ECON111:

Mathematics for Economics and Business

(Nonlinear Functions (2/2))

Dr Yigit Oezcelik

Yigit.Oezcelik@liverpool.ac.uk
Management School (ULMS)

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Outline

We study exponential and logarithmic functions and their

applications.
Introduction to exponential and logarithm functions
Introduction to natural exponential and natural logarithm
functions
Growth formulas
Reading:
Renshaw Chapter 11 ”The Exponential Function and
Logarithms”
Renshaw Chapter 12 ”Continuous Growth and the Natural
Exponential Function”

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 Exponential and Logarithm Functions

Exponential and Logarithm Functions

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

The Exponential Function (1/2)

The exponential function is another type of nonlinear function.

They often arise in analysing variables that grow through time.
A general exponential function can be expressed as
y = bx ,

where base b>0 is some constant and the exponent x can be

any real number.
Always when x = 0 then y = 1 (, i.e. y-intercept).
As x becomes more positive y increases rapidly.
As x becomes more negative, y gets smaller and smaller but is
still positive (never cuts the x-axis).

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

The Exponential Function (2/2)

Example: y = 10x is sketched below.

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

The Logarithm Function (1/4)

The inverse function of an exponential function is a logarithm

function - another important class of nonlinear functions.
A logarithm is the power to which a base must be raised to yield
a particular number.
Generally, if y = bx > 0, then the logarithm of y to base b is

x = logb y,

which is the inverse function of the exponential function.

The definition of a logarithmic function facilitates a solution to
an exponential equation, where the unknown is the exponent.

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

The Logarithm Function (2/4)

Sketch the logarithm function x = log10 y.

Solution: Note, the general exponential function y = bx > 0 is
the inverse function of the general logarithmic function
x = log10 y.
In our case, b = 10. We can tabulate the following:

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

The Logarithm Function (3/4)

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

The Logarithm Function (4/4)

Question: Consider 8 = 2n . What is the value of n?

The general exponential function is y = bx , where in our case, y
= 8, b = 2, and x = n is the unknown.
We need to express x as a function of y, which is the inverse
function of the general exponential function.
This inverse function is the logarithm function x = log2 y, which
is n = log2 8 = 3.

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

Logarithm Rules (1/3)

The following three rules apply to logarithmic functions:

Product Rule: The Product becomes sum after taking logs.

logb (x · y) = logb x + logb y.

Quotient Rule: The Quotient becomes difference after taking

logs.
x
logb ( ) = logb x − logb y.
y
Power Rule: The Power becomes linear after taking logs.

logb (xm ) = m · logb x.

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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

Logarithm Rules (2/3)

Example: Express 2logb x − logb y + logb z as a single logarithm.
Solution:
First use Power Rule

2logb x − logb y + logb z = logb x2 − logb y + logb z

Next, use Quotient rule

x2
= logb ( ) + logb z
y
Finally, use Product rule
x2 z
= logb ( ).
y
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 Exponential and Logarithm Functions General Exponential and Logarithm Functions

Logarithm Rules (3/3)

√
x6 y
Example: Show that loge ( xy2 ) = 2loge x − 32 loge y.
Solution:
p
x6 y p
loge ( ) = log e x6 y − loge xy 2
xy 2

= loge (x6 y)0.5 − loge xy 2 = loge x3 y 0.5 − loge xy 2

= loge x3 + loge y 0.5 − (loge x + loge y 2 )

= 3loge x + 0.5loge y − loge x − 2loge y

3
= 2loge x − loge y
2
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 Exponential and Logarithm Functions Natural Exponential and Logarithmic Functions

Natural Exponential / Logarithmic Functions (1/3)

Consider the function
1 n
y = (1 + ) , n > 0.
n
What happens if n keeps increasing?
When n=1, y=2
When n=2, y=2.25
When n=10, y=2.5937
When n=100, y=2.70481
As n goes to infinity, y approaches a mathematical constant,
which we call e (Euler number).
1 n
e = lim (1 + ) = 2.7182818....
n→∞ n

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 Exponential and Logarithm Functions Natural Exponential and Logarithmic Functions

Natural Exponential / Logarithmic Functions (2/3)

A natural exponential function refers to an exponential function

with e as the base:

y = ex ≡ exp(x).

A natural logarithmic function is a logarithmic function to base e

y = loge x ≡ ln(x).

The rules of general logarithmic functions remain relevant:

Product Rule: ln(xy) = ln(x) + ln(y)
Quotient Rule: ln( xy ) = ln(x) − ln(y)
Power Rule: ln(xm ) = m · ln(x)

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 Exponential and Logarithm Functions Natural Exponential and Logarithmic Functions

Natural Exponential / Logarithmic Functions (3/3)

Example: Solve for x in the equation

1000 = 500e0.5x .

Solution:

1000 = 500ex =⇒ 2 = e0.5x

Now, use the definition of natural logs function

ln(2) = ln(e0.5x ) =⇒ ln(2) = 0.5x

ln(2)
x= = 1.39.
0.5
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 Exponential and Logarithm Functions Applications

Applications of Exp. and log functions (1/5)

The exponential and logarithmic functions are often featured in

analysing variables that grow with time.
We will now look at two important growth formulas that we will
encounter later in our module. For time being, we just take
these two formulas as given.
In these examples, we will see how exponential and logarithmic
functions can be applied to solve economic/business problems
involving growth.
The first formula deals with variables that grow in discrete
jumps, i.e. monthly, quarterly, etc.

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 Exponential and Logarithm Functions Applications

Applications of Exp. and log functions (2/5)

The frequent compounding growth formula is given by
r nx
y = a(1 + ) ,
n
where
a is the initial value of the variable
r is the annual interest rate or growth rate,
x is the number of years,
y is the future compound value, and
n is the number of times per year that the growths occur.
For example, GDP and RPI are published quarterly and monthly
and so reflect quarterly and monthly jumps in output and UK
price levels. This formula can be used to compute their future
values.
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 Exponential and Logarithm Functions Applications

Applications of Exp. and log functions (3/5)

BUT: the output of goods and services is continuous.
BUT: the prices of thousands of different goods and services
sold every day are varying in a way that is deemed continuous.
So, we need a continuous growth formula to reflect that!
The formula for calculating the value of a variable that grows
continuously at a constant nominal annual growth rate is

y = aerx ≡ a · exp(rx),

where
e = 2.718281828,
a = initial value of the variable,
r = the nominal annual growth rate (%), and
x = number of years of growth.
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 Exponential and Logarithm Functions Applications

Applications of Exp. and log functions (4/5)

Example 1: We are told that retail prices are rising by 10% per
year and that they are measured by an index. The current level
of the index is 100. What will the price level index after 7 years?
Solution: The retail price index grows annually at a fixed rate,
so we can use the discrete growth formula:
r nx
y = a(1 + )
n

0.1 1·7
= 100(1 + )
1
= 194.87

i.e. the retail price index becomes 194.87 after 7 years.

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 Exponential and Logarithm Functions Applications

Applications of Exp. and log functions (5/5)

Example 2: GDP grows at a nominal annual growth rate of 4%
per annum. Even though the data are collected annually, GDP
does grow continuously. If the initial level is 100, what is its level
after 5 years?
Solution: Apply the continuous compounding growth formula

y = aerx ≡ a · exp(rx),

where a=100, r=0.04, x=5. It follows

y = 100e0.04·5 = 122.1

which means after 5 years the GDP level grows continuously to

about 122.1.
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 Exponential and Logarithm Functions

Mid Semester Feedback

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 Exponential and Logarithm Functions

Thank you!
Do you have any questions?
Yigit.Oezcelik@liverpool.ac.uk

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