The Use of Mathematics in Economics

Written by catherine capozzi
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The Use of Mathematics in Economics
Economists use math in several ways. (keypad image by vashistha pathak from Fotolia.com)

Though economics is technically a social science, students pursuing this field receive a firm foundation in math. Determining how resources are allocated requires a mathematical understanding of how to calculate those resources, the cost of distribution and assessing other quantitative measures. Thus, the field of economics is riddled with mathematical equations and applications.

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Types of Math

The types of math used in economics are primarily algebra, calculus and statistics. Algebra is used to make computations such as total cost and total revenue. Calculus is used to find the derivatives of utility curves, profit maximisation curves and growth models. Statistics allows economists to make forecasts and determine the probability of an occurrence. Therefore, many students take at least a year of calculus, statistics and forecasting courses called econometrics in pursuit of a bachelor’s degree in economics.

Math in Decision-Making

Economists are hired to determine the risk or probable outcome of an event. For example, hospitals want to know what the risks are of dying from an operation and if the benefits are worth it. The National Institutes of Health explains the relationship between litigation pressure and rates of C-sections and VBACs. Because of the increased risk of litigation, some states ban vaginal birth after C-section, or VBACs. This policy was likely made after an economist assessed what the statistical risk was to the mother and weighed it against the cost of a malpractice lawsuit based on this number. Thus, the decision is an economic one. Economists working for pharmaceutical companies make similar math computations to assess if the risk of taking a drug outweighs its potential benefits.

Benefits

Economists use their math skills to find ways to save money, even in counter-intuitive ways. Using a profit maximisation graph, economists might advise a venue to sell only 75 per cent of the available tickets instead of 100 per cent to make the most money. If the company lowers the price of tickets to attract additional concertgoers and fill the stadium to capacity, it might make less money than selling only 75 per cent of the tickets at a much higher price.

Economists also use math to determine a business’ long-term success, even when some factors are unpredictable. For instance, an economist working for an airline uses statistical forecasting to determine the price of fuel two months from now. The company uses this data to lock in fuel prices, or to hedge fuel. Bijan Vasigh, author of the book “Introduction to Air Transport Economics” explains that Southwest gained a financial advantage over other carriers due to its fuel hedging strategy.

Limitations

Economists perform mathematical calculations with imperfect information. Their economic models are rendered useless in times of natural disasters, union strikes or any other catastrophic event. Additionally, math can seldom help economists predict irrational human behaviour. A fundamental assumption of economics is that humans act rationally. However, humans often make irrational decisions based on fear or love. These two factors cannot be accounted for in an economic model.

Potential

Economists are revising the way calculations are performed to account for intangible effects like pollution. Economists currently do not calculate the effects of rainforest depletion or water pollution into things like profit maximisation or business costs, for example. Quentin Grafton and Wiktor Adamowicz, authors of “The Economics of the Environment and Natural Resources,” explain that economic standards such as GDP are inadequate when measuring the health of the economy. A new field is emerging called “natural resource accounting,” which attempts to attribute a dollar value to these costs.

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