Role of Mathematics in Business & Economics Essay Sample

Role of Mathematics in Business & Economics Pages
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Mathematics have been one of the primary elements of business and economics since ancient times, when farmers had to count the animals in their possession and merchants had to have a clear picture of their goods’ value. With the introduction of money as the universal legal tender, all goods acquired a numerical value, making math calculations even more important. Furthermore, in the competitive global market environment of today, businesses have to take advantage of every opportunity for profit, making frequent statistical market analyses a necessity. Business Mathematics:

Business mathematics is mathematics used by commercial enterprises to record and manage business operations. Commercial organizations use mathematics in accounting, inventory management, marketing, sales forecasting, and financial analysis. Mathematics typically used in commerce includes elementary arithmetic, elementary algebra, statistics and probability. Business management can be made more effective in some cases by use of more advanced mathematics such as calculus, matrix algebra and linear programming. Commercial Maths:

Another meaning of business mathematics, sometimes called commercial math or consumer math, is a group of practical subjects used in commerce and everyday life. The practical applications typically include checking accounts, price discounts, markups and markdowns, payroll calculations, simple and compound interest, consumer and business credit, and mortgages.

Importance of Mathematics in Business & Economics:
Mathematics is used in most aspects of daily life. Many of the top jobs such as business consultants,company directors and a host of others require a solid understanding of basic mathematics, and in some cases require a quite detailed knowledge of mathematics. Money Transactions

The four basic math operations are essential to understand transactions and calculate profits and losses. On every transaction, from paying your grocery bill to making an investment, a certain amount of money is removed from one budget to another. Hence, a transaction always includes a subtraction from the buyer’s budget and an addition to seller’s budget. In cases of mass payments, such as during a monthly payday or when people buy tickets for a concert, you can multiply the value of individual tickets or paychecks by the number of spectators or employees. This way you can find the total cost of a payroll or the total gate earnings. Identifying Market Trends

Market analysis is one of the core elements of a business plan. Understanding the needs of a consumer base, as well as your competitor’s strengths in the market is knowledge that can give an edge to your business. You must analyse data from questionnaires, as well as from official sources like the Census Bureau and use your statistical skills to group them and convert them into percentages to discover the consumers’ trends and your piece of the market pie chart. Measuring Economic Performance

The Gross Domestic Product, commonly known as the GDP, is the sum of private consumption plus government spending plus gross investment plus the difference or exports minus imports. It’s a lot of additions and — in a failing economy — subtractions, for which you need math skills to compute. To find the GDP per capita, you must divide the nominal GDP by the country’s population. Furthermore, the growth — or shrinking — of an economy is evident when subtracting the newest GDP estimates with older data. Understanding Inflation and Interest Rates

Interest rate is the percentage of surplus value a borrower has to give the lender. A quite simplistic example of an interest rate is when a borrower receives $100 with a 3 percent interest and has to repay $103. Another occasion when math knowledge on percentages is helpful in economics is when you must calculate the future prices of products and services based on the current rate of inflation. For example, if we assume that the U.S. economy’s inflation in 2008 was 2.5 percent, a loaf of bread costing $1.75 in 2008 will rise up to 1.75 + (1.75 — 0.025) = $1.79. Tax Records

Basic math skills make it easier to file and maintain tax records, a necessity for individuals and businesses alike. And taxes like sales tax, property taxes, unemployment tax and social security taxes must be monitored. Without basic math skills, it is easy to make a mistake; errors in figuring taxes will likely lead to an audit, a complicated procedure, or a loss of significant amounts of revenue. Payroll

Math is important when dealing with payroll systems. It allows you to calculate percentage raises, figure cost-of-living increases, or calculate how much an employee owes into his or her health savings accounts or insurance premiums. Other Decisions

Math is important when making even general business decisions, like whether to expand into a new branch, whether you can afford to hire another employee, or if you can market a product nationally. Knowledge of basic math makes interest calculations, markups and markdowns, credit lines and mortgage calculations less tedious and time-consuming, saving you and your customers time and money. The Use of Mathematics in Business & Economics:

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 maximization curves and growth models. Statistics allows economists to make forecasts and determine the probability of an occurrence. 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 maximization graph, economists might advise a venue to sell only 75 percent of the available tickets instead of 100 percent to make the most money. If the company lowers the price of tickets to attract additional concert-goers and fill the stadium to capacity, it might make less money than selling only 75 percent 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 behavior. 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. Mathematics is not a closed intellectual system, in which everything has already been worked out. There is no shortage of open problems. Mathematicians publish many thousands of papers embodying new discoveries in mathematics every month.Mathematics is not numerology, nor is it accountancy; nor is itrestricted to arithmetic. Pseudomathematics is a form of mathematics-like activity undertaken outside academia, and occasionally by mathematicians themselves. It often consists ofdetermined attacks on famous questions, consisting of proof-attempts made in an isolated way . The relationship to generally accepted mathematics is similar to that between pseudoscience and real science.


* Contemporery Math for business & Consumers-By Brechner, Robert.
(2006) * The Role of mathematics in Business Decision -By Stephen F Keating – 1973 * The Role of Mathematics and Logic-By Kenneth Ewart Boulding-1971 * THE ROLE OF MATHEMATICS IN ECONOMICS-Journal of Political Economy, 56, 3 (June 1948): 187-199. * Heriot Watt University: Mathematics for Economics and Business -Lecture 1 * U.S. Small Business Administration: Market Analysis

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