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Mathematical Economics

Reviewed by Komal | Updated on Sep 30, 2020


What is Mathematical Economics?

Mathematical economics refers to an economic model that uses the principles and methods of mathematics to create economic theories and to analyse economic dilemmas. Mathematics helps economists to perform quantifiable experiments and create models for predicting future economic growth.

Advances in computing power, large-data techniques, and other advanced mathematical technologies have played a major role in making quantitative methods a fundamental aspect of economics. All of these elements are supported by scientific methods which advance the study of economics.

The synthesis of statistical methods, mathematics and economic principles have created a whole new branch of econometrics. The mathematical economy is a specialisation within the Econometrics branch.

Understanding Mathematical Economics

In order to prove, disprove, or forecast economic behaviour, mathematical economics depends on statistical observations. Even though the researcher's bias heavily influences the discipline of economics, mathematics enables economists to describe an observable phenomenon and offers the backbone for theoretical interpretation.

There was a period when economics relied heavily on anecdotal evidence or situational theories to try and make economic phenomena significant. At that time, mathematical economics was a starting point in the sense that it introduced formulae for quantifying economic changes. This has gushed out into economics as a whole, and most economic theories now contain some kind of statistical evidence.

Impact of Mathematical Economics

Mathematical economics paved the way for genuine economic modelling. Through the inclusion of mathematics, theoretical economic models have become useful instruments for day-to-day economic policymaking.

Econometrics as a whole has the goal of translating qualitative statements (such as "the relationship between two or more variables is positive") into quantitative statements (such as "consumption spending rises by 95 cents for each dollar increase in disposable income").

Mathematical economics is especially useful in resolving optimisation problems where, for example, a policymaker looks for the best change out of a variety of changes to affect a particular outcome.

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