Chapter One

Introduction
1.1 Background of the Study
The term matrix entered scientific discourse early 20th century when Werner Heisenberg
formulated his theory of matrix mechanics which postulated infinite matrices to represent the
position and momentum of electron inside an atom.
The concept of matrices has had its origin in various types of linear problems, the most
important of which concerns the nature of solutions of any given system of linear equations.
Matrices are also useful in organizing and manipulating large amounts of data. Today, the
subject of matrices is one of the most important and powerful tools in Mathematics which has
found applications to a very large number of disciplines such as Engineering, Business and
Economics, statistics etc.
1.2 Objective of the study
1.2.1 General Objective
The general objective of the project is to provide some theoretical evidence on the application of
matrix and determinants in Economics.
1.2.2 Specific Objectives
The specific objectives of this study are:
 Examining the application of matrix in Input output model.
 Identifying the ways in which different Companies apply matrix model
 To compare and contricts different ways of applying matrix in demand and supply model.
1.3 Significance of the study
This study specially :
 May benefits the existing and potential students who want to study mathematics,
Economics and other natural /social science discipline.
 Provide a base for further study and research on application of matrix in Economics.
 Chapter Two
Preliminary Concepts
2.1 Definition of a matrix
Definition: A rectangular arrangement of mn numbers (real or complex) in to m horizontal rows
and n vertical columns enclosed by a pair of brackets [ ], such as
 a11 a12 ... a1n 
a a 22 ... a 2 n 
 21
 . . . 
 . . . 
 
 . . . 
a m1 a m1 ... a mn 

is called an m n (read “m by n”) matrix or a matrix of order m n .

Parentheses ( ) are also commonly used to enclose numbers constituting matrices.
Before we go any further, we need to familiarize ourselves with some terms that are associated
with matrices. The numbers in a matrix are called the entries or the elements of the matrix. For
the entry a ij , the first subscript i specify the row and the second subscript j the column in which

the entry appears. That is, a ij is an element of matrix A which is located in the i th row and j th

column of the matrix A. Whenever we talk about a matrix, we need to know the order of the
matrix.

Definition :Two matrices A and B are said to be equal, written A = B, if they are of the same
order and if all corresponding entries are equal.

5 1 0  2  3 1 0  9
For example,     9 2    .
3 2  2
but
2 3 4   2  2

x  y 6 1 6
Example: Given the matrix equation 
   3 8 . Find x and y.
 x y 8   
x y 1
Solution: By the definition of equality of matrices,
x y  3
solving gives x = 2 and y = -1.
2.2 Types of matrices
Certain types of matrices, which play important roles in matrix theory, are now considered.
Row Matrix: A matrix that has exactly one row is called a row matrix. For example, the matrix
A  5 2  1 4 is a row matrix of order 1 4 .

Column Matrix: A matrix consisting of a single column is called a column matrix. For
3 
example, the matrix B  1 is a 3 1 column matrix.
4 

Zero or Null Matrix: A matrix whose entries are all 0 is called a zero or null matrix. It is
0 0 0 0 
usually denoted by 0m n or more simply by 0. For example, 0    is a 2  4
0 0 0 0 
zero matrix.
Square Matrix: An m n matrix is said to be a square matrix of order n if m = n. That is, if it
has the same number of columns as rows.
 3 4 6 
2  1
For example,  2 1 3  and 
5 6 
are square matrices of order 3 and 2 respectively.
 5 2  1 

 
In a square matrix A  a ij of order n, the entries a11 , a 22 , ..., a nn which lie on the diagonal

extending from the left upper corner to the lower right corner are called the main diagonal
3 2 4 
entries, or more simply the main diagonal. Thus, in the
 
matrix C = 1 6 0  the
5 1 8 

entries c11  3, c22  6 and c33  8 constitute the main diagonal.

Note: The sum of the entries on the main diagonal of a square matrix A of order n is called the
n
trace of A. That is, Trace of A = a
i 1
ii .
Triangular Matrix: A square matrix is said to be an upper (lower) triangular matrix if all entries
below (above) the main diagonal are zeros.
5 0 0 0
2 4 8  1 0 
For example, 0 1 2  and 
3 0
are upper and lower triangular matrices,
6 1 2 0
0 0  3  
 2  4 8 6
respectively.

Diagonal Matrix: A square matrix is said to be diagonal if each of the entries not falling on the
 
main diagonal is zero. Thus a square matrix A  a ij is diagonal if a ij  0 for i  j .

Activity: What about for i = j?

5 0 0 
For example, 0 0 0  is a diagonal matrix.
0 0 7 

Notation: A diagonal matrix A of order n with diagonal elements a11 , a 22 , ..., a nn is denoted

by A  diag ( a11 , a 22 , ..., a nn )

Scalar matrix: A diagonal matrix whose all the diagonal elements are equal is called
a scalar matrix.
2 0 0 
For example, 0 2 0  is a scalar matrix.
0 0 2

  k , ifi  j
Note: Let A  a ij be a square matrix. A is a scalar matrix if and only if a ij   .
0, ifi  j
Identity Matrix or Unit Matrix: A square matrix is said to be identity matrix or unit matrix if
all its main diagonal entries are 1’s and all other entries are 0’s. In other words, a diagonal matrix
whose all main diagonal elements are equal to 1 is called an identity or unit matrix. An identity
matrix of order n is denoted by In or more simply by I.
 1 0 0 
1 0
For example, I 3  0 1 0  is identity matrix of order 3. I 2    is identity matrix of
 0 1 
0 0 1

order 2.

 
Note: Let A  a ij be a square matrix. A is an identity matrix if and only if

1, 𝑖𝑓 𝑖 = 𝑗
𝑎𝑖𝑗 = {
0, 𝑖𝑓 𝑖 ≠ 𝑗

2.3 Algebra of matrices

Addition of matrices: Let A and B be two matrices of the same order. Then the addition of A
and B, denoted by A + B, is the matrix obtained by adding corresponding entries
of A and B. Thus, if
A  ( a ij )m n and B  ( bij )mn , then A  B  ( aij  bij )mn .

Remark: Notice that we can add two matrices if and only if they are of the same order. If they
are, we say they are conformable for addition. Also, the order of the sum of two matrices is same
as that of the two original matrices.
If A is any matrix, the negative of A, denoted by –A, is the matrix obtained by replacing each
entry in A by its negative. For example, if
 2  1  2 1 

A  5 4  , then  A   5  4 

 6 0   6 0 
Properties of Addition of Matrices
1. Matrix addition is commutative. That is, if A and B are two matrices of the same order,
then A + B = B + A.
2. Matrix addition is associative. That is, if A, B and C are three matrices of the same order,
then (A + B) + C = A + (B + C).
3. Existence of additive identity. That is, if 0 is the zero matrix of the same order as that of
the matrix A, then A + 0 = A = 0 + A.
4. Existence of additive inverse. That is, if A is any matrix, then
A + (-A) = 0 = (-A) + A

Note: The zero matrix plays the same role in matrix addition as the number zero does in
addition of numbers.
Subtraction of Matrices: Let A and B be two matrices of the same order. Then by
A – B, we mean A + (-B). In other words, to find A – B we subtract each entry of
B from the corresponding entry of A.
4  1 0 2 
Example 3.3.1:  
Let A  2 3  and B  5  2
5  7  6 1 

4  0  1  2   4  3
Then  
A  B  2  5 3  ( 2 )   3 5 
5  6  7  1    1  8 

Multiplication of a Matrix by a Scalar

Let A be an m n matrix and k be a real number (called a scalar). Then the multiplication of A
by k, denoted by k A, is the m n matrix obtained by multiplying each entry of A by k. This
operation is called scalar multiplication.

0 2 3 7 6 3
Example: If A   and B    . Find 2A + 3B.
2 1 4  1 4 5 
 0 2 3 0 4 6  7 6 3 21 18 9 
Solution: 2 A  2      and 3B  3   
2 1 4  4 2 8  1 4 5  3 12 15
0 4 6 21 18 9  21 22 15 
2 A  3B      3 12 15   7 14 23
4 2 8    

Properties of scalar multiplications

1. If A and B are two matrices of the same order and if k is a scalar, then
k ( A  B)  kA  kB
2. If k1 and k2 are two scalars and if A is a matrix, then
k1  k2 A  k1 A  k2 A
3. If k1 and k2 are two scalars and if A is a matrix, then
k1k2 A  k1 (k2 A)  k 2 (k1 A)
Multiplication of Matrices
While the operations of matrix addition and scalar multiplication are fairly straightforward, the
product AB of matrices A and B can be defined under the condition that the number of columns
of A must be equal to the number of rows of B. If the number of columns in the matrix A equals
the number of rows in the matrix B, we say that the matrices are conformable for the product
AB.
Because of wide use of matrix multiplication in application problems, it is important that we
learn it well. Therefore, we will try to learn the process in a step by step manner. We first begin
by finding a product of a row matrix and a column matrix.

 a 
Example: Given A = [ 2 3 4 ] and B =  b  , find the product AB.
 c 

Solution: The product is a 1  1 matrix whose entry is obtained by multiplying the

corresponding entries and then forming the sum.

 a 
AB = [ 2 3 4 ]  b  = [ (2a + 3b + 4c)]
 c 
Note that AB is a 1  1 matrix, and its only entry is 2a + 3b + 4c.
  5 
Example: Given A = [ 2 3 4 ] and B =  6  , find the product AB.
 7 

 5 
Solution: AB = [ 2 3 4 ]  6  = 10  18  28  56
 7 
Note: In order for a product of a row matrix and a column matrix to exist, the number of entries
in the row matrix must be the same as the number of entries in the column matrix.

Example 3.3.5: Here is an application: Suppose you sell 3 T-shirts at $10 each, 4 hats at $15
each, and 1 pair of shorts at $20. Then your total revenue is
 3
 

10 15 20  4   (10  3)  (15  4)  (20  1)   110

    
1

Pr ice Re venue

Quantity

 5 3 
Example: Given A = [ 2 3 4 ] and B =  6 4  , find the product AB.
 7 5 

Solution: We already know how to multiply a row matrix by a column matrix. To find the
product AB, in this example, we will be multiplying the row matrix A to both the first
and second columns of matrix B, resulting in a 1  2 matrix.

AB = [ 2 . 5 + 3 . 6 + 4 . 7 2.3 + 3.4+ 4.5 ] = [ 56 38 ]

We have just multiplied a 1  3 matrix by a matrix whose order is 3  2. So unlike addition and
subtraction, it is possible to multiply two matrices with different dimensions as long as the
number of entries in the rows of the first matrix is the same as the number of entries in columns
of the second matrix.

We summarize matrix multiplication as follows:

In order for product AB to exist, the number of columns of A, must equal the number of rows of
B. If matrix A is of dimension m  n and B of dimension n  p, the product AB will have the
dimension m  p. Let A  ( a ij ) be an m n matrix and B  ( b jk ) be an n  p matrix. Then the

product AB is the m  p matrix defined by AB  ( c ik ), where

n
c ik  a i 1 b1k  a i 2 b2 k  ...  a in bnk   a ij b jk , I = 1,2,…,m and k = 1,2,…,p
j 1

Thus, the product AB is the m  p matrix, where each entry c ik of AB is obtained by

multiplying corresponding entries of the ith row of A by those of the kth column of B and then
finding the sum of the results.

Remark: The definition refers to the product AB, in that order, A is the left factor called pre
factor and B is the right factor called post factor.

1  4 
 2 4 1 6 
Example: Find the product AB if A  5 3  and B   
0 2   2 7 3 8

 10  24  11  26 
Solution: AB    4 41 14 54 
 4 14 6 16 

Observe that the product BA is not defined since the number of columns of B is not equal to the
number of rows of A. This shows that matrix multiplication is not commutative. That is, for any
two matrices A and B, it is usually the case that AB  BA (even if both products are defined).

1 0 1 2
Example: Let A    , and B  1 0 , then
0 0  
1 2 1 0
AB    , BA    . Thus, AB  BA .
0 0  1 0

Note: 1. AB = 0 does not necessarily imply A = 0 or B = 0.

2. AB = AC does not necessarily imply B = C.
  1 1 1  1 2 3 0 0 0
Example: 1) Let A    3 2  1 , B  2 4 6 , then AB  0 0 0 .
   
 2 1 0  1 2 3 0 0 0

1  3 2  1 4 1 0   3 1  1  2
   
2) Let A  2 1  3 , B  2 1 1 1 , C  3  2  1  1 then
1  2 1 2  2  5  1 0 
4  3  1    
   

 3  3 0 1 
 1 15 0  5
AB     AC . But B  C .
 3 15 0  5
 
 

In this chapter, we will be using matrices to solve linear systems. Later, we will be asked to
express linear systems as the matrix equation AX = B, where A, X, and B are matrices. The
matrix A is called the coefficient matrix.
Remark: For real numbers, a multiplied by itself n times can be written as an.
Similarly, a square matrix A multiplied by itself n times can be written as
An. Therefore, A2 means AA, A3 means AAA and so on.

2.4 Transpose of a matrix

Definition: Let A be an m n matrix. The transpose of A, denoted by A' or A t , is the n m

matrix obtained from A by interchanging the rows and columns of A. Thus the first row of A is
the first column of At, the second row of A is the second column of At and so on.
 2 3
2  4 6  t  
Example: If A    , then A    4 1 
3 1 4  6 4
 

Properties: a) If A and B have the same order,  A  B t  A t  B t .

b) For a scalar k , kAt  kA t .

c) If A is m n and B is n  p , then ( AB) t  B t At . d)

A t t  A
Definition: A square matrix A is said to be orthogonal if AAt  A t A  I

 
Definition : A square matrix A  a ij is said to be skew symmetric if A t   A ,

or equivalently, if a ij  a ji for each i and j

Remark: aii  aii  2aii  0 or aii  0 . Hence elements of main diagonal of a skew-symmetric
matrix are all zero.

2.5 Elementary row and column operations

Elementary row operations:
1. (Replacement) Replace one row (say Ri ) by the sum of itself and a multiple of

another row (say R j ). This is abbreviated as Ri  k R j  Ri .

2. (Interchange) Interchange two rows (say Ri and R j ). This is abbreviated as Ri  R j

.
3. (Scaling) Multiply all entries in a row (say Ri ) by a nonzero constant (scalar) k. This

is abbreviated as Ri  k Ri
For elementary column operations “row” by “column” in (1), (2) and (3) above.

We say that two matrices are row equivalent if one is obtained from the other by a finite
sequence of elementary row operations.
It is important to note that row operations are reversible. If two rows are interchanged, they can
be returned to their original positions by another interchange. If a row is scaled by a nonzero
1
constant c, then multiplying the new row by produces the original row. Finally, consider a
c
replacement operation involving two rows, say rows i and j, and suppose c times row i is added
to row j to produce a new row j. To “reverse” this operation, add – c times row i to the new row j
and obtain the original row j.
Example : Find the elementary row operation that transforms the first matrix in to the second,
and then find the reverse row operation that transforms the second matrix in to the first.
 1 3  1 1 3  1
0 2  4, 0 1  2
   
0  3 4  0  3 4 

1 3  1 1 3  1
Solution: 0 2  4 R2 ½ R2 0 1  2 
 
0  3 4  0  3 4 

1 3  1 1 3  1
0 2  4 2R2 R2 0 1  2 
   
0  3 4  0  3 4 

2.6 Row reduced echelon form of a matrix

In the definition that follows, a nonzero row (or column) in a matrix means a row (or column)
that contains at least one non-zero entry; a leading entry of a row refers to the left most nonzero
entry (in a non zero row).
Definition : A matrix is in echelon form (or row echelon form) if it has the
Following three properties:
1) All nonzero rows are above any rows of all zeros.
2) Each leading entry of a row is in a column to the right of the leading entry of the
row above it.
3) All entries in a column below a leading entry are zero.
If a matrix in echelon form satisfies the following additional condition then it is in
reduced echelon form (or row reduced echelon form)
4) The leading entry in each non zero row is 1
5) Each leading 1 is the only nonzero entry in its column.

Example : The following matrices are in row echelon form, in fact the second
matrix is in row reduced echelon form
 
2  3 2 1 1 0 0 29
0 1  4 8 , 0 1 0 16 
 5  
0 0 0  0 0 1 1 
 2
 Chapter Three
Relevance of Matrix and Determinant in Economics
3.1 Definition of a Determinant
However, if A is a square matrix, then the determinant function associates with A exactly one
numerical value called the determinant of A, that gives us valuable information about the
matrix
Definition: (Determinant of order 1): Let A  a11  be a square matrix of order 1. Then

determinant of A is defined as the number a11 itself. That is, a11  a11 .

Example 3  3 ,  5  5 and 0  0 .

a a12 
Definition : (Determinant of order 2): Let  11  be a 2  2 matrix, then
a 21 a 22 
A  a11a 22  a12a 21 .

That is, the determinant of a 2  2 matrix is obtained by taking the product of the entries in the
main diagonal and subtracting from it the product of the entries in the other diagonal.
To define the determinant of a square matrix A of order n(n > 2), we need the concepts of the
minor and the cofactor of an element.

Let A  a ij be a determinant of order n. The minor of aij, is the determinant that is left by

deleting the ith row and the jth column. It is denoted by Mij.
a11 a12 a13
For example, given the 3 x 3 determinant a 21 a 22 a 23 . The minor of a11 is
a 31 a 32 a 33

a22 a23 a a23

M 11  , the minor of a12 is M 12  21 , and so on.
a32 a33 a32 a33

Let A  a ij be a determinant of order n. The cofactor of aij denoted Cij or Aij, is defined as

( 1 )i  j M ij , where i + j is the sum of the row number i and column number j in which the entry

 M ij , if i  j is even
lies. Thus Cij   .
 M ij , if i  j is odd
  0 1 2
 
Example : Evaluate the cofactor of each of the entries of the matrix:  1 2 3 
3 1 1
 
Solution: C11 = -1, C21 = 1 , C31 = -1, C12 = 8, C13 = -5, C22 = -6, C32 = 2, C23 = 3, C33 = -1

Definition :( Determinant of order n): If A is a square matrix of order n (n >2), then its
determinant may be calculated by multiplying the entries of any row (or column) by their
cofactors and summing the resulting products. That is,
det A  ai1Ci1  ai 2 Ci 2  .....  ainCin Or det A  a1 j C1 j  a 2 j C 2 j  .....  a nj C nj

1 3 4
Example 4.1.2: Find the value of 0 2 5
2 6 3

Solution: Choose a given row or column. Let us arbitrarily select the first row. Then
1 3 4
2 5 0 5 0 2
0 2 5  (1)  ( 3 )( 1 ) 4 = 1(6  30)  3(0  10)  4(0  4)
6 3 2 3 2 6
2 6 3

= 22

3.2 Solving a linear system

This is the process of finding the solutions of a linear system. We first see the technique of
elimination (Gaussian elimination method) and then we add two more techniques, matrix
inversion method and Cramer’s rule.
3.2.1 Cramer’s rule for solving system of linear equations (homogeneous and non
homogeneous)
Suppose we have to solve a system of n linear equations in n unknowns Ax = b. Let Ai(b) be the
matrix obtained from A by replacing column i by the vector b .If detA  0 then we have
det A i (b)
xi  , which is called Cramer’s Rule for finding the solutions of n linear equations in
det A
n unknowns is known as
Example 4.4.1: Solve the following system of linear equations by Cramer’s Rule.
 2x1  x 2  x 3  6
x1  4x 2  2x 3   4
3x1  x3  7
Solution: Matrix form of the given system is Ax  b

 2 1 1   x1   6 
     
where A   1 4  2  x   x2  and b    4
3 0 1  x   7 
   3  
det A i (b)
By Cramer’s Rule, x i  (i  1, 2, 3)
det A
2 1 1
det A  1 4  2  3
3 0 1

6 1 1 2 6 1
4 4 2 1 4 2
det A1 (b) 7 0 1 6 det A2 (b) 3 7 1 3
x1    2 , x2     1 and
det A 2 3 det A 2 3
2 1 6
1 4 4
det A3 (b) 3 0 7 3
x3     1.
det A 2 3

Exercise: Solve the following system of linear equations by Cramer’s Rule.

2 x1  x 2 7
 3x1  2 x3   8
x 2  2 x3   3

NB: For the non homogeneous system Ax  b , if det A  0 , then the Cramer’s rule does not
give any information whether or not the system has a solution. However, in the case of
homogeneous system we have the following useful theorem.
Theorem 3.1: A system of n homogenous linear equations in n unknowns Ax = 0, has a non
trivial solution if det A  0 . If det A  0, it has only the trivial solution x1 = x2
= … = xn = 0.

3.3 Markov Chain

Markov was a mathematician whose name has been given to a process in which the future state
is completely determined by the present state and not at all by the way the present state arose.

Assume that there are two companies X and Y that produce and sell the same type of
commodities. They compete for customers and the following change occur due to the
promotional companies.

After one period

X Y
one period
Before

X 0.4 0.6
Y 0.7 0.3

The interpretation of the numbers in the table is very important.

0.4 indicates that 40% of X’s customers before one period remain loyal to X after one period as
well. 0.6 indicates to that 60% of X’s previous customers have now shifted to Y. 0.7 indicates
that 70% of Y’s previous customers shifted to X, while 0.3 indicates that 30% Y’s previous
customers remain loyal to Y. Thus, the table represents “transition” of customers from one firm
 0.4 0.6 
to another. The matrix   is called transition matrix
 0.7 0.3 
Note that the rows add to one. (0.4 + 0.6 = 1 and 0.7 + 0.3 = 1)

Let’s assume that the initial market share between X and Y is 0.2 and 0.8. That is, 20% of the
total market is served by X, while 80% of the market is controlled by Y. Given the above
transition matrix their relative market share after one period, two periods, three periods, etc. will
be:
Initial state (0.2 0.8)
  0.4 0.6 
After one period (0.2 0.8)    0.64 0.36
 0.7 0.3 

 0.4 0.6 
After two periods (0.64 0.36)   = (0.508 0.492)
 0.7 0.3 

 0.4 0.6 
After three periods (0.508 0.492)   = (0.5476 0.4428)
 0.7 0.3 

 0.4 0.6 
After four periods (0.5476 0.4428)   = (0.60236 0.39852)
 0.7 0.3 
This process is called Markov Process. Note our transition matrix in this example has been
constant as we moved from a state to state. Such a process is called stationary Markov process.

If this process is repeated for infinite number of times, will the relative share of the two
companies change from state to state or will they maintain an equilibrium after which no change
in relative share occurs despite the transition matrix? The answer is, there is an equilibrium state
known as a steady state, where no change takes place in relative share despite or transition in
customers.
At the steady state:
 0.4 0.6 
(X , Y)   = (X , Y)
 0.2 0.3 
Where X and Y are the market shares of X and Y at the steady state. Thus, solving

X+Y=1 , by definition
0.4x + 0.2y = X by matrix multiplication
0.6x + 0.3y = Y by matrix multiplication

Will give us the value of X and Y.

X+Y=1
-0.6x + 0.7y = 0
0.6x – 0.7y = 0
 R1  R1  1 1 1
 
10 R2  R2   0.6 0.7 0
R2  R3  R3  0.6  0.7 0 


7 R1  R2  R1  1 1 1 
 
6 R1  R2  R2   6 7 0 
R3  R3  0 0 0 

1 R1  R1
3 13 0 7 
 
1 R2  R2  0 13 6 
3
 0 0 0
R3  R3  

1 0 7 
 13
 6 
0 1
13 
 
0 0 0 
 
Therefore X = 7/13 = 0.538
Y = 6/13 = 0.462
If the two companies are at this ratio, the given transition matrix will not produce any
change.
Example
10% of the population own an automobile and 90% do not. Based on past experience 5 percent
of non- owners become owners and 1% of owners become non-owners each year.
a) What will be the percent of owners and non owners next year?
b) What is the steady state?
Solution:
The transition table will be

O N
O 0.99 0.01
N 0.05 0.95
  0.99 0.01 
Wherefore, the transition matrix is  
 0.05 0.95 
a) Initial state 0.1 0.9
 0.99 0.01 
After one year (0.1 0.9)   = (0.144 0.864)
 0.05 0.95 
That is, next year 14.4% of the population will own an automobile while 86.4% will not
have any.
b) To calculate the steady state
 0.99 0.01 
(X1 X2)   = (X1 X2),
 0.05 0.95 
where X1 is the percent that own and X2 that do not.

X1 + X2 = 1 X1 = 1/6 = 0.17
0.99X1 + 0.05X2 = X1 X2 = 5/6 = 0.83
0.01X1 + 0.95X2 = X2
A chain in which one totally absolves the other is called Absorbing Markov chain.
Example:
Assume that, in a year, 0.01% of the non drug-abusers become abusers but all the abusers remain
abusers. What will be the steady state?
Answer:
 1 0 
(X Y)   = (X Y), where X-Drug abusers, Y- Non- abusers.
 0.01 0.99 

The outcome will be (1 0), all will be drug abusers at the steady state.

3.4 Input-Output Analysis

The input-output analysis, initially developed by professor W. Leontief (an American economist
of Russian origin), is another import application of matrix algebra. Input-output analysis
describes the economy as flow of goods and services between the different sectors of the
economy plus the final consumption. Thus, by adjusting the transition matrix (here it is called the
technical coefficient matrix) the planner can achieved the required proportion between the
different sectors of the economy.
Consider, for example, the following input-output model for a closed economy which consists of
three sectors only –agriculture, industry and services.

Input
Agriculture Industry Service Final Consumption
Agriculture 0.2 0.2 0.3 0.3
Out put

Industry 0.3 0.2 0.2 0.3

Service 0.1 0.1 0.2 0.6
Labor 0.7 0.1 0.2

The meanings of the numbers:

Of the total agricultural output 20% is used as input for the agriculture itself (like in the form of
seed, manure, etc.), 20% is used as input for the industry (like cotton to textile, skin to the
tannery, etc) and 30% is used as input for the service (like for Hotels and Restaurants etc.) and
the remained 30% is directly consumed.

Of the total industrial output 30% is used as input for agriculture (like tractors, fertilizers, tools,
etc), 20% as industrial inputs (like spare parts, energy…etc) 20% for the service (like machines
and tools needed in the service sector, and 30% the industrial out put is directly consumed.

Likewise, 10% of the service output goes to agriculture in the form of input (like training for
farmers, health service…etc.) 10% to the industry and 20% for the service sector itself. 60% the
service output is consumed directly.

Lastly, 70% of the total labor force is engaged in agriculture, while 10 and 20 percent of it is
engaged in the industry and service respectively.

Now, we can actually run the Markov process to determine the share of each sector in the
national economy.

Then, the task of the planner will be to achieve the required proportion between the three sectors
by adjusting a) the final consumption, b) the labor supply, and c) the technology matrix.
Example: A hypothetical and simple input-output model of a closed economy is given by the
table below. Calculate the share of agriculture, industry and service at a steady
state. Here final consumption is taken as input as well.
Input
Agriculture Industry Service
Agriculture 0.6 0.2 0.2
Output

Industry 0.3 0.4 0.3

Service 0.2 0.3 0.5

Solution: Let X1 be the share of agriculture

X2 be the share of industry, and
X3 be the share of service
 0.6 0.2 0.2 
 
X 1 X2 X3  0.3 0.4 0.3    X 1 X 2 X 3 
 0.2 0.5 
 0.3

X1 + X2 +X3 = 1
0.6X1 + 0.3X2 + 0.2X3 = X1
0.2X1 + 0.4X2 + 0.3X3 = X2
0.2X1 + 0.3X2 + 0.5X3 = X3

X1 + X2 +X3 = 1
-0.4X1 + 0.3X2 + 0.2X3 = 0
0.2X1 - 0.6X2 + 0.3X3 = 0
0.2X1 + 0.3X2 – 0.5X3 = 0

R1  R1  1 1 1 1
 
4 R1  R2  R2  4 3 2 0
2 R1  R3  R3  2  6 3 0
 
2 R1  R4  R4  2  6 3 0
 
R1  R3  R1  1 1 1 1
 
R2  6 R3  R2  0 7 6 4
R3  8R4  R3  0 8 1 2
 
R2  7 R4  R4  1 2 
 0 7

 21 
55 R1  9 R2  R1  1 9 0 3 1 0 0 
  1
R1  R1  55 0 0 21  55 
R2  R2  0 55 0 16  55    16 
 0 55 0 16  0 1 0 
R3  R3 0 55 18  0 55 18 
0 1  55 
  R2  R2 0
R3  R4  R4  0 55 18  55 
0
  18 
0 
0
1  0 0 0 0 1
50 
R3  R3  
55 0 0 0 0

X1 = 21/55 = 0.38
X2 = 16/55 = 0.29
X3 = 18/55 = 0.33
 CHAPTER FOUR
CONCLUSION
The study was prepared to investigate the theoretical back ground of matrices and and
determinants and its application in Economics .
As mentioned, the matrix and determinant concepts are applicable in fields of social science
especially in Economics. Determinants are also used in solving system linear equations.
Generally, we have shown that the Cramer’s rule is capable of solving system linear equations
whose determinant of its coefficient matrix is non-zero. This method provides an alternative and
supplementary technique to the convectional ways of solving system linear equations. .It is
practical method, easily adaptable on a computer to solve such problems with a modest amount
of problem preparation.
References
1. D. C. Lay, Linear algebra and its applications, Pearson Addison Wesley, 2006
2. Bernard Kolman& David R. Hill, Elementary linear algebra, 8 th ed., Prentice Hall, 2004
3. H. Anton and C Rorres, Elementary linear algebra, John Wiley &Sons, INC., 1994
4. K. Hoffman & R. Kunze, Linear Algebra, 2nd ed., Prentice Hall INC.1971
5. S. Lipschutz, Theory and problems of linear algebra, 2nd ed. McGraw-Hill1991.
6. DemissuGemeda, An Introduction to Linear Algebra, Department of Mathematics, AAu,
2000
7. C.M. Bender ,S.A.Orszag, Advanced Mathematical Method for scientists and Engineers,
McGraw-Hill, New York , 1978
8. Dr. M. Shantha Kumar, Computer Based Numerical Analysis, First Edition, New Delhi,
1999
9. Frank Ayres, Theory and Differential Equations (Schuam’s outline series, 1981)
10. E. Angel, R. Bellman, Dynamic programming and Partial Differential Equation,
Academic press, New York , 1972
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Table of Contents
Chapter One ................................................................................................................................1
Introduction ................................................................................................................................1
1.1 Background of the Study ...................................................................................................1
1.2 Objective of the study ........................................................................................................1
1.2.1 General Objective .......................................................................................................1
1.2.2 Specific Objectives .....................................................................................................1
Chapter Two ...............................................................................................................................2
Preliminary Concepts ..................................................................................................................2
 2.1 Definition of a matrix ....................................................................................................2
2.2 Types of matrices ..............................................................................................................3
2.3 Algebra of matrices .......................................................................................................5
2.4 Transpose of a matrix ...................................................................................................... 10
2.5 Elementary row and column operations ....................................................................... 11
2.6 Row reduced echelon form of a matrix ........................................................................ 12
Chapter Three ........................................................................................................................... 13
Relevance of Matrix and Determinant in Economics ................................................................. 13
3.1 Definition of a Determinant ........................................................................................... 13
3.2 Solving a linear system .................................................................................................... 14
3.3 Markov Chain.................................................................................................................. 16
3.4 Input-Output Analysis ..................................................................................................... 19
References............................................................................................................................. 24