1. Variables, Constants and Parameters

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From the course by University of London

Quantitative Foundations for International Business

117 оценки

University of London

Quantitative Foundations for International Business

117 оценки

Course 3 of 6 in the Specialization International Business Essentials

This course provides the essential mathematics required to succeed in the finance and economics related modules of the Global MBA, including equations, functions, derivatives, and matrices. You can test your understanding with quizzes and worksheets, while more advanced content will be available if you want to push yourself. This course forms part of a specialisation from the University of London designed to help you develop and build the essential business, academic, and cultural skills necessary to succeed in international business, or in further study. If completed successfully, your certificate from this specialisation can also be used as part of the application process for the University of London Global MBA programme, particularly for early career applicants. If you would like more information about the Global MBA, please visit www.londoninternational.ac.uk/mba This course is endorsed by CMI

From the lesson

Equations

Although financial models are theoretical frameworks, we often use mathematical tools to work with these models. Mathematical models usually consist of a set of equations, which are designed to describe the structure of the model, and whose solution determines the importance of variables. This week, we will look at equations, including the basic terminology, and the rules for solving equations requiring more than one operation.

Equations- An Introduction3:33

1. Variables, Constants and Parameters6:14

2. The Real Number System6:08

3. Basic Rules7:34

4. Like Terms3:12

5. Translate Phrases into Mathematics6:22

6. Working with Business Formulas5:30

7. Ratio and Proportion6:25

Equations- Summary2:42

Meet the Instructors

George Kapetanios
Professor of Finance and Econometrics
King's College London

[MUSIC]

A financial model is essentially a theoretical framework which can become but

necessarily be mathematical.

If the model is mathematical however, we will need to use a set of equations

which have the function of describing the structure of the model.

While building up a financial model,

we first pose a set of analytical assumptions.

The system of the equations by relating a number of a variable to one another

in certain ways constitutes the mathematical model, which has

the function of giving mathematical form the set of our assumptions.

Once we build up the mathematical model, which best fits our assumptions,

we focus on deriving the conclusions which logically follow from our assumptions.

A variable is an entity whose value can change.

In fact, it can take on different values.

The most important economic variables are price,

profit, revenue, cost, national income,

consumption, investment, imports, and exports.

Since a variable can assume various values, it is more convenient

to represent them by using symbols rather than specific numbers.

For example, usually prices are represented by P.

Profits are represented by the Greek letter pi,

revenues are represented by R, and costs are represented by C,

while national income is represented by Y, and so forth.

When we write P equal to a specific number like P=5,

then we stick a specific value to a variable.

We build up an economic model with the aim

of finding the solution values of a certain set of variables.

Like for example, the profit maximizing level of output.

When we try to find the solution of a system from the variables

contained into the model, then these variables are said to

be endogenous variables which indicates that they originated from within.

If the model contains also variables which derived from forces

which are external to the model and whose values are accepted as given data only,

such variables are called exogenous variables,

which indicates that they are originating from without.

Notice that even if a variable is endogenous to one model, it

might be the case that the same variable is exogenous to a different model.

In an analysis of the market determination of weak price, for

instance the variable P should definitely be endogenous.

But, in the framework of the theory of the consumer expenditure,

P would be become instead a datum to the individual consumer,

and must therefore be considered exogenous.

Variables are often combined with fixed numbers, which are called constants.

We can find for example, 9P or 0.4R.

A constant is an entity that does not change and

therefore is the opposite of a variable.

The constant, which is along with the variable,

it is indicated as the coefficient of the variable.

However, a coefficient may be symbolic rather than numerical.

We can indicate the coefficient by using symbols rather than numbers,

so that to obtain a higher level of generality.

We can for example, let the symbol a stand for a given constant and

use the expression aP instead of 7P in a model.

Notice that it can take the entirety of the value.

This is why it can be said that it is a constant, that is a variable.

In order to fix this characteristic, we call it parametric constant or parameter.

Normally by convention, parametric constants

are represented by the symbol a, or b, or c, or

their counterparts in the Greek alphabet alpha, beta and gamma.

But of course, other symbols can be used.

In order to visually distinguish exogenous variables from their

endogenous counterparties, it is usually followed

the practice of attaching a subscript zero to the chosen symbol.

Therefore, if P symbolizes price,

then signifies an exogenously determined price.

[MUSIC]

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