Dynamic Analysis

Introduction
The first part looked at static analysis then moved on to comparative
static analysis
◦ Questions of what the equilibrium will be under certain conditions

Dynamic Analysis- attainability of the equilibrium position

◦ What happens if initially we are away from equilibrium, will it
converge to eqm?
◦ The path the variables follows as it progress to equilibrium

1. Integration
2. Differential equations
3. Difference equations
Introduction
In dynamic analysis time is of crucial importance and is considered in
two ways
◦ As a continuous variable e.g continuous interest compounding
◦ As a discrete variable- once within a period

Integration and differential equations are used to analyse a continuous

time case

Difference equations are used to analyse a discrete time case

Integration
 Rules of Integration
◦ Indefinite Integrals
◦ Definite integrals
◦ Improper integral

Economic Application
Integration
Can define it as a process of uncovering the primitive
function from a given derived function.
Finding F(x), the integral or anti-derivative given f(x) the
derivative

𝑓 𝑥 𝑑𝑥 = 𝐹 𝑥 + 𝑐

f(x) is the integrand

F(x) is the indefinite integral
c is a constant of integration
Rules of Integration-
Continuous variables & indefinite
Integrals
• Indefinite integral mean that we carry a constant, c.

•c in the answer means you acknowledge multiple parentage

(primary function).
 Note on the constant of
Integration
2𝑑𝑥 = 2𝑥 + 𝑐

Note:
F1(x)=2x-7 f(x)=2
F2(x)=2x+100 f(x)=2
F3(x)=2x+5/9 f(x)=2

The derivative (f(x)=2) is true for an infinite number of

functions.
Rules of Integration
1. Integration of a constant, k

𝒌𝒅𝒙 = 𝒌𝒙 + 𝒄

e.g.
9𝑑𝑥 = 9𝑥 + 𝑐

1𝑑𝑥 = 𝑥 + 𝑐
Rules of Integration
2. The power rule (n≠-1)
𝟏
𝒙𝒏 𝒅𝒙 = 𝒙𝒏+𝟏 + 𝒄
𝒏+𝟏
1
𝑥 8 𝑑𝑥 = 𝑥 9 + 𝑐 Check:
9 𝑑 1 9 1 9−1
𝑥 +𝑐 =9 𝑥 + 0 = 𝑥8
Examples 𝑑𝑥 9 9
1 𝟏
1 −2+1
i 𝑥 −1/2 𝑑𝑥………………..= 1 𝑥 + 𝑐 = 𝟐𝒙 + 𝒄
𝟐
−2+1
1 𝟏
𝑖𝑖 𝑥 3 𝑑𝑥 …………………= 𝑥 3+1 + 𝑐 = 𝒙𝟒 + 𝒄
3+1 𝟒
1 1 𝟏
𝑖𝑖𝑖 𝑑𝑥 …………………= 𝑥 −4 𝑑𝑥 = 𝑥 −4+1 + 𝑐 = − 𝒙−𝟑 + 𝒄
𝑥4 −4+1 𝟑
Rules of Integration
3. Integration of a constant multiplied by a variable term

𝑲𝒇 𝒙 𝒅𝒙 = 𝑲 𝒇 𝒙 𝒅𝒙

−𝒇 𝒙 𝒅𝒙 = − 𝒇 𝒙 𝒅𝒙

Examples
1 𝟓
5𝑥 6 𝑑𝑥………..= 5 𝑥 6 𝑑𝑥 = 5 𝑥 6+1 + 𝑐 = 𝒙𝟕 + 𝒄
6+1 𝟕
2 2 2 𝟏
−3 −3 1 −3+1
−3𝑥 𝑑𝑥…..−3 𝑥 𝑑𝑥 = −3 2 𝑥 + 𝑐 = −𝟗𝒙 + 𝒄
𝟑
−3+1
Rules of Integration
4. The log rule
𝒅𝒍𝒏 𝒇 𝒙 𝒇′(𝒙)
Recall =
𝒅𝒙 𝒇(𝒙)
So
𝒇′(𝒙)
𝒅𝒙 = 𝐥𝐧 𝒇 𝒙 + 𝒄
𝒇(𝒙)
The numerator function is a first derivative of the denominator function
3𝑥 2 −4
e.g. find 𝑑𝑥
𝑥 3 −4𝑥+1
Let 𝑓 𝑥 = 𝑥 3 − 4𝑥 + 1
𝑓 ′ 𝑥 = 3𝑥 2 − 4
Therefore
3𝑥 2 − 4
3
𝑑𝑥 = ln 𝑥 3 − 4𝑥 + 1 + 𝑐
𝑥 − 4𝑥 + 1
Rules of Integration
𝟏
5. The integral of 𝒙−𝟏 𝒐𝒓
𝒙

(log rule)
𝒙−𝟏 𝒅𝒙 = 𝒍𝒏𝒙 + 𝒄

x˃0
𝒇′(𝒙)
Similar to the log rule 𝒅𝒙 = 𝐥𝐧 𝒇 𝒙 + 𝒄
𝒇(𝒙)
Rules of Integration
6. Integration of a natural exponential function
𝒆𝒙 𝒅𝒙 = 𝒆𝒙 + 𝒄

𝟏
𝒆𝒇(𝒙) 𝒅𝒙 = . 𝒆𝒇(𝒙) +𝒄
𝒇′(𝒙)
𝒈(𝒙) 𝒇(𝒙)
𝒈 𝒙 . 𝒆𝒇(𝒙) 𝒅𝒙= .𝒆 +𝒄
𝒇′(𝒙)

e.g
1 𝟑
1. 3𝑒 2𝑥 dx………………= 3 𝑒 2𝑥 𝑑𝑥 = 3. . 𝑒 2𝑥 + 𝑐 = 𝒆𝟐𝒙 + 𝒄
2 𝟐
4𝑥 2 2𝑥 4𝑥 2 𝟏 𝟒𝒙𝟐
2. 2𝑥𝑒 dx………….=
8𝑥
.𝑒 +𝑐 =
𝟒
𝒆 +𝒄
Rules of Integration
7. Integration of the sum or difference of several power functions

𝒇 𝒙 ± 𝒈 𝒙 𝒅𝒙 = 𝒇 𝒙 𝒅𝒙 ± 𝒈 𝒙 𝒅𝒙

e.g.
𝟓
5𝑥 − 3𝑥 2 dx…………….= 5𝑥 𝑑𝑥 − 3 𝑥 2 𝑑𝑥 = 𝟐 𝒙𝟐 − 𝒙𝟑 + 𝒄
14𝑥 14𝑥
(2𝑒 2𝑥 + 7𝑥 2 +5)𝑑𝑥…….= 2 𝑒 2𝑥 𝑑𝑥 + 7𝑥 2 +5
𝑑𝑥 = 𝒆𝟐𝒙 + 𝐥𝐧 𝟕𝒙𝟐 + 𝟓 + 𝒄
Rules of Integration
8. Substitution Rule
𝒅𝒖
𝒇 𝒖 . . 𝒅𝒙 = 𝒇 𝒖 𝒅𝒖 = 𝑭 𝒖 + 𝒄
𝒅𝒙

e.g.
6𝑥 2 (𝑥 3 + 2)99 𝑑𝑥
𝑑𝑢 𝑑𝑢
Let 𝑢 = 𝑥3 +2 = 3𝑥 2 ………..𝑑𝑥 =
𝑑𝑥 3𝑥 2
𝑑𝑢 1 100
6𝑥 2 (𝑥 3 + 2)99 𝑑𝑥 = 2 99
6𝑥 . 𝑢 . 2 = 2 𝑢99 𝑑𝑢 = 𝑢
3𝑥 50
𝟏
= (𝒙𝟑 + 𝟐)𝟏𝟎𝟎 +𝒄
𝟓𝟎
More Example
(6𝑥 2 + 10)(𝑥 3 + 5𝑥 + 2)4 𝑑𝑥
Substitution rule
𝑑𝑢 𝑑𝑢
𝑙𝑒𝑡 𝑢 = 𝑥 3 + 5𝑥 + 2 = 3𝑥 2 + 5 … … dx =
𝑑𝑥 3𝑥 2 +5
𝑑𝑢 𝑑𝑢
(6𝑥 2 + 10)𝑢4 2 3𝑥 2 + 5 𝑢4 = 2𝑢4 𝑑𝑢
3𝑥 2 +5 3𝑥 2 +5
2
= 𝑢5
5
𝟐
= (𝒙𝟑 + 𝟓𝒙 + 𝟐)𝟓 +𝒄
𝟓
Rules of Integration
10. Integration by parts
If you can identify two functions
𝑣=𝑓 𝑥 𝑎𝑛𝑑 𝑢 = 𝑔(𝑥)
Then

𝒗. 𝒅𝒖 = 𝒖𝒗 − 𝒖. 𝒅𝒗

e.g.
𝑥. 𝑒 𝑥 𝑑𝑥

𝑑𝑣
Let v=x then = 1 𝑎𝑛𝑑 𝑑𝑣 = 𝑑𝑥
𝑑𝑥
Let 𝑑𝑢 = 𝑒 𝑥 𝑑𝑥 then 𝑢 = 𝑒 𝑥 𝑑𝑥 = 𝑒 𝑥 (omit the constant at this stage)
 𝑥
Conti. v=x ; dv=dx; du=𝑒 𝑑𝑥 ;
𝑥
u=𝑒
So
𝑥. 𝑒 𝑥 𝑑𝑥 = 𝑣. 𝑑𝑢 = 𝑢𝑣 − 𝑢. 𝑑𝑣

= 𝑒 𝑥 . 𝑥 − 𝑒 𝑥 𝑑𝑥
= 𝑒 𝑥 . 𝑥 − 𝑒 𝑥 + 𝑐 (include the constant when integration has been completed
= 𝑒𝑥 𝑥 − 1 + 𝑐
How do you know which part is v and which part is du?
Rule of thumb: the part of the integrand that will become a constant if
(repeatedly) differentiated is usually the v
e.g. Find 𝑙𝑛𝑥 . 𝑥𝑑𝑥
𝑙𝑛𝑥𝑑𝑥
Summary
𝑓(𝑥)
When we have 𝑓 𝑥 . 𝑔 𝑥 𝑑𝑥 or 𝑑𝑥 , there is no general formula
𝑔(𝑥)
to separate it into the integrals of f(x) and g(x)

So chose the appropriate method from either

- exponential rule
- log rule
- substitution rule
- integration by parts
 Definite Integral
Indefinite integral is given as a continuous function e.g.
𝑓 𝑥 𝑑𝑥 = 𝐹 𝑥 + 𝑐

Introduce 2 limits into the integration to get a definite numerical

value in the solution.
◦ Lower limit of integration, a
◦ Upper limit of integration, b

𝒃
𝒃
𝒇 𝒙 𝒅𝒙 = 𝑭 𝒙 𝒂= 𝑭 𝒃 − 𝑭(𝒂)
𝒂
 4 3 2
1. 2
(𝑥 − 6𝑥 )𝑑𝑥
1 4 4
Integrate = 𝑥 − 2𝑥 3 2
4
Evaluate at the
limits 1 4 3
1
= (4) −2(4) − (2)4 −2(2)3
4 4

= 64 − 128 − 4 − 16

= −64 + 12

= −𝟓𝟐
 3 2𝑥
2. 0
𝑒 𝑑𝑥
Use exponential rule
1 2𝑥 3
= 𝑒 0
2

1 2(3)
= (𝑒 − 𝑒 2(0) )
2

1
= (403.429 − 1)
2

= 𝟐𝟎𝟏. 𝟐𝟏
 1 3 2 2
3. −1
(2𝑥 − 1) (6𝑥 )𝑑𝑥
Using substitution rule
𝑑𝑢 𝑑𝑢
𝐿𝑒𝑡 𝑢 = 2𝑥 3 − 1 = 6𝑥 2 𝑑𝑥 =
𝑑𝑥 6𝑥 2

1 3 𝑑𝑢
(2𝑥 − 1)2 (6𝑥 2 )𝑑𝑥 = 𝑢2 6𝑥 2
−1 6𝑥 2
1
= 𝑢2 𝑑𝑢 = 𝑢3
3
1 1
= (2𝑥 3 − 1)3 −1
3
1
= ((2 13 − 1)3 − (2(−1)3 −1)3 )
3
1
= (1+27)
3
= 𝟗. 𝟑𝟑
Definite Integrals
The deference between an indefinite integral and definite integral is
◦ Indefinite integral result is given as a continuous function.
◦ Definite integral result is a numeral value, calculated between two points.
Graphical Interpretation

𝑏 𝑑
𝐴𝑟𝑒𝑎 𝐴 = 𝑎
𝑓(𝑥) 𝑑𝑥 𝐴𝑟𝑒𝑎 𝐵 = 𝑐
𝑓(𝑥) 𝑑𝑥
Area B is negative since B is below x-axis
Improper Integrals
When a definite integral cannot be solved to a numerical value then it is
called an improper integral.
Improper Integrals
(1) Infinite limits of integration
Since infinity is not a number, we would rather use limits to
evaluate a function as the limit approaches infinity.
∞ 𝒃
𝒂
𝒇 𝒙 𝒅𝒙 = lim 𝒂 𝒇(𝒙) 𝒅𝒙
𝒃→∞
And
𝒃 𝒃
−∞
𝒇 𝒙 𝒅𝒙 = lim 𝒂 𝒇(𝒙) 𝒅𝒙
𝒂→−∞
∞
𝑎 ≤ 𝑥 < ∞ we say 𝑎 𝑓 𝑥 𝑑𝑥
If f(x) is continuous for
𝑏
converges to finite B ifand only if lim 𝑎 𝑓 𝑥 𝑑𝑥 = 𝐵. If not,
𝑏→∞
it diverges and the integral does not exist.
Example
∞1
1 𝑥
𝑑𝑥
Improper because the upper limit tends to infinity
∞ 𝑏
1 1
𝑑𝑥 = lim 𝑑𝑥
1 𝑥 𝑏→+∞ 1 𝑥

𝑏
= lim 𝑙𝑛𝑥 1
𝑏→∞

= lim 𝑙𝑛𝑏 − 𝑙𝑛1

𝑏→∞

= lim 𝒍𝒏𝒃
𝑏→∞

Since 𝑙𝑛𝑏 → ∞ 𝑎𝑠 𝑏 → ∞, the integral is divergent

Example
∞ 3
1 𝑥2
𝑑𝑥
Improper because the upper limit tends to infinity
∞ 3 𝑏 −2 𝑑𝑥
1 𝑥2
𝑑𝑥 = lim 3𝑥
𝑏→∞ 1
𝑏
= lim 3[−𝑥 −1 1
𝑏→∞

= lim 3(−𝑏−1 − −1 )
𝑏→∞

=3
As b tends to infinity, −𝑏 −1 tends to zero and the answer converges to
3.
 Improper Integral
(2) Infinite integrand
If f(x) becomes infinite somewhere in [a,b], we again use limits to
solve it. Look out for this when working with functions such as
1
, 𝑙𝑛𝑥, 𝑒 𝑥 , 𝑒𝑡𝑐
𝑥

1
1 1
𝑑𝑥 = 𝑙𝑛𝑥 0= 𝑙𝑛1 − 𝑙𝑛0
0 𝑥

The integral is improper because the lower limit does not exist.
This is an improper integral because
1
as 𝑥 → 0, → ∞
𝑥
11 11
0 𝑥
𝑑𝑥 = lim 𝑎
𝑑𝑥
𝑎→0 𝑥

= lim [𝑙𝑛𝑥 1𝑎
𝑎→𝑜
= lim (𝑙𝑛1 − 𝑙𝑛𝑎)
𝑎→0
= lim (−𝑙𝑛𝑎)
𝑎→0

Since −𝑙𝑛𝑎 → ∞ 𝑎𝑠 𝑎 → 0, the integral is divergent

 Example
∞6
Is 1 𝑥
𝑑𝑥 convergent or divergent?
6
Improper because as 𝑥 → ∞, →∞
𝑥
∞6 𝑏6
1 𝑥
𝑑𝑥 = lim 1 𝑑𝑥
𝑏→∞ 𝑥

= lim [6𝑙𝑛𝑥 1𝑏
𝑏→∞
= lim 6(𝑙𝑛𝑏 − 𝑙𝑛1)
𝑏→∞
= lim 6𝑙𝑛𝑏
𝑏→∞
As 𝑏 𝑡𝑒𝑛𝑑𝑠 𝑡𝑜 ∞, 6𝑙𝑛𝑏 tends to ∞, therefore the result is
divergent
1. Finding the area under the
curve
The derivative is the slope of a curve.
The definite integral is the area under a curve.

[graph]

𝑏
Area A= 𝑎
𝑓 𝑥 𝑑𝑥
𝑑
Area B= 𝑐
𝑓 𝑥 𝑑𝑥 (negative since B is below the x-axis)
𝑑
Note: if we calculate 𝑎 𝑓 𝑥 𝑑𝑥 we will not get the total area between the curve and
the x-axis. The negative area (c to d) will cancel out some of the positive area (a to c).
Example 1
Find the area under the curve

1
𝑥 + 1 𝑑𝑥
−1
Solution
1 1 1
−1
𝑥 + 1 𝑑𝑥 = [ 𝑥 2 + 𝑥 −1
2
1 2 1
= 1 + 1 − ( (−1)2 −1)
2 2
3 1
= +
2 2

=𝟐
2. Marginal and Total Functions
We can determine the total function by integrating a given marginal function.
e.g. marginal cost is 𝑀𝐶 𝑄 = 2𝑒 0.2𝑄 and fixed cost is 𝐶𝐹 = 90. Find the total
cost function.
𝑇𝐶 = 𝑀𝐶𝑑𝑄

= 2𝑒 0,2𝑄 𝑑𝑄
2
= 0,2 𝑒 0,2𝑄 + 𝑐 = 10𝑒 0,2𝑄 + 𝑐

At Q=0, total cost consists only of fixed cost.

∴ 𝑇𝐶 0 = 𝐶𝐹 = 90
∴ 10𝑒 0,2(0) + 𝑐 = 90
10 + 𝑐 = 90 → 𝑐 = 80
∴ 𝑻𝑪 = 𝟏𝟎𝒆𝟎,𝟐𝑸 + 𝟖𝟎
3. Investment and Capital
Formation
The capital stock at any time t is given by K(t). The rate at which capital is formed is the rate of
investment flow, I(t).
𝑑𝐾
=𝐼 𝑡
𝑑𝑡
𝐾 𝑡 = 𝐼 𝑡 𝑑𝑡

e.g. if the initial capital stock is 100 and the investment flow is 𝐼 𝑡 = 3𝑡 1/2 , What will the size
of the stock be in 4 years (i.e. t=4)?
𝐾 𝑡 = 3𝑡 1/2 𝑑𝑡

1 1 3
= 3. 𝑡 2+1 + 𝑐 = 2𝑡 2 + 𝑐
1
+1
2
𝐾 0 = 2 0 + 𝑐 = 100
𝑐 = 100

∴ 𝑲 𝒕 = 𝟐𝒕𝟑/𝟐 + 𝟏𝟎𝟎

𝐾 4 = 2(4)3/2 +100 = 116

4. Using Definite integral to
calculate Consumer Surplus
Consumer surplus is the area below the demand line
(consumer’s willingness-to-pay) but above the price line
Formula for calculating
consumer surplus
CS=Area under demand curve – area of rectangle

= 𝑨𝒓𝒆𝒂 𝑨𝑩𝑸∗ 𝟎 − 𝑨𝒓𝒆𝒂𝑷∗ 𝑩𝑸∗ 𝟎 (from the diagram)

𝑄=𝑄0
= 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛 𝑑𝑄 − 𝑃0 𝑄0
𝑄=0
Example
If the demand∗
curve is given by 𝑃 = 45 − 2𝑄 − 𝑄2 , market price is 𝑃∗ = 10 and
quantity is 𝑄 = 5, what is the consumer surplus?

Solution
5
𝐴𝑟𝑒𝑎 𝑢𝑛𝑑𝑒𝑟 𝑡ℎ𝑒 𝑑𝑒𝑚𝑎𝑛𝑑 𝑐𝑢𝑟𝑣𝑒 = 0
(45 − 2𝑄 − 𝑄2 ) 𝑑𝑄
1 5
= [45𝑄 − 𝑄2 − 3 𝑄3 0

1
= 45 5 − 52 − 53 −0
3

= 158.33
𝐴𝑟𝑒𝑎 𝑜𝑓 𝑟𝑒𝑐𝑡𝑎𝑛𝑔𝑙𝑒 = 𝑃∗ ∗ 𝑄∗ = 10 ∗ 5 = 50
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 = 𝐴𝑟𝑒𝑎 𝑢𝑛𝑑𝑒𝑟 𝑑𝑑 𝑐𝑢𝑟𝑣𝑒 − 𝐴𝑟𝑒𝑎 𝑜𝑓 𝑟𝑒𝑐𝑡𝑎𝑛𝑔𝑙𝑒
= 158.33 − 50 = 𝟏𝟎𝟖. 𝟑𝟑
Using Definite Integral to
calculate Producer Surplus
Producer surplus is the area below the price line and above the
supply curve

Formula for calculating producer surplus

PS=Area of rectangle– area under supply curve

𝑄=𝑄0
= 𝑃0 𝑄0 − 𝑠𝑢𝑝𝑝𝑙𝑦 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛 𝑑𝑄
𝑄=0