Paper XI

Business Mathematics

PROJECT
ON

Applications of Matrices to
Business and Economics

Made By:
Akash Gupta

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 Contents

Topic Page No.

• Acknowledgements 2

• Introduction 4

• Application of Matrix Addition and

Subtraction 6

8
• Application of Matrix Multiplication
13
• Application of System of Linear Equations
18
• Leontief’s Input-Output Model
25
• Bibliography

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 Applications of Matrices to
Business and Economics

What is a Matrix?

A matrix is a two-dimensional arrangement of numbers in rows and columns enclosed by

a pair of square brackets ([ ]), in the form shown below.

 a11 a12  a1n 

a a22  a2 n 
 21
    
 
am1 am 2  amn 

The above figure shows an m × n matrix of m rows and n columns.

Matrices are used to describe linear equations, keep track of the coefficients of linear
transformations and to record data that depend on multiple parameters. They can be
added, multiplied, and decomposed in various ways, which also makes them a key
concept in the field of linear algebra.

The subject of matrices has been researched and expanded by the works of many
mathematicians, who have found numerous applications of matrices in various disciplines
such as Economics, Engineering, Statistics and various other sciences.

In this project, the following applications to matrices will be discussed:

• Applications of Matrix Addition and Subtraction

• Applications of Multiplication of Matrices
• Applications of System of Linear Equations
• Leontief Input-Output Model

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But first, let’s discuss how various situations in business and economics can be
represented using matrices. This can be done using the following examples.

1. Annual productions of two branches selling three types of items may be

represented as follows:

Branch Item A Item B Item C

I
II  2000 2876 2314
 7542 3214 2969

2. Number of staff in the office can be represented as follows:

 2 Peon
 4 Clerk
 
 3 Typist
  Head Clerk
1

1
Office Superintendent

3. The unit cost of transportation of an item from each of the three factories to each
of the four warehouses can be represented as follows:

Warehouse
Factory W1 W2 W3 W4

I
13 12 17 14 
II 22 26 11 19 
III  
16 15 18 11 

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Applications of Matrix Addition and Subtraction

The applications of addition and subtraction of matrices can be illustrated through the
following examples:

Illustration 1 - The quarterly sales of Jute, Cotton and Yarn for the year 2002 and 2003
are given below.
Year 2002
QI Q2 Q3 Q4
Jute 20 25 22 20
10 20 18 10 
A = Cotton
 
Yarn
15 20 15 15 

Year 2003
Jute 10 15 20 20
B=
Cotton  5 20 18 10 
Yarn
 
 8 30 15 10 

Find the total quarterly sales of Jute, Cotton and Yarn for the two years.

Solution –

The total sales of Jute, Cotton and Yarn will be obtained as under

20 25 22 20 10 15 20 20

A+ B =
10 20 18 10 
+
 5 20 18 10 
   
15 20 15 15   8 30 15 10 

30 40 42 40
15 40 33 40
=
 
23 50 30 25

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Illustration 2 – X Ltd has the following sales position of its products A and B at its two
centers P and Q at the end of the year
P Q

A B50 45
Y=
B 60 70
 
If the sales for the first three months is given as
P Q

A B30 15 
Q=
B 20 20
 
Find the sales position for the last nine months.

Solution –

Given are the sales positions for the whole year (Y) and for the first three months (Q).

Hence, sales position for the remaining nine months –

50 45 30 15 

Y–Q = 60 70 - 20 20
   
P Q
B
A 20 30
= B 40 50
 

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Applications of Matrix Multiplication

It is important to note that two matrices can be multiplied if and only if the number of
columns of the first matrix equals the number of rows of the second. The resultant matrix
will have the number of rows equal to the first matrix and number of columns equal to
that of the second matrix.

In other words,
• A matrix of the order [a x b] can only be multiplied with a matrix of order [b x c]
• The resultant matrix will be of the order [a x c]

The application of multiplication of matrices can be illustrated through the following

examples.

Illustration 3 – Ram, Shyam and Mohan purchased biscuits of different brands P, Q and
R. Ram purchased 10 packets of P, 7 packets of Q and 3 packets of R. Shyam purchased 4
packets of P, 8 packets of Q and 10 packets of R. Mohan purchased 4 packets of P, 7
packets of Q and 8 packets of R. If brand P costs Rs 4, Q costs Rs 5 and R costs Rs 6
each, then using matrix operation, find the amount of money spent by these persons
individually.

Solution –
Let Q be the matrix denoting the quantity of each brand of biscuit bought by P, Q and R
and let C be the matrix showing the cost of each brand of biscuit.
P Q R
Ram 10 7 3 
 4 8 10
Q = Shyam  
Mohan  4 7 8  3× 3

P  4
5 
C= Q  
R 6 3×1

Since number of columns of first matrix should be equal to the number of rows of the
second matrix for multiplication to be possible, the above matrices shall be multiplied in
the following order.

10 7 3  4
   
Q × C =  4 8 10 × 5
 4 7 8  6

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 10 × 4 + 7 × 5 + 3× 6
 
=  4 × 4 + 8× 5 + 10 × 6
 4 × 4 + 7 × 5 + 3× 6 

40 + 35 + 18  93 
   
= 16 + 40 + 16  = 116
16 + 35 + 48  99 

Amount spent by Ram, Shyam and Mohan is Rs 99, Rs 116 and Rs 99 respectively.

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Illustration 4- A firm produces three products A, B and C requiring the mix of three
materials P, Q and R. The requirement (per unit) of each product for each material is as
follows.
P Q R
A 2 3 1 
4 2 5
M =B
 
C 2 4 2

Using matrix notations, find

(i). The total requirement of each material if the firm produces 100 units of each
product.
(ii). The per unit cost of production of each product if the per unit cost of materials
P, Q and R is Rs 5, Rs 10 and Rs 5 respectively.
(iii). The total cost of production if the firm produces 200 units of each product.

Solution –

(i). The total requirement of each material if the firm produces 100 units of each
product can be calculated using the matrix multiplication given below.

P Q R

A B 2 3 1  A
C P Q R
4 2 5 B
[100 100 100]   = [ 800 900 800]
2 4 2C

(ii). Let the per unit cost of materials P, Q and R be represented by the 3×1 matrix
as under
P 5
10
C =Q  
R  5 
With the help of matrix multiplication, the per unit cost of production of each
product would be calculated as under

2 3 1   5 
   
AC = 4 2 5 10
 
2 4 2  5 

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 A 45
65
=B
 
C 60

(iii). The total cost of production if the firm produces 200 units of each product
would be given as

45
[ 200 200 200] 65 = [ 34,000]
60

Hence, the total cost of production will be Rs. 34,000.

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Illustration 5 - Mr. X went to a market to purchase 3 kg of sugar, 10 kg of wheat and 1
kg of salt. In a shop near to Mr. X’s residence, these commodities are priced at Rs 20, Rs
10 and Rs 8 per kg whereas in the local market these commodities are priced at Rs 15, Rs
8 and Rs 6 per kg respectively. If the cost of traveling to local market is Rs 25, find the
net savings of Mr. X, using matrix multiplication method.

Solution –
Let matrices Q and P represent quantity and price. Then,
Sugar Wheat Salt

Quantity Matrix =Q [
= 3 10 1 ]
Shop Local Market

Sugar 20 15

10 8 
Price Matrix =P =Wheat  
Salt
 8 6 

20 15
 
Therefore, Total Price = Q × P= [ 3 10 1] 10 8  = [168 131]
 8 6 

Now,
Cost of purchasing from shop = Rs 168 and
Cost of purchasing from local market= Rs 131 + Rs 25 (Cost of travel) = Rs 156

Hence, net savings to Mr. X from purchasing through Local Market

= 168 – 156 = Rs 12

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Applications of System of Linear Equations

The following examples can be used to illustrate the common methods of solving systems
of linear equations that result from applied business and economic problems.

Illustration 6 – Mr. X invested a par of his investment in 10% bond A and a part in 15%
bond B. His interest income during the first year is Rs 4,000. If he invests 20% more in
10% bond A and 10 % more in 15% bond B, his income during the second year increases
by Rs 500. Find his initial investment and the new investment in bonds A and B using
matrix method.

Solution –
Let initial investment be x in 10% bond A and y in 15% bond B. Then, according to given
information, we have

0.10 x + 0.15 y = 4,000 or 2 x + 3 y = 80,000

0.12 x + 0.165 y = 4,500 or 8 x + 11 y = 3,00,000

Expressing the above equations in matrix form, we obtain

2 3   x   80,000 
8 11  y  = 3,00,000
    
A X B
This can be written in the form AX = B or X = A-1B

Since | A | = -2 ≠ 0, A-1 exists and the solution can be given by:

X = A-1B
1  11 − 3  80,000  1 − 20,000
= −     =− 
2 − 8 2  3,00,000 2 − 40,000
10,000 
= 20,000
 

Hence x = Rs 10,000, y = Rs 20,000, and new investments would be Rs 12,000 and Rs

22,000 respectively.

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Illustration 7 – An automobile company uses three types of steel s1, s2 and s3 for
producing three types of cars c1, c2 and c3. The steel requirement (in tons) for each type of
car is given below:

Cars
c1 c2 c3

s1 2 3 4

Steel s2 1 1 2

s3 3 2 1

Determine the number of cars of each type which can be produced using 29, 13 and 16
tons of steel of the three types respectively.

Solution –
Let x, y and z denote the number of cars that can be produced of each type. Then we have

2 x + 3 y + 4 z = 29
x + y + 2 z = 13
3 x + 2 y + z = 16

The above information can be represented using the matrix method, as under.

2 3 4  x  29
1 1 2  y  = 13 
    
3 2 1   z  16 

The above equation can be solved using Gauss Jordan elimination method.
By applying the operation R1 ↔ R2 the given system is equivalent to

1 1 2  x  13 
2 3 4  y  = 29
    
3 2 1   z  16 

Now applying R2 → R2 – 2R1 and R3 → R3 – 3R1, the above system is equivalent to

1 1 2   x   13 
0 1 0   y  =  3 

0 − 1 − 5  z  − 23
Applying R3 → R3 + R2 the above system is equivalent to

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 1 1 2   x   13 
0 1 0   y  =  3 
    
0 0 − 5  z  − 20

x + y + 2 z = 13 −(1)
y=3 −(2)
− 5 z = −20 −(3)

Therefore, z = 4. Substituting y = 3 and z = 4 in (1), we get x = 2. Hence the solution is

x = 2, y = 3 and z = 4

Illustration 8 – A company produces three products everyday. Their total production on a

certain day is 45 tons. It is found that the production of the third product exceeds the

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production of the first product by 8 tons while the total combined production of the first
and third product is twice that of the second product. Determine the production level of
each product using Cramer’s rule.

Solution –
Let the production level of the three products be x, y and z respectively. Therefore, we
will have the following equations

x + y + z = 45 −(1)
z = x+8
i.e. − x + 0 y + z = 8 −(2)
x + z = 2y
i.e. x − 2y + z = 0 −(3)

Therefore, we have, using (1), (2) and (3)

1 1 1  x  45
− 1 0 1  y  =  8 
    
 1 − 2 1  z   0 
Which gives us

1 1 1
∆ = −1 0 1 = 6
1 −2 1
Since ∆ ≠ 0, there is a unique solution.

45 1 1
∆1 = 8 0 1 = 66
0 −2 1

1 45 1
∆ 2 = − 1 8 1 = 90
1 0 1

1 1 45
∆3 = −1 0 8 = 114
1 −2 0

Therefore,

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 66
x= = 11
6
90
y= = 15
6
114
z= = 19
6
Hence, the production levels of the products are as follows:
First product - 11 tons
Second product - 15 tons
Third product - 19 tons

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The Leontief Input-Output Model

The Leontief Input-Output Model discusses the interdependence of industries on each

other. Based on the assumption that each industry in the economy has two types of
demands: external demand (from outside the system) and internal demand (demand
placed on one industry by another in the same system), the Leontief model represents the
economy as a system of linear equations. The Leontief model was invented in the 30’s by
Professor Wassily Leontief who was awarded the Nobel Prize in Economics in 1973 for
his effort.

There are two types of Leontief models, i.e. Closed and Open.

Closed Input-Output Model

Consider an economy consisting of n interdependent industries (or sectors) S1,…,Sn. That
means that each industry consumes some of the goods produced by the other industries,
including itself (for example, a power-generating plant uses some of its own power for
production). We say that such an economy is closed if it satisfies its own needs; that is,
no goods leave or enter the system. Let mij be the number of units produced by industry Si
and necessary to produce one unit of industry Sj. If pk is the production level of industry
Sk, then mij pj represents the number of units produced by industry Si and consumed by
industry Sj . Then the total number of units produced by industry Si is given by:

p1mi1+p2mi2+…+pnmin.

In order to have a balanced economy, the total production of each industry must be equal
to its total consumption. This gives the linear system:

m11 p1 + m12 p2 +  + m1n pn = p1

m21 p1 + m22 p 2 +  + m2 n p n = p2
    
mn1 p1 + mn 2 p2 +  + mnn p n = pn

If

 m11 m12  m1n 

m m22  m2 n 
A =  21
    
 
 mn1 mn 2  mnn 

then the above system can be written as AP = P, where

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  p1 
p 
P =  2
 
 
 pn 

A is called the input-output matrix.

We are then looking for a vector P satisfying AP = P and with non-negative components,
at least one of which is positive.

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Illustration 9 - Suppose that the economy of a certain region depends on three industries:
service, electricity and oil production. Monitoring the operations of these three industries
over a period of one year, we were able to come up with the following observations:

1. To produce 1 unit worth of service, the service industry must consume 0.3 units
of its own production, 0.3 units of electricity and 0.3 units of oil to run its
operations.

2. To produce 1 unit of electricity, the power-generating plant must buy 0.4 units of
service, 0.1 units of its own production, and 0.5 units of oil.

3. Finally, the oil production company requires 0.3 units of service, 0.6 units of
electricity and 0.2 units of its own production to produce 1 unit of oil.

Find the production level of each of these industries in order to satisfy the external and
the internal demands assuming that the above model is closed, that is, no goods leave or
enter the system.

Solution

Consider the following variables:

1. p1= production level for the service industry

2. p2= production level for the power-generating plant (electricity)

3. p3= production level for the oil production company

Since the model is closed, the total consumption of each industry must equal its total
production. This gives the following linear system:

0.3 p1 + 0.3 p 2 + 0.3 p3 = p1

0.4 p1 + 0.1 p 2 + 0.5 p3 = p 2
0.3 p1 + 0.6 p2 + 0.2 p3 = p3

The input-output matrix is

0.3 0.3 0.3

A = 0.4 0.1 0.5
0.3 0.6 0.2

and the above system can be written as (A-I)P = 0. Note that this homogeneous system
has infinitely many solutions (and consequently a nontrivial solution) since each column

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in the coefficient matrix sums to 1. The augmented matrix of this homogeneous system
is

− 0.7 0.3 0.3 0

 0.4 − 0.9 0.5 0
 
 0.3 0.6 − 0.8 0

which can be reduced to

1 0 − 0.82 0
0 1 − 0.92 0
 
0 0 0 0

To solve the system, we let p3 = t (a parameter), then the general solution is

p1 = 0.82t
p 2 = 0.92t
p3 = t

and as we mentioned above, the values of the variables in this system must be
nonnegative in order for the model to make sense. In other words, t ≥ 0. Taking t=100
for example would give the solution

p1 = 82 units
p 2 = 92 units
p3 = 100 units

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Open Input-Output Model
The first Leontief model treats the case where no goods leave or enter the economy, but
in reality this does not happen very often. Usually, a certain economy has to satisfy an
outside demand, for example, from bodies like the government agencies. In this case, let
di be the demand from the ith outside industry, pi, and mij be as in the closed model above,
then

pi = mi1 p1 + mi 2 p 2 +  + min p n + d i

for each i. This gives the following linear system (written in a matrix form):

P = AP + d

where P and A are as above and

 d1 
d 
d =  2
 
 
d 3 

is the demand vector.

One way to solve this linear system is

P = AP + d
⇒ ( I − A) P = d
⇒ P = ( I − A) −1 d

Of course, we require here that the matrix I-A be invertible, which might not be
always the case. If, in addition, (I-A)-1 has nonnegative entries, then the components
of the vector P are nonnegative and therefore they are acceptable as solutions for this
model. We say in this case that the matrix A is productive.

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Illustration 10 - Consider an open economy with three industries: coal-mining operation,
electricity-generating plant and an auto-manufacturing plant. To produce Re 1 of coal, the
mining operation must purchase Re 0.1 of its own production, Rs 0.30 of electricity and
Re 0.1 worth of automobile for its transportation. To produce Re 1 of electricity, it takes
Rs 0.25 of coal, Rs 0.4 of electricity and Rs 0.15 of automobile. Finally, to produce Re 1
worth of automobile, the auto-manufacturing plant must purchase Rs 0.2 of coal, Rs 0.5
of electricity and consume Rs 0.1 of automobile. Assume also that during a period of one
week, the economy has an exterior demand of Rs 50,000 worth of coal, Rs 75,000 worth
of electricity, and Rs 1,25,000 worth of autos. Find the production level of each of the
three industries in that period of one week in order to exactly satisfy both the internal and
the external demands.

Solution

The input-output matrix of this economy is

 0.1 025 0.2

A = 0.3 0.4 0.5
 0.1 0.15 0.1

and the demand vector is

 50,000 
d =  75,000 
1,25,000

Now, using the equation

P = ( I − A) −1 d

where

 0.9 − 0.25 − 0.2

I − A = − 0.3 0.6 − 0.5
 − 0.1 − 0.15 0.9 

Using the Gauss Jordan elimination technique, we find that

1.464 0.803 0.771

( I − A) −1 = 1.007 2.488 1.606
0.330 0.503 1.464

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Which gives

1.464 0.803 0.771  50,000   229921.59

P = 1.007 2.488 1.606  75,000  = 437795.27 
0.330 0.503 1.464 1,25,000 237401.57 

So, the total output of the coal-mining operation must be Rs 229921.59, the total output
for the electricity-generating plant is Rs 437795.27 and the total output for the auto-
manufacturing plant is Rs 237401.57.

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 BIBLIOGRAPHY

1. ‘Business Mathematics’ by S. K. Singh and J. K. Singh, Brijwasi Book

Distributors and Publishers

2. ‘Mathematics for Business Studies’ by Dr. J. K. Thukral, Mayur

Paperbacks

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