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

yt yt yt 1

is a difference equation

Examples of Difference Equations

1. yt yt 1 2
2. yt 1 3 yt 3
3. yt 2 3 yt 1 3 yt 4
4. yt 2 yt 1 3 yt 2 1
5. yt 1 3 yt 2t
6. yt 1 2 yt 3
2

7. yt 1 2 log( yt ) 3
8. yt 1 2 yt 3t 2
9. yt 3 2 yt 2 3 yt 1 yt 10

Classification of difference equations

by order

1.

Equations 1-9 above are all examples of

difference equations however these
equations have different characteristics
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 1. yt yt 1 2
2. yt 1 3 yt 3
3. yt 1 2 log( yt ) 3
4 yt 1 2 yt 3t 2

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
1. yt 2 3 yt 1 3 yt 4
2. yt 2 yt 1 3 yt 2 1
2

3. yt 2 yt 1 3 log( yt 2 ) 3t

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
1. yt yt 3 2
2. yt 3 3 yt 3
2

3. yt 3 2 yt 2 3 yt 1 yt 10

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 yt , yt 1 , yt 2 , etc it is
linear if all of the y terms are raised to no power
other than one.

Examples of linear and non-linear

difference equations
1. yt yt 1 2

Difference
equations
6,7and 8 are
linear while
others are nonlinear

2. yt 1 3 yt 3
3. yt 2 3 yt 1 3 yt 4
4. yt 2 yt 1 3 yt 2 1
5. yt 1 3 yt 2t
6. yt 1 2 yt 3
2

7. yt 1 2 log( yt ) 3
8. yt 1 2 yt 3t 2
9. yt 3 2 yt 2 3 yt 1 yt 10

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
1. y y 2
Difference
2. y 3 y 3
equations 5and 3. y 3 y 3 y 4
4. y 2 y 3 y 1
8 are non5. y 3 y 2t
autonomous
6. y 2 y 3
and others are 7. y 2 log( y ) 3
8. y 2 y 3t
autonomous
9. y 2 y 3 y y 10
difference
equations
t 1

t 1

t 2

t 1

t 1

t 1

t 2

t 1

t 1

t 1

t 3

t 2

t 1

Solutions of Difference Equations

The solution of a difference equation is a

function that satisfies the difference equation
true
t
Example: yt 2 is solution of

yt 1 2 yt , t 1,2,3,...
The solution of a difference equation is not
unique as a result y C 2t
t

Exercise

Classify each of the following according to

order, linear or non-linear , autonomous or
non-autonomous and difference or differential
equations

1. yt 1 yt 0
2. yt 2 yt 1 2 yt 1
3. yt 2 y t 1 t

4. yt 2 2 yt
2

5. yt 1 3 yt 2t
6. yt 1 2 yt 3
2

7. yt 1 2 log( yt ) 3
8. yt 1 2 yt 3t 2
9. yt 3 2 yt 2 3 yt 1 yt 10

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 :

yt 1 ayt b, t 0,1,2,...
where a & b are known constants

Solution of First Order Linear

Autonomous Difference Equations

Solving a difference equation is generally

finding the function of time yt that that
satisfies the difference equation

Solution Methods of first order linear

difference equations with constant
coefficients

The linear ,first-order, autonomous difference

equation is given by :

yt 1 ayt b, t 0,1,2,...
where a & b are known constants and given y 0
is initial value first order autonomous
difference equation

Solution of initial value first order

linear difference equations with
constant coefficients

Given initial value linear ,first-order,

autonomous difference equation :

yt 1 ayt b, t 0,1,2,...
where a & b are known constants and given y 0
solution is given by
t
1 at
a y0 b
yt
1 a

y0 bt

if a 1, t 0,1,2,...

if a 1

Solution of general first order linear

difference equations with constant
coefficients

Given the general linear ,first-order,

autonomous difference equation :

yt 1 ayt b, t 0,1,2,...
where a & b are known constants
solution is given by
t
1 at
Ca b
yt
1 a

C bt

if a 1, t 0,1,2,...

if a 1

Solve each of the following initial value first order

linear difference equations with constant
coefficients

a. yt 1 yt 2 , y0 2
b. yt 1 3 yt 1 , y0 1
c. yt 1 0.5 yt 50 , y0 50
d . 3 yt 2 yt 1 1 , y0 2

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 y y
t 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 :

yt 1 ayt b, t 0,1,2,...
where a & b are known constants
The steady state solution is given by
b
y
,a 1
1 a

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

a. yt 1 yt y 2 , y0 2
t

b. yt 1 3 yt 1 , y0 1
c. yt 1 0.5 yt 50 , y0 50
d . 3 yt 2 yt 1 1 , y0 2

Application

Simple interest and compound interest

Introduction to Differential
Equations

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ordinary differential equations

Definition:
A differential equation is an equation containing an unknown function
and its derivatives.
Examples:.

1.

dy
2x 3
dx

2.

d2y
dy

3
ay 0
2
dx
dx

3.

d 3 y dy
6y 3
3
dx
dx

y is dependent variable and x is independent variable, and these are ordinary

differential equations since only ordinary derivatives are involved in the equation
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Partial Differential Equation

Examples:
1.

2u 2u
2 0
2
x
y

u is dependent variable and x and y are independent variables,

and is partial differential equation.

2.

4u 4u
4 0
4
x
t

3.

2 u 2 u u
2
2
t
x
t

u is dependent variable and x and t are independent variables

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Order of Differential Equation

The order of the differential equation is order of the highest
derivative in the differential equation.
Differential Equation

ORDER

dy
2x 3
dx

d2y
dy
3 9y 0
2
dx
dx
4

d 3 y dy
6y 3
3
dx
dx
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Degree of Differential Equation

The degree of a differential equation is power of the highest
order derivative term in the differential equation.
Differential Equation

d2y
dy
3 ay 0
2
dx
dx

Degree
1

d 3 y dy
6y 3
3
dx
dx
3

d 2 y dy
2 3 0
dx dx
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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:

d2y
dy

3
9 y 0.
1.
2
dx
dx
is linear.

Example: 2.

d 3 y dy
6y 3
3
dx
dx

is non - linear because in 2nd term is not of degree one.

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Example: 3.

d2y
dy
3
x

x
dx
dx 2
2

is non - linear because in 2nd term coefficient depends on y.

Example: 4.

dy
sin y
dx
is non - linear because

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sin y y

3!

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is non linear

32

It is Ordinary/partial Differential equation of order and of degree, it is

linear / non linear, with independent variable, and dependent variable.
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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

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Examples

1. y 5 y t

2. y 5 y 3

3. y t y cos t

4. y y 0
2

Differential
equations 2 and 4
are autonomous
and 1 and 3 are
non-autonomous
differential
equations
dy
Notations: y dt

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1st order differential equation

1. Derivative form:

dy
a1 x a 0 x y g x
dx
2. Differential form:

1 xdy ydx 0
.

3. General form:

dy
f ( x, y )
dx
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or

Mathematics for Economists

dy
f ( x , y , ) 0.
dx
36

First Order Ordinary Differential

equation

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Second order Ordinary Differential

Equation

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nth order linear differential

equation
1. nth order linear differential equation with constant coefficients.

dny
d n 1 y
d2y
dy
a n n a n 1 n 1 .... a 2 2 a1
a0 y g x
dx
dx
dx
dx
2. nth order linear differential equation with variable coefficients

dy
d n 1 y
d2y
dy

a n x a n 1 x

......

a
x

a
x
a0 x y g x
2
1
n
2
dx
dx
dx
dx

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Autonomous Equations
Definition: The general form of the linear
autonomous first order differential
equation is

y ay b
where

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a&b

are constants

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Examples
Each of the following are autonomous first
order linear differential equations

1. y 5 y 2

2. y 5 y 3

3. y 0.3 y 0

4. y y 0
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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

2t
For example for y 2 y 0 , y e is a
solution

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Solution methods of autonomous

differential equations

Given y ay b
where a & b are
constants

If b=0, the equation y ay 0 is called

homogeneous otherwise it is called nonhomogeneous differential equation

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Examples
Equations 3 & 4 are homogeneous while 1
and 2 are non-homogeneous

1. y 5 y 2

2. y 5 y 3

3 . y 0 .3 y 0

4. y y 0
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Solution methods of autonomous differential equations

Given y ay b
where a & b
are constants
Solving it involves two steps
1. Finding the solution of the complementary

homogeneous equation y ay 0, yh

2. Finding the a particular solution where y 0

3. And finally the general solution is given by
y yh y p
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Theorem( Homogeneous solution)

The general solution of the homogeneous
form of the linear , autonomous
, first order

differential equation y ay 0 is where a is

a constant

yh Ce

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at

46

Exercise
Solve each of the following differential
equations

1. y 5 y 0

2. y 5 y 0

3. y 0.3 y 0

4. y y 0
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Particular Solution
A steady state solution of a differential
equation is the solution
of the differential

dy
equation where y dt 0 hence the
steady state solution of the y ay b where
a & b are constants is y b , this steady
a
state solution is particular solution of y ay b
Hence the general solution of y ay b is

y y p yh Ce
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Examples
Find the general solution of each of the
following differential equations

1. y 0.5 y 2

2. y 5 y 3

3. y 0.3 y 2

4. y y 0
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The Initial Value Problem (IVP)

Given y ay b
where a & b
are
constants and if initial value y (0) y0 is
given the problem is called initial value
problem and the general solution will give
rise to the solution
b at b

y y p y h y 0 e
a
a

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Exercises: Solve the following

differential equations

a. y y 0 and y0 1

b. y 3 y 12 and y0 10

c. 2 y 1 / 2 y 12 and y0 10

d . y 5 and y0 1
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e. y 6 y 6 and y0 3

f . 10 y 5 y and y0 1

g . 4 y 4 y 8 and y0 10

h. y 7 and y0 2

i. y 2 y 1 and y0 5

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a. y 2 y 4 and y0 3
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Examples
Solve each of the following IVP

1. y 0.5 y 2, y0 10

2. y 5 y 3, y0 2

3. y 0.3 y 2, y0 3

1
4. y y 0, y0 1 / 4
5
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Steady Sate and convergence

Given y ay b
where a & b
are
constants the solution is converges to the
steady state solution y b no matter what
the initial value if and onlya if the coefficient
of the differential equation a 0

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Example
Discuss the convergence of the solution of
each of the following ODEs

1. y 0.5 y 2, y0 10

2. y 5 y 3, y0 2

3. y 0.3 y 2, y0 3

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1
4. y y 0, y0 1 / 4
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