ASB-1101 QUANTITATIVE METHODS

PART 1: MATHEMATICS 1
LINEAR ALGEBRA, EQUATION SOLVING AND
MATHEMATICAL FUNCTIONS

1.1.1 Rules of linear algebra

1.1.2 Addition

a+b = b+a

a+b+c = (a+b)+c = a+(b+c) [order of addition does not matter]

1.1.2 Multiplication

ab = ba

abc = (ab)c = a(bc) [order of multiplication does not matter]

1.1.3 Factorisation and the use of brackets

a(b+c) = ab +ac [expansion of brackets]

ab+ac = a(b+c) [factorisation]

(a+b) (c+d) = (a+b)c+(a+b)d

= ac+bc+ad+bd

When expanding brackets, always perform the operation inside the brackets first. If there are
brackets within brackets, start from the inside and work outwards.

e.g. 3{5a+2(a+b)} = 3{5a+2a+2b}

= 3{7a+2b}
= 21a+6b

1.1.4 Subtraction and negative values

The formal definition of a negative number is as follows. For any number, there exists a
corresponding ‘additive inverse’ number, such that the sum of the number and its additive
inverse number is zero.

e.g. the additive inverse of 3 is –3, so 3+(–3) = 0.

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In general, the additive inverse of any positive number is the corresponding negative number.
Subtraction of a number is the same as addition of that number’s additive inverse.

a+(b) = a+b a– (b) = a–b

a+(–b) = a–b a– (–b) = a+b

Rules

(a) Two ‘minuses’ make ‘plus’

(b) A minus sign outside a bracket changes the signs of all the terms inside the bracket
e.g. a – (x+2y–3z) = a–x–2y+3z
(c) ab is positive:
either if ‘a’ and ‘b’ are both positive
or if ‘a’ and ‘b’ are both negative
(d) ab is negative if one of ‘a’ and ‘b’ is positive, and the other is negative

1.1.5 Division, reciprocals and fractions

The formal definition of a reciprocal is as follows.: For any number except zero, there exists a
corresponding ‘multiplicative inverse’ number, or ‘reciprocal’ number, such that the product of
the number and its reciprocal is 1.

e.g. the reciprocal of 2 is 1/2, also written as 2–1

2 1/2 = 1, or 2 (2–1) = 1

Division by a number is the same as multiplication by the reciprocal of that number.

a b or a/b = a (1/b) or a (b–1)

The number 0 can be used in the numerator of a fraction, but not in the denominator.

0/a = 0
a/0 is undefined
0/0 is undefined

Rules
a
a c ac a c b ad
Multiplication and division: ;
b d bd b d c bc
d

ab b
Cancellation of common factors:
ac c

2
Addition and subtraction: To add/subtract two fractions, put them over a ‘common
denominator’; then add or subtract the numerators; then (if
possible) simplify by cancelling common factors.

a c ad bc ad bc
b d bd bd bd

a c ad bc ad bc
b d bd bd bd

1.1.6 Powers (exponents)

Let b be any number, and let n be any positive integer (whole number). The expression bn
(‘b raised to the power n’ where b is the base and n is the exponent) is defined as follows:

b1 = b
b2 = b b
b3 = b b b
:
bn = b b .... b
[n times]

Similar expressions can be defined for values of n that are not positive integers:

b0 = b/b = 1
b–1 = b/(b b) = 1/b
b–2 = b/(b b b) = 1/b2
:
b–n = b/(b b ... b) = 1/bn
[n+1 times]

Expressions can also be defined for values of n which are fractional or decimal, provided b
is not negative:

b1/2 = square root of b ( b) = the number c such that c2 = b

b1/3 = cube root of b (3 b) = the number d such that d3 = b
:
b1/n = n’th root of b (n b) = the number k such that kn = b

3
The following rules and examples may be useful when manipulating expressions containing
powers.

b3/2 = (b3)1/2 or (b1/2)3

b0.75 = b3/4 = (b3)1/4 or (b1/4)3
bm bn = bm+n
bm bn = bm–n
(bm)n = bmn
(ab)n = an bn
(a + b)2 = (a + b)(a + b) = a2 + ba +ab + b2 = a2 + 2ab + b2
(a – b)2 = (a – b)(a – b) = a2 – ba – ab + b2 = a2 – 2ab + b2
(a + b)(a – b) = a2 + ba – ab – b2 = a2 – b2

1.1.7 Manipulation of equations and inequalities

Rules for carrying terms across the ‘equals sign’:

If a + b = c then a = c – b
If a – b = c then a = c + b

Rules for cross-multiplication:

cd
If ab = cd then a
b

a c bc
If then a or ad = bc
b d d

a b means ‘a is greater than or equal to b’

a>b means ‘a is greater than b’
a b means ‘a is less than or equal to b’
a<b means ‘a is less than b’

Rules for addition and multiplication involving inequalities:

If a>b then a+c>b+c

If a>b then ac>bc if c>0
ac<bc if c<0

Similar rules apply for the other inequalities: <, and .

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1.2 Equation solving

1.2.1 Linear equations in one unknown variable

Often we need to use the rules of algebra to solve an equation which contains one unknown
variable. A linear equation is one which has terms in the unknown variable itself, e.g. x, but no
terms in x2, x3, x1/2 etc.

Method

1. If there are fractions, eliminate them by putting everything over a common denominator,
and then multiplying through by the denominator.

2. If there are brackets, multiply them out.

3. Collect all the terms in x on one side of the equation, and all the numerical terms on the
other side.

4. Divide both sides through by the coefficient on x, to obtain the numerical solution for x.

5. Substitute the solution back into the original equation and evaluate both sides, to check
whether the solution is correct.

Examples

Solve the following equations for x:

(i) 3x + 4 = 10
(ii) 3(x – 3) = 2(x – 5) + 7
1 3 10
(iii)
6 x 2x

Solutions

(i) 3x + 4 = 10 3x = 10 – 4
3x = 6
x = 6/3
x=2 [Check : 3(2) – 4 = 10 OK]

(ii) 3(x – 3) = 2(x – 5) + 7 3x – 9 = 2x – 10 + 7

3x – 2x = –10 + 7 + 9
x = 6 [Check : 3(6 – 3) = 2(6 – 5) + 7 OK]

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 1 3 10 x 18 30
(iii) [putting everything over 6x]
6 x 2x 6x 6x 6x

x + 18 = 30 [multiply throughout by 6x to eliminate denominator]

x = 30 – 18
x = 12 [Check : 1/6 + 3/12 = 10/24 OK]

1.2.2 Simultaneous linear equations in two unknown variables

A slightly more complicated situation arises when we have more than one equation, and there is
more than one unknown variable to solve for. In general, we can always solve provided there are
as many equations as there are unknown variables; i.e. 2 equations in 2 unknown variables
(x and y); 3 equations in 3 unknown variables (x, y and z); and so on.

There are two methods of solution: algebraic and graphical.

Algebraic method

1. Eliminate any fractions or brackets (as in section 1.2.1). Then rearrange both equations so
that the terms in x and y are on the left hand side, and the numerical terms are on the
right.

2. Multiply each side of one (or both) of the equations through by a number (or numbers) so
that the coefficient on one of the variables (x or y) has the same numerical value in both
equations. The signs of the equalised coefficients can be the same or different.

3. Eliminate the chosen variable by subtracting one equation from the other (if the signs of
the equalised coefficients are the same) or adding the two equations (if the signs are
different).

4. Solve the resulting equation for the remaining variable.

5. Substitute the solution back into one of the original equations, and solve for the other
variable.

6. Check your solution by substituting both values back into the other original equation.

Examples

Solve algebraically the following pairs of simultaneous equations:

(i) x + 2y = 5
x –y =2

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(ii) 2y + 14 = 6x
5x – 3y = 1

(iii) 4x + 2y = 14
2x – y = 1

Solutions

(i) x + 2y = 5 [1]
x–y =2 [2]
[1] – [2] 3y = 3
y=1

substitute into [1] x+2 1=5

x=5–2
x=3

check in [2] 3–1=2 OK

(ii) rearranging –6x + 2y = –14 [1]

5x – 3y = 1 [2]

[1] 3 –18x + 6y = –42 [3]

[2] 2 10x – 6y = 2 [4]
[3] + [4] –8x = –40
x = –40/–8
x=5

substitute into [2] 5 5 – 3y = 1

24 = 3y
y = 24/3
y=8

check in [1] –6 5 + 2 8 = –14 OK

(iii) 4x + 2y = 14 [1]
2x – y = 1 [2]

[2] 2 4x – 2y = 2 [3]

[1] + [3] 8x = 16

7
 x = 16/8
x=2

substitute into [1] 4 2 + 2y = 14

2y = 14 – 8
2y = 6
y=3

check in [2] 2 2–3 =1 OK

Graphical method

1. Rearrange both equations so that y appears by itself on the left hand side of both (i.e. get
both equations in the form y = c+mx, where c and m are numbers).

2. For the first equation, find the numerical value of y when x = 0, and plot the point on the
graph. Next find the numerical value of y for a second, arbitrarily chosen, value of x, and
plot on the graph. Join the two points with a straight line.

3. Repeat step 2 for the second equation.

4. Locate the solution at the point of intersection of the two lines. If the point of intersection
is off the graph, try again with different scales on the axes.

For any linear equation of the form y = c+mx or y = mx+c,

c is the intercept, i.e. the value of y at which the line cuts the y-axis
m is the slope, where m>0 the line is upward sloping
m=0 the line is flat
m<0 the line is downward sloping.

The ‘coordinates’ of any point on a graph can be represented in the form (x-value, y-value).

e.g. (5,8) means ‘x = 5 and y = 8’

Examples

Solve graphically the following pairs of simultaneous equations (taken from the previous
example):

(i) x + 2y = 5 (iii) 4x + 2y = 14
x– y=2 2x – y = 1

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Solutions (to locate two points on each line)

5 x
(i) x + 2y = 5 2y = 5 – x y [1]
2 2

x – y=2 –y = 2 – x y=x–2 [2]

[1] when x = 0, y = 5/2 = 2.5

when x = 5, y = 5/2 – 5/2 = 0

[2] when x = 0, y = –2

when x = 5, y = 5 – 2 = 3

y y=x 2
3 X

X
2.5
(3,1)
1

X x
3 5
5 x
y
2 2
2
X

(iii) 2y + 4x = 14 2y = 14 – 4x y = 7 – 2x [1]
2x – y = 1 –y = 1 – 2x y = 2x – 1 [2]

[1] when x = 0, y = 7

when x = 3, y = 7–6 = 1

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 [2] when x = 0, y = –1

when x = 3, y = 6–1 = 5

y
X
7
y=2x 1
5 X

(2,3)
3

1 X y=7 2x
x
2 3
1X

1.2.3 Economics application: supply and demand under conditions of perfect competition

Example

The quantity demanded of a certain product (qd, measured in kilos per week) depends on the
market price (p per kilo, in £’s), while the quantity supplied (qs, measured in kilos per week)
depends on the price producers receive (p* per kilo, in £’s), as follows:-

qd = 40–4p qs = 2p*–8

The market price is the price which producers receive, plus any tax, minus any government
subsidy, so:
p = p*+t, where t>0 tax
t<0 subsidy

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Using algebraic methods, find the equilibrium values of p, p* and qd (=qs)

(i) When there are no taxes or subsidies,

(ii) When a tax of £3 per kilo is imposed,
(iii) When a subsidy of £1.50 per kilo is awarded.

Solution

If p = p*+t p* = p – t qs = 2(p–t) – 8

(i) When t=0, qd = 40 – 4p

qs = 2p – 8

For market clearing, let qd = qs = q

40 – 4p = 2p – 8

48 = 6p

p = 48/6

p=8

From demand equation, q = 40 – 4 8

q = 40 – 32

q=8

Check in supply equation 2 8–8=8 OK

(ii) When t=3, qd = 40 – 4p

qs = 2(p – 3) – 8 qs = 2p – 14

For market clearing, let qd = qs = q

40 – 4p = 2p – 14

54 = 6p

p = 54/6

p=9

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 From demand equation, q = 40 – 4 9

q = 40 – 36

q=4

Check in supply equation 2 9 – 14 = 4 OK

(iii) When t=–1.5, qd = 40 – 4p

qs = 2(p + 1.5) – 8 qs = 2p – 5

For market clearing, let qd = qs = q

40 – 4p = 2p – 5

45 = 6p

p = 45/6

p = 7.5

From demand equation, q = 40 – 4 7.5

q = 40 – 30

q = 10

Check in supply equation 2 7.5 – 5 = 10 OK

In order to show the graphical solution, note that economists’ graphs of demand and supply
curves are constructed differently to the normal mathematician’s graphs of the relationship
between two variables, y and x.

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 y read p read
anti-clockwise clockwise

y=1 y=3 2x qd=40 4p

p=6

x=1 x q=16 q

qs =2p 8

8 (8,8)

qd=40 4p

8 q

p qs =2p 14
Effect of tax
qs =2p 8 of £3 per unit
9
8 (8,8)

qd=40 4p

4 8 q
 p

qs =2p 8 Effect of a subsidy

of £1.50 per unit
(8,8)
qs =2p 5
8
7.5

qd=40 4p

8 10 q

1.2.4 Quadratic equations

Quadratic equations are equations in one variable (x), which take the form:

ax2+bx+c = 0 , where a, b, c are constants (b or c, but not a, could be equal to zero)

Normally there are two solutions for x (but in some cases there can be one solution or no
solutions).

Two methods for solving are:-

(a) Factorisation. This is easy if you can spot how to do it, but sometimes you can’t! Also,
the method of factorisation will not help identify a case for which there is
no solution.

(b) Formula method. This takes longer and can be tedious, but it is guaranteed to work if you do
it right, and it will always identify cases for which there is no solution.

(a) Method of factorisation

Rewrite the equation as the product of two factors:

ax2+bx+c = (mx+p)(nx+q) = 0 where mn = a

mq+np = b
pq = c

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Then, if ax2+bx+c = 0, either mx+p = 0 x = –p/m
or nx+q = 0 x = –q/n

These expressions give the two solutions. The two factors (i.e. the numerical values of m, n
and p) have to be determined by trial and error.

If it helps, the original equation can be ‘multiplied or divided through’ by any number to simplify
the factorisation.

Examples

Solve the following for x:

(i) x2+4x+3 = 0 (vi) x2+6x+9 = 0

(ii) x2–5x+4 = 0 (vii) 2x2–x–3 = 0
(iii) x2+2x–8 = 0 (viii) 6x2+x–12 = 0
(iv) 2x2+2x–40 = 0 (ix) x2+8x+4 = 0
(v) x2–9 = 0 (x) x2–2x+7 = 0

Solutions

(i) x2+4x+3 = 0 (x+3)(x+1) = 0 x = –3 or x = –1

(ii) x2–5x+4 = 0 (x–4)(x–1) = 0 x = 4 or x = 1

(iii) x2+2x–8 = 0 (x+4)(x–2) = 0 x = –4 or x = 2

(iv) 2x2+2x–40 = 0 x2+x–20 = 0 (x+5)(x–4)=0 x = –5 or x = 4

(v) x2–9 = 0 (x+3)(x–3) = 0 x = –3 or x = 3 [(a2–b2) = (a+b)(a–b)]

(vi) x2+6x+9 = 0 (x+3)(x+3) = 0 x = –3 [only one solution]

(vii) 2x2–x–3 = 0 (2x–3)(x+1) = 0 x = 3/2 or x = –1

(viii) 6x2+x–12 = 0 (2x+3)(3x–4) = 0 x = –3/2 or x = 4/3

(ix) x2+8x+4 = 0 There is no obvious factorisation which will solve this. In fact, there is a
solution, but the formula method is needed to find it (see below).

(x) x2–2x+7 = 0 Again, there is no obvious factorisation. In this case, application of the
formula method will show that there is no solution (see below).

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(b) Formula method

For any quadratic equation of the form:

ax2+bx+c = 0

the solution can be obtained by substituting the numerical values of the coefficients a, b and c
into the following formula:

b b2 4ac
x
2a

A solution exists only if b2–4ac 0, because the square root of a negative number is undefined.

Examples

Solve the following for x:

(i) x2+4x+3 = 0
(ii) x2–5x+4 = 0
(v) x2–9 = 0
(ix) x2+8x+4 = 0
(x) x2–2x+7 = 0

Solutions

(i) x2+4x+3 = 0 a = 1, b = 4, c = 3

4 42 4 1 3 4 16 12 4 4 4 2
x = = =
2 1 2 2 2

x = –6/2 or x = –2/2
x = –3 or x = –1

(ii) x2–5x+4 = 0 a = 1, b = –5, c = 4

5 52 4 1 4 5 25 16 5 9 5 3
x = = =
2 1 2 2 2

x = 8/2 or x = 2/2
x = 4 or x = 1

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(v) x2–9 = 0 a = 1, b = 0, c = –9

0 02 4 1 0 36 0 6
x
2 1 2 2

x = 3 or x = –3

(ix) x2+8x+4 = 0 a = 1, b = 8, c = 4

8 82 4 1 4 8 64 16 8 48 8 6.9282
x
2 1 2 2 2

x = –7.4641 or x = –0.5359

(x) x2–2x+7 = 0 a = 1, b = –2, c = 7

2 22 4 1 7 2 4 28 2 24
x
2 1 2 2

There is no solution because the square root of a negative number [ –24] is undefined.

Graphical representation of quadratic equations

Although not recommended as a method for solving quadratic equations, it is sometimes useful
to draw a sketch-diagram to get a visual representation of the solution. For the equation
ax2+bx+c = 0, we write:
y = ax2+bx+c

i.e. ‘let the expression ax2+bx+c equal y’

To obtain a graphical representation, the steps are as follows:

1. Find y when x = 0, and plot the point.

2. Find the values of x at which y = 0 [by solving the original quadratic equation] and plot
the points.

3. Join the plotted points with a curve.

Note : If a > 0, curve is ‘U-shaped’. If a < 0, curve is ‘dome-shaped’.

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Example

Produce a graphical representation of the solution to the following quadratic equation:

(ii) x2–5x+4 = 0

Solution

Let y = x2–5x+4

When x=0, y = 02 – 5 0 + 4 = 4

When y=0, x=4 or x=1 (solutions obtained above, by factorisation or by the formula method).

X (0,1) y=x2 5x 4

X X

(1,0) (4,0) x

1.2.5 Economics application: Demand, revenue, cost and profit equations for a monopolist

Consider a monopolist with a linear demand equation, q = 16–p, where q = quantity demanded
and p = price.

To obtain an expression for the monopolist’s total revenue, TR, in terms of the quantity of output
which it produces and sells, start by rearranging the demand equation:

q = 16 – p p = 16 – q

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By definition, total revenue = price quantity

TR = pq = (16–q) q = 16q–q2

So total revenue is a quadratic expression in q, of the form TR = aq2+bq+c,

with a = –1, b = 16 and c = 0.

To obtain an expression for average revenue (per unit sold), AR, we simply divide total revenue,
TR, by the number of units sold, q.

TR pq
AR p
q p

16 q q 2
Therefore in this case, AR = = 16 – q
q

AR = p = 16–q is simply a rearrangement of the original demand equation.

Suppose now the firm’s total cost, TC, in terms of the quantity of output which it produces is the
following:
TC = 4q+20

By definition profit, , is the difference between total revenue, TR, and total cost, TC.
Therefore we can write:
= TR – TC
= (16q – q2) – (4q + 20)
= –q2 + 12q – 20

Profit is a quadratic expression in q, where a = –1, b = 12 and c = –20.

To find the firm’s break-even levels of production, i.e. the values of q at which = 0, we
should solve the following quadratic equation for q:

–q2 + 12q – 20 = 0

Simplify by multiplying through by –1:

q2 – 12q + 20 = 0

(q – 2)(q – 10) = 0 [using the method of factorisation]

q = 2 and q = 10 are the break-even levels of output at which profit, = 0.

Alternatively, using the formula method with a =1, b = –12, c = 20:

19
 12 12 2 4 1 20 12 144 80 12 64 12 8
q
2 1 2 2 2

q = 2 or q = 10 as above.

Numerical evaluation of TR, AR, TC and

TR = 16q – q2 AR = 16 – q TC = 4q + 20 = –q2 + 12q – 20

q
0 0 - 20 –20
1 15 15 24 –9
2 28 14 28 0
3 39 13 32 7
4 48 12 36 12
5 55 11 40 15
6 60 10 44 16
7 63 9 48 15
8 64 8 52 12
9 63 7 56 7
10 60 6 60 0
11 55 5 64 –9

The shaded areas represent the break-even levels of production.

TR, TC,

TC=4q+20

TR=16q q2

2 10 q

= q2+12q 20
Example

A monopolist is faced with the demand equation, q = 100 – p, where q = quantity demanded
and p = price.

The total cost equation is: TC = q2 + 36q +120, where q = quantity supplied.

(i) By manipulating the demand equation, show that the total revenue equation is:

TR = 100q – q2

(ii) Write down an expression for the firm’s profit ( = TR–TC) in terms of q, and find the
firm’s two break-even levels of production, i.e. the values of q at which = 0.

Solution

(i) By definition, TR = price quantity

Rearranging the demand equation, q = 100 – p

p = 100 – q

TR = pq = (100 – q) q

TR = 100q – q2

(ii) By definition, = TR – TC

= (100q – q2) – (q2 + 36q + 120)

= –2q2 + 64q – 120

At break-even levels of production, =0

–2q2 + 64q – 120 = 0

q2 – 32q + 60 = 0 [dividing through by –2]

(q – 2)(q – 30) = 0

Therefore the break-even levels of production are q = 2 and q = 30.

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 TR, TC, TC=q 2+36q+120

TR=100q q2

2 30 q

= 2q2+64q 120

1.3 Mathematical functions

1.3.1 Definitions

It is very common in mathematics to write down an expression for one variable (y) in terms of
of another variable (x). y is the dependent variable, and x is the independent variable.

e.g: y = 7–2x; y = x3; y = x2+3x+2

In each case, we take x and transform it in some way to obtain y.

y = f(x) = 7–2x

x y

We can write y=f(x), ‘y is a function of x’, to denote that y is determined by doing

something to x.

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In any particular case, f(x) can be defined as the specific rule we are applying.

For example ...

If y = f(x) = 7–2x, then f(x) means ‘multiply x by 2, then subtract the result from 7’.
If y = f(x) = x3, then f(x) means ‘multiply x by x by x’.

1.3.2 Mathematical functions: some general points

1. We don’t have to use f(x) to denote a function: any letter will do.
e.g. y = g(x); y = h(x); y = (x)

2. Any function of the form y = f(x) = mx+c is described as a linear function of x

(including the case when c = 0).

Any function of the form y = f(x) = ax2+bx+c is described as a quadratic function of x

(including the case when b and/or c = 0).

3. It is possible to add, subtract, multiply or divide two functions, f(x) and g(x)

e.g. if f(x) = 7 – 2x and g(x) = 1 + 3x

f(x) + g(x) = 8 + 3x f(x) g(x) = 7 + 19x – 6x2

f (x) 7 2x
f(x) – g(x) = 6 – 5x
g(x) 1 3x

4. It is possible to define ‘functions of functions’. f{g(x)} means ‘do ‘g’ to x, then do‘f ’ to
the result’.

e.g. if f(x) = 7 – 2x and g(x) = 1 + 3x

f{g(x)} = 7 – 2(1+3x)

f{g(x)} = 5 – 6x

5. It is possible to define functions of more than one variable.

e.g. z = f(x,y) = x2 + 3xy – 2y2

means ‘take x and y, and do ‘f’ to them in order to obtain z’.

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6. For some (but not all) functions y = f(x), it is possible to define the inverse function:

x = f –1(y)

The inverse function describes what to do if, having started with x and used f(x) to get y,
we now want to reverse the process, and get back from y to x.

y = f(x)

x y

x = f–1(y)

For example ... y = f(x) = 7 – 2x

2x = 7 – y

7 y
x
2 2

7 y
The inverse function of y = f(x) = 7 – 2x is x ( y)
2 2

y = f(x) = 7–2x

x y

7 y
x = f–1(y) =
2 2

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1.3.3 The exponential function

One important type of mathematical function defines y in terms of x by raising some fixed
number to the power of x.

For example, y = f(x) = 2x ; y = g(x) = 3x etc.

In mathematics there is one special number which has all sorts of powerful and surprising
‘magic’ properties. The number is:

e = 2.718281828459......

e is used to define a mathematical function of the type described above, which is known as the
exponential function.

y = exp(x) = ex = 2.71828x (quoting e to 5 decimal places)

The function exp(x) means ‘raise 2.71828... to the power of x in order to get y’.

y = exp(x) = ex = 2.71828x

x y

Some illustrative figures for the evaluation of the function y = exp(x) = ex are shown below,
along with the other functions y = f(x) = 2x and y = g(x) = 3x.

x y = f(x) = 2x y = exp(x) = ex y = g(x) = 3x

–2 1/4 0.13534 1/9
–1 1/2 0.36788 1/3
0 1 1 1
1 2 2.71828 3
2 4 7.38906 9
3 8 20.08554 27

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 y=exp(x)=e x=2.71828x
y

20.08554

7.38906

2.71828
1
0.36788
0.13534
2 1 0 1 2 3 x
which looks quite

x2 x3 x4 x5
ex 1 x ..
2! 3! 4! 5!

where 2! or ‘two factorial’ is 2 1

3! or ‘three factorial’ is 3 2 1
4! or ‘four factorial’ is 4 3 2 1 etc.

and by definition 1! = 1
and 0! = 1 [note 0! 0 as you might have expected]

We can show that the formula ‘works’ for illustrative values of x:

0 02 03
e 1 0 .. 1 OK
2! 3!

12 13 14 15 1 1 1 1
e1 1 1 .. 1 1 .. =2.71828 OK
2! 3! 4! 5! 2 6 24 120

2 22 23 24 25 4 8 16 32
e 1 2 .. 1 2 .. 7.38906 OK
2! 3! 4! 5! 2 6 24 120

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Rules for manipulating the exponential function

Rules for manipulating the exponential function are just the same as the rules used for any
other ‘power’ expressions (see section 1.1.6).

1
1. e–x =
ex

2. ex ey = ex + y

3. ex ey = ex – y

4. (ex)y = ex y

The exponential function is used in economics and finance for specifying the time path of
variables that tend to grow continuously over time. For example ...

1. Specifying equations for the Gross Domestic Product of an economy experiencing

continuous economic growth;

2. Specifying equations for the cumulative value of a sum of money placed on deposit,
which earns interest credited continuously over time.

1.3.4 The natural logarithm function

The exponential function takes values of x and converts them into y, using the formula
y = 2.71828x (or y = ex). The obvious next question is how to define the inverse of this
function, i.e. how do we go from ‘y’ back to ‘x’ again?

The natural logarithm function is the inverse of the exponential function.

loge(y) or ln(y) is the natural logarithm of y, also referred to as the ‘logarithm to base e of y’.

loge(y) is defined to be the number x, such that ex = y.

y = exp(x) = ex = 2.71828x

x y
x = loge(y) = ln(y)

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The following table illustrates the relationship between y=ex and x=loge(y).

x y = ex x = loge(y)
–2 0.13534 loge(0.13534) = –2
–1 0.36788 loge(0.36788) = –1
0 1 loge(1) = 1
1 2.71828 loge(2.71828) = 1
2 7.38906 loge(7.38906) = 2
3 20.08554 loge(20.08554) = 3
4 54.59815 loge(54.59815) = 4

Other examples: loge(2) = 0.69315 [because e0.69315 = 2]

loge(3) = 1.09861 [because e1.09861 = 3]

x
x=loge(y)= ln(y)
3
2
1
0 1
2.71828 7.38906 20.08554 y
1
2

In practice, the natural logarithm function can be written in the usual format of y = loge(x) = ln(x)
with y as the dependent variable and x as the independent variable.

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1.3.5 Other logarithmic functions

The natural logarithm of y is also known as ‘the logarithm to base e of y’ because it is

the inverse of the exponential function y = ex.

However, we could also define an inverse function of this kind for any function of the form
y = bx .

(a) the logarithm to base 2 of y is the number x such that 2x = y

log2(1/2) = –1 because 2–1 = 1/2

log2(1) = 0 because 20 = 1
log2(2) = 1 because 21 = 2
log2(4) = 2 because 22 = 4
log2(8) = 3 because 23 = 8 and so on.

(b) the logarithm to base 10 of y is the number x such that 10x = y

log10(1/10) = –1 because 10–1 = 1/10

log10(1) = 0 because 100 = 1
log10(10) = 1 because 101 = 10
log10(100) = 2 because 102 = 100
log10(1000) = 3 because 103 = 1000 and so on.

Rules for manipulating logarithms (of any base)

1. logb(xy) = logb(x) + logb(y)

2. logb(x y) = logb(x) – logb(y)

3. logb(xm) = m logb(x)

4. logb(x) is undefined for x 0 [although sometimes it is said that logb(0) = – ]

5. logb(1) = 0

6. logb(b) = 1

7. logb(bx) = x

8. blogb(y) = y

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