Giancarlo Gandolfo

Economic Dynamics
Study Edition

Fourth Edition

S Springer
Chapter 11

Differential Equations: General

Principies

11.1 Definitions
An ordinary differential equation is a functional equation involving one or
more of the derivatives y', y", y'", etc. of an unknown function of time y =
f(t): which obviously is differentiable.
Before going on, it is as well to point out that we have adopted the
prime notation (y' etc.) rather than the dot notation (y etc.) to denote time
derivatives because the dot notation becoines awkward when one has to deal
with higher-order derivatives.
We have called the equation an ordinary differential equation since the
unknown function is a function of one argument; if the independent variables
were more than one, partial derivatives would appear in differential equation,
which would be partial differential equation (we shall not treat this type of
functional equation).
The order of a differential equation is given by the highest derivative
appearing in the equation.
After what we said in the Introduction, it will be clear that to solve (or to
'integrate 1 ) a differential equation means to find the unknown function that
satisfies the relationship expressed in the equation.
Let us begin, as usual, by a simple example. Consider the differential
equation y' = a, where a is a constant. From elementary integral calculus it
follows that y = at + 6; let us remember, incidentally, that integration—the
'inverse' operation of differentiation—represents the solution of a differential
equation. We note that in the solution an arbitrary constant b appears (the
other constant a is known, since it appear in the differential equation). This
is not surprising, since we know that differentiation eliminates such constant,
so that from y' — a. Let us now consider the second order differential equation
y" --- a. Performing two successive integrations we obtain y = ^at2 + bt + r;

G. Ganilolfo, Economic Dynamics, 163

(0 Springer-Verlag Berlin Heidelberg 2010
164 Chapter 11. Differential Equations: General Principies

now, two arbitrary eonstants, b and c, appear in the solution. It is easy to

check that, if we differentiate the function y twice, such arbitrary eonstants
clisappear one after the other, so that from y = ~at2 -f bt + c we obtain, in
fact, y" = a, that is the differential equation from whieh we started.
We shall see later on how the arbitrary constant(s) can be deterniined
through additional conditions; what interests us here is to note that we can
induce, from the reasoning above, the following important theorem:

T h e o r e m 11.1 The general solution of a differential equation of order n

¿s a function of t which involves exactly n arbitrary eonstants}

11.2 Linear differential equations with con-

stant coefficients
As we said in the Introduction, the differential equations most widely used in
economic dynamics are linear and with constant coefficients, which are also
the easiest to handle from the mathematical point of view. In this second
part of the book we shall use the expression 'differential equation' (or even,
when the meaning is clear from the context, simply 'equation') in the sense
of 'ordinary differential equations, linear with constant coefficients'.
The general form of an n-th order differential equation is

aQy{n) 4- aiy{n~l) + .... + (zn—1¿/ + o-nV = g{t), (11.1)

where etc., indicate the derivatives of the order n, n— 1, etc.; the

a's are given eonstants and g(t) is a known function. Some a's may be zero,
but of course a 0 must be different from zero if the equation is of order n.
Eq. (11.1) is called a non-homogeneous equation; the corresponding
homogeneous form is

n )
W + (llí/n ^ + •••• + Q-n-iy' + anlJ — 0. (11.2)

The reason for dealing with these two forms separately is that the solution of
Eq. (11.1) can be obtained in a relatively simple manner when the solution
of Eq. (11.2) is known.

'We have implieitly assumed that this function exists and is unique (apart from the
arbitrary eonstants). Actuallv this assuniption conld he ¡)roved by ineans of an existence
and nniqueness tln^orein, but we shall not treat such theorems. A11 types of equations
considered this l>ook are well behaved, in the sense that their solution ('xists and is unique.
In general, it may be observed that the properties that the 'well behaved' functions used
in economic theory are assumed to have, are usually more than enough to satisfy the
refiuirements oí an.v existence and nniqueness theorem.
11.2. Linear differential eqnations with constant coefficients 165

11.2.1 The homogeneous equation

The following theorems are fundamental in the theory of homogeneous dif-
ferential equations:

T h e o r e m 11.2. If y\(t) is a solution of (Ti.2), then Ayi(t)—where A

is an arbitrary constant—is also a solution.
The proof is simple. Assume that yi(t) satisfies Eq. (11.2), and substitute
Ayi(t) in the same equation, obtaining
a
oAy[ ^ + a>iAy[ ^ + .... + an^iAy[ + anAy\ = 0;

therefore
A[aoy[ ^ + o>iy[ ^ + an-iy[ 4- anyi\ = 0. (H-3)
If Ayi(t) has to be a solution, Eq. (11.3) must be satisfied. Since y\(t)
is a solution of (11.2), the expression in square brackets vanishes, and so Eq.
(11.3) is indeed identically satisfied. This proves the theorem.
Before going on to the next theorem, it is as well to recall the notion of
linearly independent functions.
Given n functions yi(t), y2(t), yn{t), they are said to be linearly depen-
dent if n constants Ai, A2,..., An exist, which do not all vanish, and such
that the equation

A\y\(t) + ^4.2 2/2 (^) + ••• + Amym(t) = 0 (H-4)

is identically satisfied for all admissible valúes of t. If, on the contrary, this
equation can be identically satisfied only with Ai = A2 = ... = An = 0, the
functions are linearly independent.

T h e o r e m 11.3 If iji(t),ij2(t) are two distinct (i.e., linearly independent)

solutions of the homogenous equation (n > 1), then A\y\(t) + A2y2 (t) is also
a solution for any two arbitrary constants Ai,A2.
The proof is similar to that of Theorem 11.2 and is left as an exercise.
Theorem 11.3—called the superposition theorem—can easily be extended
to any number k < n of distinct solutions of Eq. (11.2), and gives us the
procedure to obtain the general solution of the homogeneous equation. This
procedure consists in finding n distinct solutions yi(t), y2(t),..., yn{t) and
combining them linearly, as stated in Theorem 11.4:

T h e o r e m 11.4 The general solution of Eq. (11.2) is given by

f{t\ A\, A2 A-n) = Aiyi(t) + A2y2(t) + ... + Anyn(t), (H-5)

where yi(t), y2(t),..., yn(t) are n linearly independent solutions of Eq. (11.2).
and Ai, A2 ..., An are arbitrary constants.
166 Chapter 11. Differential Equations: General Principies

The proof is straightforward: by Theorem 11.3, the function (11.5) is a

solution of the differential equation (11.2). Since this function contains ex-
actly n arbitrary eonstants, we can conclude—from Theorem 11.1—that it is
the general solution of Eq. (11.2). The practical problem of how to find the n
functions y\(t), ¡J2(t), •••, yn(t) wül be tackled in the following chapters; for
the moment we observe that, given a homogenous equation of order n, a set
of n linearly independent solution is called a fundamental set. The condition
for a set of n solutions to form a fundamental set is contained in Theorem
11.5.

T h e o r e m 11.5 Let yi(t), y2(t), •••, yn{t) be n solutions of Eq. (11.2).

They are linearly independent (i.e. form a fundamental set) if and only if
the following determinant (called the Wronski determinant or Wronskian)

Vi (t) y2(t) yn(t)

y'i (t) ú ( t ) y'nW
W(t) = (11.6)

t / r í ] ( t ) ,vr"(í) y ( r a - 1 ) (t)
is different from zero for all admissible valúes of t.
To prove this theorem, consider Eq. (11.4): since this relation is satisfied
identically, it may be differentiated any number of times up to n — 1. Henee
we can write the following linear system

<4i¡/i(í) "1-^2 Z/2(0 +...+ Anyn{t) = 0,

+^21/2(0 +...+ A
r,l/n{t) = 0,
(11.7)

+A2ytl\t) +•••+ Any\.n l

Ht) — 0,

which is a system of homogeneous linear equations whose determinant is

W(t). According to a well-known theorem in elementary algebra, when
\V(t) 0, system (11.7) admits only the nuil solution, i.e. Eq. (11.4)
holds true if, and only if, A\ — = ... = An = 0, which is the definition
of linearly independent functions (see above). On the contrary, W(t) = 0 is
the necessary and sufficient condition for system (11.7) to possess non-trivial
solutions (i.e., solutions with at least one non-zero A¿, i = 1,2, ..., n), which
is the definition of linearly dependent functions.

11.2.2 T h e non-homogeneous equation

We have so far dealt with the homogeneous differential equation. We now
prove the basic theorem concerning the solution of the non-homogeneous
equation.
11.2. Linear differential equations with constant coefficients 167

T h e o r e m 11.6. If f(t\ A\, A2,...., An) is the general solution of (11.2)—

where A\,A2, ,An are arbitrary constants—and y(t) is any particular so-
lution of (11.1), i.e. any function that satis fies (11A), then

y(t) = y{t) + /(¿; A2, ..., A n ) (11.8)

is the general solution of (11.1).

This theorem can be proved by direct substitution of y (i) in E q . ( l l . l )
and checking that this equation is satisfied. Since y(t) contains exactly n
arbitrary constants, it is the general solution of Eq. (11.1).
The general solution of the homogenous equation is thus only a part of the
general solution of the non-homogenous equation, and so it is not 'general'
with respect to the latter. This means that the expression 'general solution'
must always be qualified. As a matter of terminology, note the following :
(1) some authors use the world 'integral' (particular or general) instead of
'solution' but with the same meaning; (2) the expression 'particular solution'
is also used (a) in the sense of a solution obtained from the general solution
by giving specific valúes to the arbitrary constants, and (b) in the sense of
any single non-general solution of the homogenous equation (i.e., to indicate
any one of yi(t), y2(t), etc.); (3) the expression 'complementary function'
is used to indicate the general solution of the homogenous equation when
considered as part of the general solution of the non-homogeneous equation,
and the expression 'reduced equation' is used to indicate the homogeneous
part of a non-homogeneous equation, i.e. the corresponding homogeneous
equation obtained putting g(t) = 0 in the course of the procedure to solve
a non-homogeneous equation. To avoid confusion, we shall not adopt these
uses.
Theorem 11.6 contains the method to follow for solving the non-homogene-
ous equation:
(a) find a particular solution y(t) of the non-homogeneous equation;
(b) put g(t) = 0 and solve the resulting homogeneous equation (often
called the k reduced' equation) by using theorem 11.4;
(c) add the two results.
Steps (a) and (b) can be taken in any order; step (c) gives the general
solution of the non-homogeneous equation.
The particular solution of the non-homogenous equation will depend, ce-
teris paribus, on the form of the given function g(t). This suggest the follow-
ing general approach: to find a particular solution of the non-homogeneous
equation, try a function having the same form of g(t) but with undetermined
constant(s) (e.g., if g(t) is a constant, try an undetermined constant; if it
is an exponential function, try the same exponential function with an un-
determined multiplicative constant, and so on). Substitute this function ni
the non-homogeneous equation and determine the coefficient(s) so that the
equation is satisfied.
168 Chapter 11. Diíferential Equations: General Principies

This method—called method of undetermined coefficients—will be ex-

pounded in detail in the following chapter, where we shall also examine the
cases in which it cannot be applied.
It is interesting to note, from the economic point of view, that in the
general solution of the non-homogeneous equation the particular solution
y(t) may usually be interpreted as the equilibrium state of the variable y (a
stationary equilibrium or a moving equilibrium according to whether y(t) is a
constant or a function of t ). The component /(£; Ai, A2l..., An) in Eq. (11.8)
may then be interpreted as giving the deviations from the equilibrium. Of
course, from the mathematical point of view it is always true that y(t)—y(t) =
/(£; Ai, A 2 ,...., A n ), independently of the possibility of giving an economic
interpretaron to the particular solution y(t).
The practical problem of how to find the n functions yi(t),
and—if the equation is non-homogeneous—the function y(t), will be tackled
in the following chapters.

11.3 Determination of the arbitrary eonstants

The problem remains of how to determine the arbitrary eonstants A¿. To
do this we need an adequate number of additional conditions. This need
derives from the fact that the solution—namely Eq. (11.5) or Eq. (11.8)
as the case may be—of the differential equation under consideration gives
solely the form, of the function y(t). Henee, to determine the n arbitrary
eonstants, rr additional conditions are needed. These usually specify that
the function and its derivatives take on known valúes at a certain point in
time, normally at the initial point t = 0. When only one point of time is
involved, the additional conditions are called initial conditions. Other side
conditions are possible, for example that the function y(t) passes through n
different given points in the (í, y) plañe, say y(tj) = ?;*, j = 1, 2 , n (in this
case we speak of boundary conditions). Initial conditions are easier to deal
with than boundary conditions, henee the side conditions are usually taken
to be initial conditions, unless the nature of the problem requires boundary
conditions.
Let us then consider the initial conditions. We are given y(t) = y(0),
y'(t) = //(O),..., l^n~l\t) = y^n~^(0) for t = 0, where ;y(0),?/(0),..., ^/""^(O)
are known valúes. Substituting these valúes in the general solution, we obtain
a system of n linear equations in the n unknowns Ai, A2 An. Consider
for example the general solution of Eq. (11.1)

u(t) = . I1//1 ( /) + A2ij2{t) + + Anyn(t) + y(í),

where ij2(t), yn(t) are n distinct solutions of the eorresponding homoge-

neous (Hiuation. Since this liolds identically. we can differentiate n — 1 times;
1 L.3. Determination oí" the arbitrary constants 169

then by letting t = 0 and substituting the given valúes y(0), ¿/'(O),..., y(n ^(0)
we obtain, after rearranging terms,

-<4i¿/i(0) + A2y2(0) + ... + Anyn(0) = y( 0) — f/(0),

Ai¿/í (0) + A2y'2(0) + ... + Any'n(0) = y'(0) — ¿/'(O),

-4iJ/i" _1 '(0) + A2!/tl\0) + ... + Anyin~l\0)

= (/""''(O) - ^ " - ' ' ( O ) ,
(11.9)
n
where of course 2 / ( 0 ) , ¿/'(0), y^ ^(0) are absent if we consider the solution
of the homogeneous equation (11.2). System (11.9) is a linear system whose
determinant is
2/1(0) 1/2(0) yn{0)
;/i(0) ió(0) y ni 0)
IT(Ü)

i/í n l,
(o) ¡Án~l){0) ... ¡¿'->(0)

It is easy to see that IV (0) coincides with the Wronskian W(t)—as defined
in Eq. (11.6)—for t = 0. Since the functions y2(t),..., yn(t) form a
fundamental set, W(t) is different from zero for any t, and so also for t = 0.
It follows that 17(0) 7^ 0. Thus system (11.9) can always be solved.
We now have enough general principies to pass on to a detailed treatment
of the differential equations of the various orders, but before doing that we
would like to point out the great similarity that exists between differential
and difference equations, so much so that the general theorems are the same.
However, some dissimilarities also exist, which give rise to differences in the
economic interpretation. The principal formal dissimilarity is that in dif-
ferential equations t varies continuously and also the function y = f(t) is
continuous (that it must be continuous is obvious, since it is differentiable),
whereas in difference equations t varies discontinuously over a set of equi-
spaced valúes, and so the solution y = f ( t ) is a function which is defined
only corresponding to these valúes of t.
This implies that it is not immaterial whether we use differential 01* dif-
ference equations in the formalization of an economic problem. If we think
that certain dynamic economic phenomenon t.akes place in a continuous way
and without discontinuous lags, then the appropriate mathematical tool to
use is differential equations, while if we think that it takes place in a discon-
tinuous way, then the appropriate tool is difference equations. Unfortunately
this sliarp distinction is not so often possible. And when it is not possible
(or if we do not want to make it), we must use more complex mathematical
tools, e.g. mixed difference-differential equations (see Ghap. 26, where the
reader will also find a general discussion of continuous vs discrete time in
economics). Thus, if we want to avoid these more complicated mathematical
tools, we must give a judgement, from the economic point of view, as to
which aspects are ijrevalent. If we think that the economic problem under
170 Chapter 11. Differential Equations: General Principies

consideration is mainly continuous and withont discontinuous lags, then we

shall use differential equations; if we think that in such phenomenon discon-
tinuous lags, etc., are the main characteristic, then we shall use difference
equations. It is important that this judgment be given from the beginning
and clearly, since the use of the one rather than the other tool in formalizing
an economic problem may give different economic results.

11.4 References
Alien, R.G.D., 1959, Mathematical Economics, Chap. 5, Sects. 5.1, 5.2.
Baumol, W.J., 1970, Economic Dynamics, Chap. 14, Sect. 1.
Ince, E.L., 1956 (1926), Ordinary Differential Equations, Chap. I, Sects. 1.1,
1.2; Chap. V, Sects. 5.1-5.3.
Ince, E.L., 1959, Integration of Ordinary Differential Equations, Chap. I,
Sects. 1, 2; Chap. II, Sect. 37.