To studies economics without mathematics, it’s possible?

- Some mathematical models usings to solve practical economics problems –

Did you now:

 In 1968, Sveriges Riksbank (Sweden's central bank) established The Sveriges

Riksbank Prize in Economic Sciences in Memory of Alfred Nobel;
 The first Prize in Economic Sciences was awarded to Ragnar Frisch (Norway –
economics) and Jan Tinbergen (Netherlands – Physics) in 1969;
 Has been awarded 44 times (years) to 71 Laureates between 1969 and 2012, and 30 of
them have a first degree studies in Mathematics (math-physics, engineering, s.o.) and
just 29 in Economics (business, commerce, political economy, s.o.);
 And from those 71 Laureates, 47 have M.Sc. or PhD in bouth areas: Mathematics and
Economics.
 There is NO Nobel Prizes in Mathematics fields !!!
1
 In economics theory and its calculus and applications, we use a lot of mathematical
domains/theories/alghoritms. I present bellow just a few example:

 Linear (vectorial) algebric theory;

 Operational researches;
 Real analyses of n-variables functions;
 Games theory;
 Chaos theory;
 Probability and statistics;
 Differential equations;
 Graphs theory, s.o.

I will present to you (in a very short way) three very known mathematicals tehnics to solved
same common economical problems. For the first two, we will using algebric tehnique/calculus,
and for the last one, we will apply the partial derivatives of an n-variables functions.

2
 The Simplex method to solve LPP (Linear Programing Problems)

 The Simplex algorithm (or Simplex method) it´s the moust popular algorithm to solve
LPP. The algorithm was developed by George Bernard Dantzig (November 8, 1914 –
May 13, 2005) and was listed it by the journal Computing in Science and Engineering
as one of the top 10 algorithms of the 20-th century.
 The Simplex method is an algebraic procedure for solving systems of linear equations
where an objective (linear) function can be improved. In mathematics terms we say:
˝ find the optimal (finite) solution for an LPP, if those solutions exists˝ .
 Is it an iterative process, which identifies a feasible starting solution. The procedure
then searches to see if there exists a ´better´ solution (if the value of the objective
function can be improved). The each successive solutions requires solving a system of
linear equations. The search (of new better solutions) continues until no further
improvement is possible for the objective function.
 An important characteristic of the Simplex method is that it guarantees that:

3
 (1) each successive solution will be feasible with the (restrictions) of LPP;
(2) the objective function will be at least as good as the value in the previous
section.

An economic LPP has the mathematical general form (model):

1  max/ min  f ( x1 , x2 , ..... , xk )  c1 x1  c2 x2  ......  ck xk

 a11 x1  a12 x2  .....  a1k xk  b1
 a x  a x  .....  a x  b
 2   21 1 22 2 2k k  2

 ............................................
am1 x1  am 2 x2  .....  amk xk  bm
 3 x1 , x2 ,....., xk  0

Usually, the number of solutions of system (2) which satiesfied conditions (3) are infinite    .
m

We must to find the optimal solutions (the solution of (2)+(3) which verified (1)) from this
infinity!!!
4
 The set of (infinity) the solutions for (2) or (2)+(3) is geometrically an ˝convex polytop˝,
which means an convex set of points in the n-dimensional space Rn or an ˝n-dimensional
convex polyhedron˝ (see Figure 1)

Figure 1 (number of variables k=3)

It’s impossible to solve the LPP in general form (1) - (3), with Simplex alghoritm. To do that,
we must to write the LPP in an special form, called “the standard form”. Always is possibles (in
few and very simpliest steps) to obtein from general form the next standard form:

5
  I   max/ min  f ( x1 , x2 , ..... , xk )  c1 x1  c2 x2  ....  ck xk  ck 1 xk 1....  cn xn
 a11 x1  a12 x2  .....  a1n xn  b1 
  mn
 a21 x1  a22 x2  .....  a2 n xn  b2 
 II   ; with conditions : rank A  rank  aij i 1,m  m
 ............................................  j 1, n
am1 x1  am 2 x2  .....  amn xn  bm  bi  0

 III  x1 , x2 ,....., xk , xk 1 ,...., xn  0

Dantzig proved (in 1940’s):

(1) The optimal solution (if exist) of standard LPP form (I) – (III), it’s also optimal solution
for general (initial) LPP form (1) – (3);
m
(2) The optimal solution of standard LPP form (I) – (III), it’s one of the Cn basic admissible
solutions of linear system (II), which satiesfied conditions (III).

(!!!) He reduced the infinity number    of solutions at (2)+(3), to a finite number( Cn ) of

m m

solution at (II)+(III).

6
 (3) To find the optimal solution will be started with 1 (one) basic admissible solutions at
linear system (II) and we “jump” to a new ‘better’ one, and in an finit number of steps (in
99% of particular economics LPP solved with Simplex alghoritm, the number of steps it’s
smaller then m+n). See Figure 2 and 3:

Figure 2 (n=3) Figure 3 (n=3)

Note:
 If the linear system (II) has 40 equations  m  10  and 40 variables  n  40  the total number of basic

solutions it is: C40  847.660.528 (but we don’t have a INFINITY). Starting with 1 solution, in moust
10

m  n  10  40  50 steps we will find out the optimal solution (if exists!).

7
 In terms of algebraic calculus: 10 steps of Simplex = 1(one) basic solution of linear system (II)!!!
Which means it’s necessary to compute maximum 1+5 = 6 basic solutions and not all 847.660.558
solutions.
 But, how eazy we can determined the initial basic admissible solution of linear system (II)?

Economical problems which have LPP mathematical models:

1. Manufacturing – Resource Allocation

A company could makes „k” products: P1, P2,... Pj,...., Pk (Pj , j=1,k) from which must to
uses „m” materials: M1, M2,... Mi,...., Mm (Mi , i=1,m).
 For 1 (one) product Pj , the company uses aij quantity at material Mi ;
 For each materials Mi , the company has a supply of bi quantity;
 The profit on product Pj , it’s cj (HRK);
Find an ˝optimal˝ production plan.
If we note: x1 , x2 ,..., x j ,..., xk the number of the products P1, P2,... Pj,...., Pk which we will
produced, the mathematical model of the problem will be:
8
1  max  f ( x1 , x2 , ..... , xk )  c1 x1  c2 x2  ....  c j x j  ....  ck xk
 a11 x1  a12 x2  .....  a1k xk  b1
 a x  a x  .....  a x  b
 2   21 1 22 2 2k k 2
; with conditions : bi  0, i  1, k
 ............................................
am1 x1  am 2 x2  .....  amk xk  bm
 3 x1 , x2 ,....., xk  0

The standard form at the LPP will be:

 I   max  f ( x1 , x2 , ..... , xk )  c1 x1  c2 x2  ....  ck xk  0 xk 1....  0 xn
 a11 x1  a12 x2  .....  a1k xk  xk 1  b1 
a x  a x  .....  a x  x  b  mnk m

 II   21 1 22 2 2k k k 2 2
; which satiesfied : rank A  rank  aij i 1,m  m
 ............................................  j 1, n
 am1 x1  am 2 x2  .....  amk xk  xn  bm  bi  0

 III  x1 , x2 ,....., xk , xk 1 ,...., xn  0

where: xk 1 ,...., xn  0 are called slack (compensations) variables.

9
Example: An company produced 3 types of laptop computer bags (the regular, deluxe, and
VIP version): P1, P2, P3, and uses 5 types of resurces M1, M2, M3, M4, M5 (lether, zipers,
textile materials, capital, and hours of labor) in the quantities as you see bellow:

M1 M2 M3 M4 M5
(leather/m2) (zipers/pieces) (Textile/m2) (capital/Euro) (hours of labor/h)
P1 0.85 4 1.25 32 4
P2 1.10 6 1.30 38 6
P3 1.55 5 0.55 52 7

The company sells each of the three products with: 46 Euro, 55 Euro and 72 Euro: How many
of each type of bag should the company produce, in order to maximize their revenue, if they
have: 450 m2 of leather, 1.500 zipers, 355 m2 textile materials, 14.500 Euro initial capital and
760 labour hours available?

We note: x1 , x2 , x3 the number of each type of laptop bags wich will be produced.

10
The mathematical model of general (initial) LPP has the form:

(1) (max) f ( x1 , x 2 , x3 )  46 x1  55 x 2  72 x3
 0.85 x1  1.10 x 2  1.55 x3  450
 4 x  6 x  5 x  1.500
 1 2 3

(2) 1.25 x1  1.10 x 2  1.55 x3  355

 32 x  38 x  52 x  14.500
 1 2 3

 4 x1  6 x 2  7 x3  760
(3) x1 , x 2 , x3  0

And the standard LPP form (which can be solve with SIMPLEX alghoritm) is:
(1) (max) f ( x1 , x2 , x3 )  46 x1  55 x2  72 x3  0 x4  0 x5  0 x6  0 x7  0 x8
0.85 x1  1.10 x2  1.55 x3  x4  450
4 x  6 x  5 x  x  1.500
 1 2 3 5

(2) 1.25 x1  1.10 x2  1.55 x3  x6  355

32 x  38 x  52 x  x  14.500
 1 2 3 7

4 x1  6 x2  7 x3  x8  760
(3) x1 , x2 , x3 , x4 , ..., x8  0

11
 2. Transportation problems

 Linear programming is of ese not only in analyzing plans of investments, but also in the
fields of transportation and shipping. It is often used to plane routes (involving also graph
theory), determine locations of warehouses, and develop efficient procedures for getting
goods to people.
 A typical transportation problem, involves determining the least-cost scheme for delivering a
commodity stocked in a number of different warehouses to a number of different locations,
say retail stores.
 Of course, in (same) practical applications it is necessary to consider problems involving
dozen or even hundreds of warehouses, and possibly just as many or more delivery
locations (retail stores). For problems on such a grand scale, even SIMPLEX alghoritm
it’s ˝too slow˝!
 For this kind of transportation problems, the SIMPLEX method was been ‚improved’,
resulting a new alghoritm: Transport Problems solving Alghoritm (TPA).

12
 Economical problem:

 A transportation company must to carried out from the origins (warehouses) W1,W2 ,..,
Wi,...,Wm which conteins some commodities in quantities a1,a2,..,ai,...,am to the
destinations (retail stores) S1,S2,..,Sj,..,Sn which demands the quantities b1,b2,.., bj ,..,bm.
 The unitary cost to delivery un product from Wi to the Sj it is cij.
 Find an „optimal” transportation plan to delivery the commodities (minimal cost to
transport all products from the warehouses to the retail stores).

If, we note: xij - the quantity taked from warehouse Wi and transported to the store Sj, than all
the data could be showed in the table form such bellow:

13
 S1 S2 …....... Sj …......... Sn
c11 c12 c1j c1n
W1 ......... ……… a1
x11 x12 x1j x1n
c21 c22 c2j c2n
W2 …..... ……... a2
x21 x22 x2j x2n
       

ci1 ci2 cij cin

Wi …..... ............ ai
xi1 xi2 xij xin
      

cm1 cm2 cmj cmn

Wm ..…... ……… am
xm1 xm2 xmj xmn
b1 b2 ……. bi ……… bn

14
Mathematical model:
m n
(1) (min) f (x11, x12,..., xij ,..., xmn) c11x11 c12x12 ...cij xij ...cmnxmn  cij xij
i1 j1

 n
 (xij ) xi1  xi2 ... xij ... xin  ai i 1, n
 j1
(2) (linear system with "mn" inequations and "m n" variables)
m
( x ) x  x ... x ... x b j 1, m
 
i1
ij 1j 2j ij mj j

(3) xij 0 () i, j 1, n

Note: If,
m n

  a  b
i 1
i
j 1
j (the offer it’s greater or smaller then the demand), we called nonequilibrate TP (NeTP);

m n

  a  b
i 1
i
j 1
j (the offer it’s equal with the demand), we called equilibrate TP (ETP), and (2)

becomes an linear equations system. This problem could be solve, and has the form:

15
 m n
(1) (min) f (x11, x12,..., xij ,..., xmn)  c11x11 c12x12 ...cij xij ...cmnxmn  cij xij
i1 j1

 n
 (xij ) xi1  xi2 ... xij ... xin  ai i 1, n
 j1
(2) (linear system with "mn" equations and "m n" variables)
m
( x ) x  x ... x ... x b j 1, m
 
i1
ij 1j 2j ij mj j

(3) xij  0 () i, j 1, n

 Always, an NeTP could be transformed in an ETP by added a new (fictive) warehouse

(Wf) or new (fictive) retail store (Sf) with 0 (zero) transportations costs.
 The optimal solution(s) of NeTP it is obtein from optimal solution(s) of ETP attached, by
erased the new row or column which was attached;

16
Example:

S1 S2 S3 S4
3 1 5 2
W1 20
x11 x12 x1j x1n
6 4 1 3
W2 40
x21 x22 x2j x2n
2 1 3 1
W3 35
xi1 xi2 xij xin
15 10 25 20
3 4

Because, a
i 1
i  20  40  35  95 and b j 1
j  15  10  25  20  70 we have an NeTP, which become an ETP:

S1 S2 S3 S4 Sf
3 1 5 2 0
W1 20
x11 x12 X13 x14 x15
6 4 1 3 0
W2 40
x21 x22 x23 x24 x25
2 1 3 1 0
W3 35
x31 x32 x33 x34 x35
15 10 25 20 25
17