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Introduction to Difference
Equations
Mathematics for Economists
Economic Dynamics
Economic dynamics is a study of how
economic variables evolve over time
Examples
Price change over time
GDP per capita change over time
Are examples of economic variables that change
over time
Definition of Difference Equation
A difference equation is an equation of the
change in a variable over discrete time
Example
is a difference equation
1 ttt yyy
Examples of Difference Equations
1032.9
32.8
3)log(2.7
32.6
23.5
132.4
433.3
33.2
2.1
123
2
1
1
2
1
1
21
12
1
1
tttt
tt
tt
tt
tt
ttt
ttt
tt
tt
yyyy
tyy
yy
yy
tyy
yyy
yyy
yy
yy
Classification of difference equations
by order Equations 1-9 above are all examples of
difference equations however these
equations have different characteristics
1. Some equations show change relationship
of two consecutive values y(t+1) and y(t) or
y(t) and y(t-1) called first order difference
equations Example
2
1
1
1
1
324
3)log(2.3
33.2
2.1
tyy
yy
yy
yy
tt
tt
tt
tt
Classification of difference equations
by order 2. Some equations show change relationships
between three consecutive values y(t+2) ,y(t+1)
and y(t) or y(t) , y(t-1)and y(t-2) called second
order difference equation
Example
tyyy
yyy
yyy
ttt
ttt
ttt
3)log(32.3
132.2
433.1
21
21
2
12
Classification of difference equations
by order 3. Some equations show change relationships
between more than three consecutive values
y(t+3), y(t+2) ,y(t+1) and y(t) called higher
order difference equations
Examples
1032.3
33.2
2.1
123
2
3
3
tttt
tt
tt
yyyy
yy
yy
Linear and Non-linear Difference
Equations Difference equations can also be classified as
linear or non-linear
A difference equation is nonlinear if it involves
any non-linear terms of it is
linear if all of the y terms are raised to no power
other than one.
etcyyy ttt ,,, 21
Examples of linear and non-linear
difference equations
1032.9
32.8
3)log(2.7
32.6
23.5
132.4
433.3
33.2
2.1
123
2
1
1
2
1
1
21
12
1
1
tttt
tt
tt
tt
tt
ttt
ttt
tt
tt
yyyy
tyy
yy
yy
tyy
yyy
yyy
yy
yy
Difference
equations
6,7and 8 are
linear while
others are non-
linear
Autonomous and Non-autonomous
Difference Equations Autonomous and Non-autonomous
Difference equations
A difference equation is said to be
autonomous if it does not depend on time
explicitly ;otherwise it is non-autonomous
Autonomous and Non-autonomous
difference equations
1032.9
32.8
3)log(2.7
32.6
23.5
132.4
433.3
33.2
2.1
123
2
1
1
2
1
1
21
12
1
1
tttt
tt
tt
tt
tt
ttt
ttt
tt
tt
yyyy
tyy
yy
yy
tyy
yyy
yyy
yy
yy Difference
equations 5and
8 are non-
autonomous
and others are
autonomous
difference
equations
Solutions of Difference Equations
The solution of a difference equation is a
function that satisfies the difference equation
true
Example: is solution of
The solution of a difference equation is not
unique as a result
t
ty 2
,...3,2,1,21 tyy tt
t
t Cy 2
Exercise
Classify each of the following according to
order, linear or non-linear , autonomous or
non-autonomous and difference or differential
equations
1032.9
32.8
3)log(2.7
32.6
23.5
2.4
2.3
12.2
0.1
123
2
1
1
2
1
1
2
2
3
12
1
1
tttt
tt
tt
tt
tt
tt
t
ttt
tt
yyyy
tyy
yy
yy
tyy
yy
tyy
yyy
yy
t
Solution Methods of first order linear
difference equations with constant
coefficients Definition: The general form of the linear
,first-order, autonomous difference equation
is given by :
,...2,1,0,1 tbayy tt
constants& knownarebawhere
Solution of First Order Linear
Autonomous Difference Equations Solving a difference equation is generally
finding the function of time that that
satisfies the difference equation ty
Solution Methods of first order linear
difference equations with constant
coefficients The linear ,first-order, autonomous difference
equation is given by :
is initial value first order autonomous
difference equation
,...2,1,0,1 tbayy tt
0ygiven and constants& knownarebawhere
Solution of initial value first order
linear difference equations with
constant coefficients Given initial value linear ,first-order,
autonomous difference equation :
solution is given by
,...2,1,0,1 tbayy tt
0ygiven and constants& knownarebawhere
1
,...2,1,0,11
1
0
0
aifbty
taifa
abya
y
tt
t
Solution of general first order linear
difference equations with constant
coefficients Given the general linear ,first-order,
autonomous difference equation :
solution is given by
,...2,1,0,1 tbayy ttconstants& knownarebawhere
1
,...2,1,0,11
1
aifbtC
taifa
abCa
y
tt
t
Solve each of the following initial value first order
linear difference equations with constant
coefficients
2,123.
50,505.0.
1,13.
2,2.
01
01
01
01
yyyd
yyyc
yyyb
yyya
tt
tt
tt
tt
Steady state solution
Steady State or stationary value in a
linear first order autonomous
difference equation is defined as the
value of y at which the system comes
to rest. That is the case where
tt yy 1
Steady state solution
Do the price of fuel increase indefinitely or
will converge to some number at some point
in time?
Steady state solution
Given the general linear ,first-order,
autonomous difference equation :
The steady state solution is given by
,...2,1,0,1 tbayy ttconstants& knownarebawhere
1,1
aa
by
Exercises For each of the following difference equations
Solve for the steady state if it exists and indicate
whether or not converge to the steady state
ty
2,123.
50,505.0.
1,13.
2,2.
01
01
01
01
yyyd
yyyc
yyyb
yyya
tt
tt
tt
tt
Application
Simple interest and compound interest
Introduction to Differential
Equations
5/25/2015 26 Mathematics for Economists
Definition:
A differential equation is an equation containing an unknown function
and its derivatives.
32 xdx
dy
032
2
aydx
dy
dx
yd
36
4
3
3
y
dx
dy
dx
yd
Examples:.
y is dependent variable and x is independent variable, and these are ordinary
differential equations since only ordinary derivatives are involved in the equation
1.
2.
3.
ordinary differential equations
5/25/2015 27 Mathematics for Economists
Partial Differential Equation
Examples:
02
2
2
2
y
u
x
u
04
4
4
4
t
u
x
u
t
u
t
u
x
u
2
2
2
2
u is dependent variable and x and y are independent variables,
and is partial differential equation.
u is dependent variable and x and t are independent variables
1.
2.
3.
5/25/2015 28 Mathematics for Economists
Order of Differential Equation
The order of the differential equation is order of the highest
derivative in the differential equation.
Differential Equation ORDER
32 xdx
dy
0932
2
ydx
dy
dx
yd
36
4
3
3
y
dx
dy
dx
yd
1
2
3
5/25/2015 29 Mathematics for Economists
Degree of Differential Equation
Differential Equation Degree
03
2
2
aydx
dy
dx
yd
36
4
3
3
y
dx
dy
dx
yd
03
53
2
2
dx
dy
dx
yd
1
1
3
The degree of a differential equation is power of the highest
order derivative term in the differential equation.
5/25/2015 30 Mathematics for Economists
Linear Differential Equation
A differential equation is linear, if
1. dependent variable and its derivatives are of degree one,
2. coefficients of a term does not depend upon dependent
variable.
Example:
36
4
3
3
y
dx
dy
dx
yd
is non - linear because in 2nd term is not of degree one.
.0932
2
ydx
dy
dx
ydExample:
is linear.
1.
2.
5/25/2015 31 Mathematics for Economists
Example: 3
2
22 x
dx
dyy
dx
ydx
is non - linear because in 2nd term coefficient depends on y.
3.
Example:
is non - linear because
ydx
dysin
!3
sin3y
yy is non linear
4.
5/25/2015 32 Mathematics for Economists
It is Ordinary/partial Differential equation of order and of degree, it is linear / non linear, with independent variable, and dependent variable.
5/25/2015 33 Mathematics for Economists
Autonomous ordinary differential equation
Mostly economic dynamics involves time as independent variable and differential
equations of time as independent variable
are common in economic modeling
A differential equation of time is said to be autonomous if it does not depend on time
explicitly otherwise it is non-autonomous
5/25/2015 Mathematics for Economists 34
Examples
5/25/2015 Mathematics for Economists 35
0.4
cos.3
35.2
5.1
2
2
yy
tyty
yy
tyy Differential equations 2 and 4
are autonomous
and 1 and 3 are
non-autonomous
differential
equations
Notations: dt
dyy
1st order differential equation
2. Differential form:
01 ydxdyx.
.0),,( dx
dyyxf),( yxf
dx
dy
3. General form:
or
1. Derivative form:
xgyxadx
dyxa 01
36 Mathematics for Economists 5/25/2015
First Order Ordinary Differential
equation
37 Mathematics for Economists 5/25/2015
Second order Ordinary Differential
Equation
38 Mathematics for Economists 5/25/2015
nth order linear differential equation
1. nth order linear differential equation with constant coefficients.
xgyadx
dya
dx
yda
dx
yda
dx
yda
n
n
nn
n
n
012
2
21
1
1 ....
2. nth order linear differential equation with variable coefficients
xgyxadx
dyxa
dx
ydxa
dx
ydxa
dx
dyxa
n
n
nn
012
2
2
1
1 ......
39 Mathematics for Economists 5/25/2015
Autonomous Equations
Definition: The general form of the linear autonomous first order differential
equation is
where are constants
5/25/2015 Mathematics for Economists 40
bayy
ba &
Examples
Each of the following are autonomous first order linear differential equations
5/25/2015 Mathematics for Economists 41
0.4
03.0.3
35.2
25.1
yy
yy
yy
yy
Solution Methods
For different types of differential equations there are different methods of solving but
generally the solution of a differential
equation is a function that satisfies the
differential equation
For example for , is a solution
5/25/2015 Mathematics for Economists 42
02
yytey 2
Solution methods of autonomous
differential equations
Given where are
constants
If b=0, the equation is called
homogeneous otherwise it is called non-
homogeneous differential equation
5/25/2015 Mathematics for Economists 43
bayy
ba &
0
ayy
Examples
Equations 3 & 4 are homogeneous while 1 and 2 are non-homogeneous
5/25/2015 Mathematics for Economists 44
0.4
03.0.3
35.2
25.1
yy
yy
yy
yy
Solution methods of autonomous differential equations
Given where are constants
Solving it involves two steps
1. Finding the solution of the complementary
homogeneous equation
2. Finding the a particular solution where
3. And finally the general solution is given by
5/25/2015 Mathematics for Economists 45
bayy
ba &
hyayy ,0
0
y
ph yyy
Theorem( Homogeneous solution)
The general solution of the homogeneous form of the linear , autonomous , first order
differential equation is where is
a constant
5/25/2015 Mathematics for Economists 46
0
ayy
atCeyh
a
Exercise
Solve each of the following differential equations
5/25/2015 Mathematics for Economists 47
0.4
03.0.3
05.2
05.1
yy
yy
yy
yy
Particular Solution
A steady state solution of a differential equation is the solution of the differential
equation where hence the
steady state solution of the where
are constants is , this steady
state solution is particular solution of
Hence the general solution of is
5/25/2015 Mathematics for Economists 48
0
dt
dyy
bayy
ba &a
by
bayy
bayy
a
bCeyyy athp
Examples
Find the general solution of each of the following differential equations
5/25/2015 Mathematics for Economists 49
0.4
23.0.3
35.2
25.0.1
yy
yy
yy
yy
The Initial Value Problem (IVP)
Given where are constants and if initial value is
given the problem is called initial value
problem and the general solution will give
rise to the solution
5/25/2015 Mathematics for Economists 50
bayy
ba &
0)0( yy
a
be
a
byyyy athp
0
Exercises: Solve the following
differential equations
5/25/2015 Mathematics for Economists 51
15.
10122/12.
10123.
10.
0
0
0
0
yandyd
yandyyc
yandyyb
yandyya
5/25/2015 Mathematics for Economists 52
342.
512.
27.
10844.
1510.
366.
0
0
0
0
0
0
yandyya
yandyyi
yandyh
yandyyg
yandyyf
yandyye
Examples
Solve each of the following IVP
5/25/2015 Mathematics for Economists 53
4/1,05
1.4
3,23.0.3
2,35.2
10,25.0.1
0
0
0
0
yyy
yyy
yyy
yyy
Steady Sate and convergence
Given where are constants the solution is converges to the
steady state solution no matter what
the initial value if and only if the coefficient
of the differential equation
5/25/2015 Mathematics for Economists 54
bayy
ba &
a
by
0a
Example
Discuss the convergence of the solution of each of the following ODEs
5/25/2015 Mathematics for Economists 55
4/1,05
1.4
3,23.0.3
2,35.2
10,25.0.1
0
0
0
0
yyy
yyy
yyy
yyy