APPLICATION OF FUNCTIONS IN BUSINESS AND ECONOMICS ANALYSIS

Presented to the Faculty of the College of Science Bulacan State University, City of Malolos Bulacan

In Partial Fulfillment of the Requirements for the Degree Bachelor of Science in Mathematics Major in Business Application

By Moises Noe D. Frias Mary Jane V. Galman 2-A

2012

What is a function? And what is the purpose of it to a persons firm? These are some questions that the researchers answered as they studied about functions and its beyond. This research paper aims the application of functions and relevance of it in the world of business and economics. The first people to work with the functions did so through their mathematics and did not call these types of relationship by a specific name. The concept of a function as a relationship between two data sets with tables was first illustrated by the Babylonians. Later, Ptolemy, a Greek mathematician demonstrated his knowledge of functions through his work in trigonometry. Just like other mathematicians of the 17th century and earlier, Rene Descates, preferred the term function loosely to suggest a variety of mathematical relationships. Over time, the world took on a more and more specific meaning. In the late 17th century, writings between Gottfried Wilhelm Leibniz and Johann Bernoulli indicate a use of the term that corresponds to its modern meaning. In 1748, the term function took its final meaning when Leonhard Euler embodied the definition of it in his book Introductio in Analysin Infinitorum. He also proposes the mathematical notation that describes a function: y=f(x). The use of functions in actual practice varies greatly with the theoretical orientation of the analysts and economists. Through studying functions, the people will able to know how functions are relevance to the field of business and economics. It aims to prove that functions are important in every persons firm and may play a role in solving a wide variety of problems from businessmen.

This work contains the definition of functions, supply and demand functions, total cost, total revenue and profit functions. It also includes market equilibrium, the impact of taxes in on equilibrium, break-even analysis and the marginal analysis. This research paper can really help economists and future businessmen in handling their firm. We hope that this work will help everyone to become more aware of the relevance of functions, particularly in business and economics, and different things behind it. OBJECTIVES: To understand more all about functions. To differentiate independent and dependent variable.

To apply functions in business and economic purposes. To learn the use of function in the law of supply and demand. o To graph the demand and supply function To determine the market equilibrium using the graph of demand and supply function. To know the impact of taxes on equilibrium. To locate break-even point, loss region and profit region on the graph of cost and revenue function. To find marginal cost, marginal revenue, and marginal profit given linear total cost function, revenue function and profit function.

1.1. FUNCTIONS In general, a function is a relation between two sets such that to each element of the domain (input) there corresponds exactly one element of the range (output). In function, domain pertains to the set of all possible values of x while range is the set of all possible values of y or f(x). When a function is defined by an equation, the variable that represents the numbers in the domain is called the independent variable of the function, and the variable that represents the numbers in the range is called the dependent variable. When we say the equation y = 0.8 x + 6 defines y as a function of x, we are saying that the equation defines a function with independent variable x and dependent variable y. (Harshbarger and Reynolds,1985) The function y=7x2, defines y as a function of x, because only one value of y will result from each value of x that is substituted into the equation. Thus, x is the independent variable and y is the dependent variable. Function is synonymous to the slope-intercept form of Linear Equation in two variables. Thus, f ( x ) = 0.8 x + 6 can also be written as y = 0.8 x + 6 . Slope (m) is the numerical coefficient of x while the constant is the y-intercept (b). Therefore, in the function f ( x ) = 0.8 x + 6 , 0.8 is the slope (m) while 6 is the yintercept (b) of the function. Slope determines the rate of change of the function. It also determines if the value of the dependent variable (y) is directly or indirectly proportional with the independent variable (x). If the slope is negative or sloping downward, the

relationship between them is indirectly proportional (as x increases, y decreases). While if the slope is positive or sloping upward, the relationship is directly proportional (as x increases, f(x) increases). Graphs 1.1 and 1.2 explain it better. 25 20
Price Price

25 20 15 10 5 0 0 1 2
Quantity Graph 1.1 shows a direct relation between price and quantity
P(x)=-5x+21

15 10 5 0 3 4
P(x)=-5x+1

2
Quantity

Graph 1.2 shows an indirect relation between price and quantity

In business and economics world, graphing a function is somehow different. If it is a function of price, the value of price is always in the vertical axis regardless the fact that it is the independent variable. In short, whether the price is the dependent or independent variable, the value of it must be place in the vertical axis.

1.2. SUPPLY AND DEMAND FUNCTION Demand is an economic principle that describes a consumers desire and willingness to pay a price for a specific good or service. The law of demand states that the quantity demanded will increase as price decreases. It shows that quantity demanded (D) is a function of price (p), D=f(p). An example of demand

function is, D( p) = 2 p + 80 , wherein, D is quantity demanded and p is price. This equation tells us that the level of demand is dependent on the price charged. The slope of the demand function is always negative since that quantity demanded is indirectly proportional with price. The slope (2) tells us the rate of change of demand when price changes. Demand schedule is the table that relates price to quantity demanded. Price (p) O Quantity Demanded (D) 80 70 60 0 0 0 0 0 5 0 5 5 0 4 5 3 0 2 5 1 0 1 1 2 2 3 3 40

Demand curve is the graphical representation of the relationship between price and the amount of a product people want to buy.
40 35 price (p) in peso 30 25 20 15 10 5 0 0 10 20 30 40 50 60 70 80

Since negative price and quantity has no meaning, the graph of demand function is restricted on the first

quadrant. The domain of the function is 0 p 40 , while the range is 0 D 80 .

It

quantity (D)

means that at the price of zero, all

consumers are willing to buy the product, while at the price of 40 and above, no one is willing to buy the product. On the other hand, supply describes the producers availability and

willingness to deliver goods or render service for a certain price. The law of supply states that the quantity supplied increases as price increases. It shows that the quantity supplied (S) is a function of price (p), S=f(p). An example of supply function is, S ( p ) = 4 p 40 , wherein, S is quantity supplied while p is price. This equation tells us that the level of supply is dependent on the price charged. The slope of the supply function is always positive since that quantity supplied is directly proportional with price. The slope (4) tells us the rate of change of supply when price changes. Supply schedule is the table that relates price to quantity supplied. Price (p) in peso Quantity Supplied (S) 10 0 15 20 20 40 25 60 30 80 35 40 45 50 100 120 140 160

Supply curve is the graphical representation of the relationship between price and the amount of product producers want to produce.
50 45 40

Since negative price and quantity has no meaning, the graph of supply function is restricted on the first quadrant. The domain of the function is 10 p ,
0 20 40 60 80 100 120 140 160

price (p) in peso

35 30 25 20 15 10 5 0

while the range is 0 S . It means that the price is 10 and below, the producers

if

quantity (S)

are not willing to produce the product, while if the price increases until infinity, the number of producer that are willing to produce the product approaches infinity too.

1.2.1. MARKET EQUILIBRIUM Based on the law of supply and demand, producers are more willing to produce a product if its price is high, but the consumers are not willing to buy a product if its price is high. On the other hand, if price is low, consumers are more willing to buy the product but producers are not willing to produce the product. In order to solve this problem between two opposing forces, an agreement is made in something called market. (This area is called market analysis) When the quantity demanded is equal to the amount supplied at a certain price, market equilibrium occurs. If the demand curve and supply curve is plot on the same plane with the same unit, the two curves will intersect each other at a certain point, this point of intersection is called the equilibrium point. Equilibrium point is a binary set containing equilibrium price and equilibrium quantity respectively. Equilibrium price is the price at the equilibrium point while equilibrium quantity is the quantity at that point. There are two ways to determine the equilibrium point, equilibrium price and equilibrium quantity. Its either by graphing the supply and demand function in one Cartesian plane or by letting S(p)=D(p). Consider this supply and demand function: S ( p ) = 4 p 40 and D( p) = 2 p + 80 , find the equilibrium point, equilibrium price and equilibrium quantity. Solution 1: Graph the demand function and supply function in one Cartesian plane. The value of p (price) on the vertical axis, while the quantity on the horizontal

axis.

Equilibrium price Equilibrium point (20, 40)

Equilibrium Quantity

Solution 2: Market equilibrium occurs when quantity demanded is equal to amount supplied at a certain price. Therefore, S(p)=D(p) in market equilibrium. 4p-40=-2p+80 6p=120 p=20 In order to get the equilibrium quantity, substitute the value of p, which is 20, in either supply function or demand function. Using the supply function: S(20)=4(20)-40 S(20)=80-40 S(20)=40 Using the demand function: D(20)=-2(20)+80 D(20)=-40+80 D(20)=l40 *equilibrium price is 20 pesos.

*equilibrium quantity is 40. The equilibrium point is (20, 40) 1.2.2. THE IMPACT OF TAXES ON EQUILIBRIUM Government imposes tax on goods and services. Suppliers pass some of the tax to the consumer by increasing the price of the good or service. When price changes, there will be a change in the supply function. When supply function changes, while the demand function remains the same, there will be also adjustment in the market equilibrium. Example: The government imposes a 3 pesos tax per item on the supplier. How does this increase affect the equilibrium price p if the supply function and demand function is given by S ( p ) = 4 p 40 and D( p ) = 2 p + 80 respectively. Solution: The price received by the supplier (R) is equal to the original price (P) deducted the amount of tax (T), R=P-T, since the original price (P) is p pesos and the amount of tax (T) is 3 pesos, the function of the price received by the supplier is R(p)=p-3. To determine the new supply function after the tax is imposed, find the composite of the supply function (before tax) and the price received by the supplier. S(p)=(S o R)(p)=S(R(p) =4(p-3)-40 S(p)=4p-52

However, demand function is the same. To determine the new equilibrium price, let S(p)=D(p). 4p-52=-2p+80 6p=132 p=22 The previous equilibrium price has increased by 2 pesos. This means that the consumer's share of the 3 pesos tax is 2 pesos whereas the supplier share is 1 peso. That is, even though the tax was imposed on the producer, some of the tax is passed on to the consumer in terms of higher prices. *the new equilibrium price is 22 pesos.

1.3. TOTAL COST, TOTAL REVENUE AND PROFIT FUNCTIONS The profit a firm makes in a product is the difference between the revenue (amount received in sales) and its costs (amount spent by firm to produce the product). If x units are produced and sold, it is written as: P(x) = R(x)-C(x). Where: P(x) = profit from x sale of units R(x) = total revenue from sale of x units C(x) = total cost of production and sale of x units In general, revenue is found by the equation: Revenue= (price of units) x (number of units) The total cost (C) is composed of two parts, fixed costs and variable costs. Fixed costs, FC, remains constant regardless of the number of units produced. Examples of fixed costs are depreciation, rent, and utilities and so on. Variable costs, VC, are those directly related to the number of units produced. Thus, the

total cost is found by the equation, C=FC+VC. And by operations of function, we can determine the profit function. It is by subtracting Total Cost Function by Total Revenue Function, P(x) = R(x)-C(x). 1.3.1. BREAK-EVEN ANALYSIS We can solve the equations for total revenue and total cost simultaneously to find the point where cost and revenue are equal. The point where cost and revenue are equal is called the break-even point. Break-even point is the quantity wherein the firm has neither profit nor loss, therefore, P(x)=0 at the break-even point. If the cost and revenue function is graphed on a Cartesian plane, the region above the break-even point is the profit region, while the region below is the loss region.

The graph shows that if the firm sold 0-99 products, there will be loss. If the firm sold exactly 100 products, there will be neither loss nor profit. And if the firm sold more than 100 products, there will be a profit. Since that the purpose of risking money for a business is to earn profit, the target quantity to be sold must be greater than 100.

1.3.2. MARGINAL ANALYSIS The rate of change in total cost with respect to the number of units produced is called the marginal cost. The rate of change in the total revenue is called the marginal revenue. And the rate of change in profit is called the marginal profit. Suppose that the total cost, total revenue, and profit functions are linear (degree of the function is one), the slope of the function determine the rate of change. Thus, the slope of total cost function is the marginal cost, the slope of total revenue function is the marginal revenue and the slope of the profit function is the marginal profit. Example: The notebooks fixed cost during production is P6000 and the variable cost is P10 per item produced. If a notebook is sold for P16 per item, (a) what is the cost function? (b) what is the equation for total revenue? (c) what is the equation of the total profit? (d) how many products must be sold in order to ensure no money will be lost during the period? (e) graph the cost and revenue function and indicate the profit region and loss region. (f) what is the marginal cost, marginal revenue, and marginal profit? Solution: (a) VC=10x ; FC=6000 ; C=FC+VC ; C=10x+6000 C(x)= 10x+6000

(b) R(x)=16x (c) P(x)=R(x)- C(x) P(x)=16x-(10x+6000) P(x)=6x-6000 (d) The break-even point is ask, then let P(x)=0 0=6x-6000 6x=6000 x=1000 *1000 notebooks must be sold in order to ensure no loss during the period. And in order to have a profit, more than 1000 notebooks must be sold. (e)

(f) The slope of the total cost function is 10, thus the marginal cost is 10. The slope of the total revenue function is 12, thus the marginal revenue is 12. And lastly, the slope of the profit function is 2, thus the marginal profit is 2.

SUMMARY Function is said to be the relation between two sets such that to each element of the domain there corresponds exactly one element of the range. All the possible value of x refers to the independent variable of the function, and all the possible value of y or f(x) is called the dependent variable. Function is synonymous to the slope-intercept form of linear equation in two variables where the slope determines if the value of f(x) is directly or indirectly proportional with the value of x. Demand describes a consumers desire and willingness to pay a price for a specific good or service. The law of demand states that the quantity demanded will increase as price decreases. The slope of the demand function is negative because quantity demanded is indirectly proportional with price. Supply describes the producers availability and willingness to deliver goods for a certain price. The law of supply states that the quantity supplied increases as price increases. The slope of the supply function is always positive because quantity supplied is directly proportional with price. In order to solve the disagreement between the consumer and producer regarding with the price of good or service, you need to determine the equilibrium point. Equilibrium point contains the equilibrium price and quantity. The intersection of the plotted quantity demanded and quantity supplied determine its equilibrium point; you may also use the process of finding the solutions of the functions to determine the equilibrium point. Tax is imposed in goods and services, and it affects the supply function,

as a result, market equilibrium is adjusted. Using the equation: P(x)=R(x)-C(x), we can determine the profit function with regards to the revenue and cost of production. Managers of almost all firms determine the point where in there will be neither loss nor profit, this is known as break-even analysis. By letting P(x)=0 or by solving the solutions of the revenue function and cost function, you can determine the break-even point. In graphing functions, slope determines the rate of change in cost, revenue and profit. Therefore, the slope of the total cost is the marginal cost, the slope of the total revenue is the marginal revenue and the slope of the profit function is the marginal profit. Applications of function are persistent in the world of business and economics. It helps analysts, economists, and businessmen to answer different dilemmas that the said person may encounter. CONCLUSION The researchers after the careful intensive reading of data arrive in this following information: Functions are the relation between two sets such that to each element of the domain there corresponds exactly one element of the range. Domain refers to the independent variable of the function while range refers to the dependent variable. The application of function plays a big role in the field of business and economics. It states the relationship between demand and price, and supply and price. It can determine the market equilibrium and the change that may happen

due to the impact of tax. The profit function can be obtained using one of the operations of function which is subtraction; the differences between revenue function and cost revenue function.