Monomial and polynomial

 Expressions consisting simply of a real number

or of a coefficient times one or more variables
raised to the power of a positive integer are
called monomials.
 Monomials can be added or subtracted to form
polynomials. Each of the monomials
comprising a polynomial is called a term.

1
 EQUATIONS: LINEAR AND
QUADRATIC

A mathematical statement setting two

algebraic expressions equal to each other
is called an equation.
 An equation in which all variables are raised to
the first power is known as a linear equation.
 A linear equation can be solved by moving the
unknown variable to the left-hand side of the
equal sign and all the other terms to the right-
hand side.
2
  Quardatic equation can be solved through
factoring or using the quadratic formula:

3
 Functions and its possible kinds…

 The domain of a function refers to the set of all

possible values of x;

 the range is the set of all possible values for

f(x).

4
5
 GRAPHS, SLOPES, AND
INTERCEPTS

 In graphing a function such as y f (x), x is

placed on the horizontal axis and is known as
the
 independent variable; y is placed on the
vertical axis and is called the dependent
variable.
 The graph of a linear function is a straight line.

6
  The slope of a line measures the change in y
divided by a change in x.
 The slope indicates the steepness and
direction of a line. The greater the absolute
value of the slope, the steeper the line.
 A positively sloped line moves up from left to
right; a negatively sloped line moves down.

7
  we need only find two points which satisfy the
equation and connect them by a straight line.
Since the graph of a linear function is a straight
line, all the points satisfying the equation must
lie on the line.

 Example:

8
  The slope of a horizontal line, for which change
in Y=0, is zero.
 The slope of a vertical line, for which x=0, is
undefined, i.e., does not exist because division
by zero is impossible.
 The y intercept is the point where the graph
crosses the y axis; it occurs when x = 0.
 The x intercept is the point where the line
intersects the x axis; it occurs when y = 0
9
10
 Slope Estimation….. (find slope)

11
 Functions of One Variable

 Variables: The basic elements of algebra,

usually called X, Y, and so on, that may be
given any numerical value in an equation
 Functional notation: A way of denoting the
fact that the value taken on by one variable
(Y) depends on the value taken on by some
other variable (X) or set of variables

Y  f (X )
12
 Independent and Dependent
Variables

 Independent Variable: In an algebraic

equation, a variable that is unaffected by the
action of another variable and may be
assigned any value
 Dependent Variable: In algebra, a variable
whose value is determined by another variable
or set of variables

13
 Two Possible Forms of Functional
Relationships

 Y is a linear function of X
Y  a  bX
– Table 1.A.1 shows some value of the linear
function Y = 3 + 2X
 Y is a nonlinear function of X
– This includes X raised to powers other than 1
– Table 1.A.1 shows some values of a quadratic
function Y = -X2 + 15X

14
 Table 1A.1: Values of X and Y for Linear
and Quadratic Functions

Linear Function Quadratic Function

Y = f(X) Y = f(X)
2
x = 3 + 2X x = -X + 15X
-3 -3 -3 -54
-2 -1 -2 -34
-1 1 -1 -16
0 3 0 0
1 5 1 14
2 7 2 26
3 9 3 36
4 11 4 44
5 13 5 50
6 15 6 54

15
 Graphing Functions of One Variable

 Graphs are used to show the relationship

between two variables
 Usually the dependent variable (Y) is shown on
the vertical axis and the independent variable
(X) is shown on the horizontal axis
– However, on supply and demand curves, this
approach is reversed

16
 Linear Function

 A linear function is an equation that is

represented by a straight-line graph
 Figure 1A.1 represents the linear function
Y=3+2X
 As shown in Figure 1A.1, linear functions may
take on both positive and negative values

17
 Figure 1A.1: Graph of the Linear
Function Y = 3 + 2X

Y-axis
10

5
Y-intercept 3

X-axis

-10 -5 0 1 5 10
X-intercept
-5

-10

18
 Intercept

 The general form of a linear equation is

Y = a + bX
 The Y-intercept is the value of Y when when X
equals 0
– Using the general form, when X = 0, Y = a, so this is
the intercept of the equation

19
 Slopes

 The slope of any straight line is the ratio of the change

in Y (the dependent variable) to the change in X (the
independent variable)
 The slope can be defined mathematically as
Change in Y Y
Slope  
Change in X X
 where  means “change in”
 It is the direction of a line on a graph.

20
 Slopes

 For the equation Y = 3 + 2X the slope equals 2

as can be seen in Figure 1A.1 by the dashed
lines representing the changes in X and Y
 As X increases from 0 to 1, Y increases from 3
to 5

Y 5  3
Slope   2
X 1  0

21
 Figure 1A.1: Graph of the Linear
Function Y = 3 + 2X

Y-axis
10

Slope  Y
5 X
Y 
53
2
Y-intercept 3 1 0
X
X-axis
-10 -5 0 1 5 10
X-intercept
-5

-10

22
 Slopes

 The slope is the same along a straight line.

 For the general form of the linear equation the
slope equals b
 The slope can be positive (as in Figure 1A.1),
negative (as in Figure 1A.2) or zero
 If the slope is zero, the straight line is
horizontal with Y = intercept

23
 Slope and Units of Measurement

 The slope of a function depends on the units in

which X and Y are measured
 If the independent variable in the equation Y =
3 + 2X is income and is measured in hundreds
of dollars, a $100 increase would result in 2
more units of Y

24
 Slope and Units of Measurement

 If the same relationship was modeled but with

X measured in single dollars, the equation
would be Y = 3 + .02 X and the slope would
equal .02

25
 Changes in Slope

 In economics we are often interested in

changes in the parameters (a and b of the
general linear equation)
 In Figure 1A.2 the (negative) slope is doubled
while the intercept is held constant
 In general, a change in the slope of a function
will cause rotation of the function without
changing the intercept

26
 FIGURE 1A.2: Changes in the Slope of
a Linear Function

10

X
0 5 10

27
 FIGURE 1A.2: Changes in the Slope of
a Linear Function

10

X
0 5 10

28
 Changes in Intercept

 When the slope is held constant but the

intercept is changed in a linear function, this
results in parallel shifts in the function
 In Figure 1A.3, the slope of all three functions
is -1, but the intercept equals 5 for the line
closest to the origin, increases to 10 for the
second line and 12 for the third
– These represent “Shifts” in a linear function.

29
 FIGURE 1A.3: Changes in the Y-
Intercept of a Linear Function

12
10

5
Y  X  5

0 5 1012 X

30
 FIGURE 1A.3: Changes in the Y-
Intercept of a Linear Function

12
10
Y   X  10
5
Y  X  5

0 5 1012 X

31
 FIGURE 1A.3: Changes in the Y-
Intercept of a Linear Function

12 Y   X  12
10
Y   X  10
5
Y  X  5

0 5 1012 X

32
 Nonlinear Functions

 Figure 1A.4 shows the graph of the nonlinear

function Y = -X2 + 15X
 As the graph shows, the slope of the line is not
constant but, in this case, diminishes as X
increases
 This results in a concave graph which could
reflect the principle of diminishing returns

33
 FIGURE 1.A.4: Graph of the Quadratic
Function Y = X2 + 15X

60

50
A
40

30

20

10
X
0 1 2 3 4 5 6

34
 FIGURE 1.A.4: Graph of the Quadratic
Function Y = X2 + 15X

60
B
50
A
40

30

20

10
X
0 1 2 3 4 5 6

35
 The Slope of a Nonlinear Function

 The graph of a nonlinear function is not a

straight line
 Therefore it does not have the same slope at
every point
 The slope of a nonlinear function at a particular
point is defined as the slope of the straight line
that is tangent to the function at that point.

36
 Marginal Effects

 The marginal effect is the change in Y brought

about by one unit change in X at a particular
value of X (Also the slope of the function)
 For a linear function this will be constant, but
for a nonlinear function it will vary from point to
point

37
 Average Effects

 The average effect is the ratio of Y to X at a

particular value of X (the slope of a ray to a
point)
 In Figure 1A.4, the ray that goes through A
lies about the ray that goes through B
indicating a higher average value at A than at
B

38
 APPLICATION 1A.1: Property Tax
Assessment

 The bottom line in Figure 1 represents the

linear function Y = $10,000 + $50X, where Y is
the sales price of a house and X is its square
footage
 If, other things equal, the same house but with
a view is worth $30,000 more, the top line Y =
$40,000 + $50X represents this relationship

39
 FIGURE 1: Relationship between the Floor Area of a
House and Its Market Value

House value
(dollars)

160,000 House without

view
110,000

40,000

10,000

0 2,000 3,000 Floor area

(square feet)
40
 FIGURE 1: Relationship between the Floor Area of a
House and Its Market Value

House value
(dollars)

House with view

160,000 House without
view
110,000

40,000

10,000

0 2,000 3,000 Floor area

(square feet)
41
 Calculus and Marginalism

 In graphical terms, the derivative of a function

and its slope are the same concept
 Both provide a measure of the marginal inpact
of X on Y
 Derivatives provide a convenient way of
studying marginal effects.

42
 APPLICATION 1A.2: Progressive and
Flat Taxes

 Advocates of tax fairness argue that income

taxes should progressive so that richer people
should pay a higher fraction of their incomes in
taxes
– This is illustrated in Figure 1 by the nonlinear line
OT that becomes steeper as taxable income
increases
– This represents an increasing marginal tax rate

43
 FIGURE 1: Progressive Rates
Compared to a Flat Tax Schedule
Tax
Liability
$1,000
50 OT

40

30

20

10

0 25 50 75 100 125 150 175 Taxable

income
44 ($1,000)
 APPLICATION 1A.2: Progressive and
Flat Taxes

 Opponents of progressive taxes have argued

for a flat tax
 The straight line OT’ represents a proposal
where the first $18,000 of taxable income
would not be taxed with a flat tax of 17
percent on additional taxable income
– This would also be progressive but not as much
as in the current system

45
 FIGURE 1: Progressive Rates
Compared to a Flat Tax Schedule
Tax
Liability
$1,000
50 OT

40

OT’
30

20

10

0 25 50 75 100 125 150 175 Taxable

income
46 ($1,000)
 Functions of Two or More Variables

 The dependent variable can be a function of

more than one independent variable
 The general equation for the case where the
dependent variable Y is a function of two
independent variables X and Z is

Y  f (X, Z)

47
 A Simple Example

 Suppose the relationship between the

dependent variable (Y) and the two
independent variables (X and Z) is given by

Y  X Z
 Some values for this function are shown in
Table 1A.2

48
 TABLE 1A.2: Values of X, Z, and Y that
satisfy the Relationship Y = X·Z

X Z Y
1 1 1
1 2 2
1 3 3
1 4 4
2 1 2
2 2 4
2 3 6
2 4 8
3 1 3
3 2 6
3 3 9
3 4 12
4 1 4
4 2 8
4 3 12
4 4 16
49
 Graphing Functions of Two
Variables

 Contour lines are frequently used to graph

functions with two independent variables
 Contour lines are lines in two dimensions that
show the sets of values of the independent
variables that yield the same value for the
dependent variable
 Contour lines for the equation Y = X·Z are
shown in Figure 1A.5

50
 FIGURE 1A.5: Contour Lines for Y = X·Z
Z

4
3
Y 9
2 Y 4
1
Y 1

0 1 2 3 4 9 X
51
 Simultaneous Equations

 These are a set of equations with more than

one variable that must be solved together for
a particular solution
 When two variables, say X and Y, are related
by two different equations, it is sometime
possible to solve these equations to get a set
of values for X and Y that satisfy both
equations

52
 Simultaneous Equations

The equations [1A.17]

X Y  3
X Y 1
can be solved for the unique solution

X 2
Y 1
53
 Changing Solutions for
Simultaneous Equations

The equations [1A.19]

X Y  5
X Y 1
can be solved for the unique solution

X 3
Y 2
54
 Graphing Simultaneous Equations

 The two simultaneous equations systems,

1A.17 and 1A.19 are graphed in Figure 1A.6
 The intersection of the graphs of the equations
show the solutions to the equations systems
 These graphs are very similar to supply and
demand graphs

55
 Figure 1A.6: Solving Simultaneous
Equations
Y
5
Y  X 1

3 Y  3 X

X
0 1 2 3 5
56
 Figure 1A.6: Solving Simultaneous
Equations
Y
5 Y  5 X
Y  X 1

3 Y  3 X

X
0 1 2 3 5
57
 APPLICATION 1A.3: Can Iraq Affect Oil
Prices?

Assume the demand for crude oil is given by

QD  80  0.4P
where QD is crude oil demanded (in millions of barrels
per day) and P price in dollars per barrel.
Assume the supply of crude oil is given by
QS  55  0.6 P
The solution to these equations, market equilibrium,
is P = 25 and QS = QD = 70 and can be found by
80  0.4 P  55  0.6 or P  25, Q  70
58
 APPLICATION 1A.3:Can Iraq Affect
Oil Prices?

Iraq produces about 2.5 million barrels of oil per day.

The impact of the decision to sell no oil can be evaluated
by assuming that the supply curve in Figure 1 shifts to S’
whose equation is given by
QS  (55  2.5)  0.6P  52.5  0.6P
Repeating the algebra yields a new equilibrium, as
shown in Figure 1, of P=27.50 and Q = 69. The
reduction in oil supply raised the price and decreased
consumption. The higher price caused non-OPEC
producers to supply about 0.5 million additional barrels.
59
 FIGURE 1: Effect of OPEC Output
Restrictions on World Oil Market
Price
($/barrel) S
32
30
28
26
24

22
20
D

62 64 66 68 70 68 70 72 74 ((millions Q
barrels)

60
 FIGURE 1: Effect of OPEC Output
Restrictions on World Oil Market
Price S’
($/barrel) S
32
30
28
26
24

22
20
D

66 68 70 68 70 72 74 ((millions Q
barrels)

61
 Empirical Microeconomics and
Econometrics

 Economists test the validity of their models by

looking at data from the real world
 Econometrics is used for this purpose
 Two important aspects of econometrics are
– random influences
– the ceteris paribus assumption

62
 Random Influences

 No economic model exhibits perfect accuracy

so actual price and quantity values will be
scattered around the “true” demand curve
 Figure 1A.7 shows the unknown true demand
curve and the actual points observed in the
data from the real world
 The problem is to infer the true demand curve

63
 FIGURE 1A.7: Inferring the Demand Curve
from Real-World Data

Price
(P)

Quantity (Q)

64
 Random Influences

 Technically, the problem is statistical

inference: the use of actual data and statistical
techniques to determine quantitative economic
relationships
 Since no single straight line will fit all of the
data points, the researcher must give careful
consideration to the random influences to get
the best line possible

65
 The Ceteris Paribus Assumption

 To control for the “other things equal”

assumption two things must be done
– Data should be collected on all of the other factors
that affect demand, and
– appropriate procedures must be used to control
for these measurable factors in the analysis
 Generally the researcher has to make some
compromises which leads to many
controversies in testing economic models
66