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(Brief) Introduction to First Order Differential Equations Differential equations are mathematical equations used to describe the behavior of processes over time. They are frequently used in macroeconomics and time series econometrics in order to explain the behavior of dynamic variables. For example, GDP is a dynamic variable because it is constantly changing over time. Some time series econometricians believe that the rate of output growth can be approximated by a relatively simple differential equation. In this course, we will cover many models that assume an understanding of basic differential equations. This handout provides a very brief introduction. All of you are encouraged to consult more comprehensive references such as: Chiang, Alpha C. Fundamental Methods of Mathematical Economics. New York: McGraw Hill The notes in this handout are based on Chiangs text. Here is an example of a differential equation: dy + u( t ) y = w ( t ) dt This equation is called a first order linear differential equation. It tells us how y changes over time and given some initial conditions. At any moment in time, this equation tells us what u() and w() are, and hence, we can figure out how y is changing over time. The functions w(t) and u(t) are assumed to be dependent on time alone. In general, they could be expressions such as at, where a is a constant, or they could be constant functions. Homogeneous Case If u(t) and w(t) are constant functions, for example, u(t) = a, and w(t) = 0 the differential equation above becomes: dy + ay = 0 dt This type of differential equation is called homogeneous, because w(t)=0. This equation can be rewritten as: y = a y

Where the dot means the derivative with respect to time. This particular equation has an easy solutionyou probably have seen these types of differential equations before. The general solution is: y ( t ) = Ae at This is called a general solution because it applies to any value of A. If we are told what is the initial condition, we can identify the value of A. For example, if we are told that y(0) = 7, then the solution becomes, y ( t ) = 7e at This expression tells us that y displays a decaying process. At time = 0, the value of y is 7, and as time goes by, it declines. According to this differential equation, y will eventually hit zero asymptotically. SIDE COMMENT: The Half-Life Occasionally, the concept of half-life shows up in macroeconomics. The half-life tells us the time it takes for a process to decay of the initial value. For example, if we define t=0 as now, the half-life of y, or y t 1 , is: 2 1 1 1 y ( t1 2 ) = y (0) = Ae a 0 = A 2 2 2 1 at1 2 A = Ae 2 ln(2) t1 2 = a Since ln(2) is approximately equal to 0.693, the half-life of a decaying process with a decay constant of 0.05 is about 13.9. Non-homogeneous case If w(t) takes on a constant, the differential equation is called non-homogeneous. The following differential equation is non-homogeneous: + ay = b y How do we solve such an equation? The solution will have two parts: the first one is called the complementary function, y c () , and the second one is called the particular integral, y p () .

The complementary function is solved by finding the solution to the homogeneous part of the differential equation. (This part is called the reduced equation of the non- homogeneous case). Thus, for example, the reduced equation of the non- homogeneous differential equation is: + ay = 0 y We already know the solution to this differential equation. Hence, the complementary function is: y c ( t ) = Ae at The particular integral is ANY particular solution of the entire equation. Of course, when the solution can be obtained this way, we always try the simplest approach: assume y is simply a constant. In this case, y is not changing over time, which means that the particular integral must obey: ay p = b b yp = a The general solution is the sum of the complementary function and the particular integral. Hence, we have as the general solution: b y ( t ) = y c ( t ) + y p ( t ) = Ae at + a With initial conditions, we can pin down the value of A, just as explained before. Hence, for given y(0), we have: b A = y (0) a Example: Solve the following differential equation: + 2y = 6 y y (0) = 10 Solution: a = 2, b =6, A = 10-3, hence we have: y ( t ) = 7e2 t + 3

Linear Systems In this course, we will also encounter linear systems of ordinary differential equations. A linear system is a system such as: = Ax x n x R A is an nxn matrix, and x 1 . = . x . n x Example: An uncoupled linear system 1 = x1 x 2 = 2 x2 x This system can be written in matrix form with the matrix A being: 1 0 A = 0 2 Hence, the system can be written as: x 1 1 0 x1 = 2 0 2 x 2 x The solution to this system is similar to the single equation case: x1 ( t ) e t 0 c1 = 2 t x 2 ( t ) 0 e c 2 The solution to this system can be described geometrically in a plane by way of a phase diagram. The graphical representation of the graphical system can help illustrate the nature of the solution. In this particular example, the phase diagram takes the following shape:

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x1

Exercises: Solve the following differential equations: +y=4 y 1. y (0) = 0 = 23 y 2. y (0) = 1 + 3y = 2 y 3. y (0) = 4 7y = 7 y 4. y (0) = 7 + 6y = 5 3y 5. y (0) = 0 Find the general solution and draw the phase diagram for the following linear systems: x 1 1 0 x1 6. = 2 0 1 x 2 x x 1 0 1 x1 7. = 2 1 0 x 2 x