Mathematical economics is the application of mathematical methods to represent economic theories and analyze problems posed in economics. It allows formulation and derivation of key relationships in a theory with clarity, generality, rigor, and simplicity. By convention, the applied methods refer to those beyond simple geometry, such as differential and integral calculus, difference and differential equations, matrix algebra, and mathematical programming and other computational methods.
Mathematics allows economists to form meaningful, testable propositions about many wide-ranging and complex subjects which could not be adequately expressed informally. Further, the language of mathematics allows economists to make clear, specific, positive claims about controversial or contentious subjects that would be impossible without mathematics. Much of economic theory is currently presented in terms of mathematical economic models, a set of stylized and simplified mathematical relationships that clarify assumptions and implications.
Broad applications include:
- optimization problems as to goal equilibrium, whether of a household, business firm, or policy maker
- static (or equilibrium) analysis in which the economic unit (such as a household) or economic system (such as a market or the economy) is modeled as not changing
- comparative statics as to a change from one equilibrium to another induced by a change in one or more factors
- dynamic analysis, tracing changes in an economic system over time, for example from economic growth.
Formal economic modeling began in the 19th century with the use of differential calculus to represent and explain economic behavior, such as utility maximization, an early economic application of mathematical optimization. Economics became more mathematical as a discipline throughout the first half of the 20th century, but introduction of new and generalized techniques in the period around the Second World War, as in game theory, would greatly broaden the use of mathematical formulations in economics.
This rapid systematizing of economics alarmed critics of the discipline as well as some noted economists. John Maynard Keynes, Robert Heilbroner, Friedrich Hayek and others have criticized the broad use of mathematical models for human behavior, arguing that some human choices are irreducible to mathematics.