , ..., xn ) = (x1 , ..., xn )
Distance:
p
(xn yn )2
d [(x1 , ..., xn ), (y1 , ..., yn )] = 2 (x1 y1 )2 +
Norm of a vector q
x = (x1 , ...xn ),

jjx jj = d (x, 0) =

x12 +

+ xn2

Inner product

Is a mapping, : Rn Rn ! R, dened as
(x1 , ..., xn ) (y1 , ..., yn ) = x1 y1 +
+ xn yn = jjx jj jjy jj cos ,
being the angle between x, y
Properties:
x y =y x
x (y + z ) = x y + x z
x (y ) = (x y ) = (x ) y
x x 0; x x = 0 ) x = 0
(x + y ) (x + y ) = x x + 2(x y ) + y y

Matrices
We call matrix an array of numbers
of the form:
0
a11
B a21
A = (aij )m n = B
@
am1

in rows (m ), and columns (n)

a12
a22
am2

1
a1n
a2n C
C
A
amn

m n is the matrix dimension. Mm n is the set of all matrices

with real entries of dimension m n
Rectangular, if n 6= m. Square if n = m. Diagonal if only the
elements aii 6= 0

Operations with matrices

Sum: Let A = (aij ), B = (bij ) 2 Mm n , then

A + B = (aij + bij ) 2 Mm n
External product: Let 2 R, and A = (aij ) 2 Mm n , then,
A = (aij ) 2 Mm n
With previous operations, Mm n is a vector space
Multiplication: Let A = (aij ) 2 Mm n , and B = (bij ) 2 Mn p ,
then AB = (cij ) = (ai 1 b1j + ai 2 b2j +
ain bnj ) 2 Mm p
Notice that vectors can be viewed as matrices in M1 n .
Transposition: Let A = (aij ) 2 Mm n . Then the tranposed of A,
denoted A0 = (aji ) 2 Mn m .

Operations with matrices (cont)

In Mm m (square matrices), multiplication is an internal

operation, i.e., if A, B 2 Mm m , then AB 2 Mm m .
Nonconmutative: AB 6= BA
Associative: A(BC ) = (AB )C
Distributive: A(B + C ) = AB + AC , and also
(A + B )C = AC + BC
Null element: 9 a matrix, I 2 Mm m such that for all
A 2 Mm m , it happens that AI = IA = A
I is the identity matrix, is a diagonal matrix such that ijj = 1 for
all j, .aij = 0 for i 6= j

Special square matrices

But: Not all square matrices have an inverse, i.e., not always given
A 2 Mm m , we can nd A 1 , such that AA 1 = A 1 A = I
Regular: A 2 Mm m such that it has an inverse A 1
Singular: A 2 Mm m such that it is not regular (it does not have
an inverse)
Idempotent: A 2 Mm m such that AA = A
Symmetric: A 2 Mm m such that A0 = A

Inverse matrices

If A has an inverse, A
(AB ) 1 = B 1 A 1
(A0 ) 1 = (A 1 ) 0

1,

it is unique, and A is the inverse of A

The equation system

a11 x1 +

+ a1n xn = b1

am1 x1 +

+ amn xn = bm

can be written in matrix form

0
10
1 0
1
a11
a1n
x1
b1
@
A@
A=@
A
am1
amn
xn
bm

Solving the system Ax = b means nding the solution, i.e., vector

x. If A is a square matrix, and has an inverse, i.e., there exist A 1 ,
then, x = A 1 b
A very convenient way of solving the system!!
The system can also be written as v1 x1 +
vn xn = b, where vi is
the i th column of A, and b = (b1 ,
, bn )0 .
The system will have a solution for any vector b if any b can be
written as a linear combination of fv1 ,
, vn g. We can only
guarantee that if fv1 ,
, vn g is a basis of Rn , i.e., if
fv1 ,
, vn g are linearly independent.
But this is then a necessary and su cient condition for A to
have an inverse!!!
A square matrix is said to have full rank whenever all its column
(row) vectors are independent.
Rank of a matrix is the minimum between the number of
independent row and column vectors.

Matrices associated to linear mappings

Let f : Rn ! Rm a linear mapping. To dene f we only need to
know f (e1 ), ...f (en ) for a basis fe1 , ..., en g in Rn . As
f (e1 ), ...f (en ) 2 Rm , they are m arrays of real numbers
Assume that f (ei ) = (a1i , a2i , ..., ami ). Then, we can associate
matrix A = (aji )j =1...m ,i =1,...,n to the linear mapping f
Take now any element in Rn , x = b1 e1 +
+ bn en , and
f (x ) = b1 f (e1 ) +
+ bn f (en ) = (y1 , ..., yn ) 2 Rm . It can be
easily computed in matrix form
0
1 0
10
1
y1
a11 a12
ain
b1
B y2 C B a21 a22
B
C
a2n C
C=B
C B b2 C
f (x ) 0 = B
@
A @
A@
A
yn
am1 am2
amn
bn

If fe1 , ..., en g is the canonical basis, then

x = (x1 , ..., xn ) = x1 e1 +
+ xn en , and
0
1 0
y1
a11 a12
B y2 C B a21 a22
0
C=B
f (x ) = B
@
A @
yn
am1 am2

10
ain
x1
B x2
a2n C
CB
A@
amn
xn

1
C
C
A

Notice: ff (e1 , ...f (en )g generates Im f . If n = m, Im f = Rn i

ff (e1 , ...f (en )g are linearly independent i A has an inverse.

Computing the rank of a matrix

With the interpretation of colums of A as a system generating

Im f , we may apply "elementary operations" to compute the rank.
They do not change the number of independent vectors
Elementary operations
Changing columns
Multipliying a column by an scalar 6= 0
Adding columns
=) Echelon procedure: to produce linear combinations changing
the actual matrix by another one, triangular. Then the rank is
immediate aparent. Example