Managerial Economics: How to Satisfy the Customer
Common Pitfalls in Capital Budgeting
The Economic Relationship between Quantity Sold and Prices

How to Use Functions to Describe Economic Relationships

Graphs easily describe the economic relationship between two variables; for example, a supply curve describes the relationship between price and quantity supplied. Economic relationships are also expressed as mathematical functions.

A function describes the relationship that exists between two or more variables. For example,

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is a general statement that indicates the variable q is a function of the variable p. A specific functional form describes the exact relationship that exists between those variables; the function

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indicates that for every one unit increase in p, q’s value increases by 5 units, or that q is five times greater than p. By identifying the exact relationship between variables, you’ve turned a general equation into a specific function.

Two variable functions are easily expressed with either an equation or a graph. However, for functional relationships involving three or more variables, you’ll find that equations are not only simpler than graphs, but also often a necessity. A functional relationship among three variables is

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This equation indicates that U is a function “g” of the variables x and y. In such functions, U is called the dependent variable because its value depends upon the values of x and y. The variables x and y are called independent variables because their values are given and determine U’s value.

Business decision-making requires knowing the specific relationship among variables. The equation

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indicates that a one-unit increase in the variable x causes a two-unit (2x) increase in U, while a one-unit increase in variable y causes a three-unit (3y) increase in U.

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