MATH ECON II

HIGHER ORDER ODES

1. 1-Dimensional, 2nd order ODEs

1.1. A Motivating Example. Let us return to the market equilibrium model. We took one step away from the classical static model,
by introducing the price updating ODE p(t)

= (D(p(t)) S(p(t)))
with D(p) and S(p) being the demand and supply at price p respectively, and > 0 some constant. This equation obviously assumes
that the supply and demand depend only on the price at the current
time t. This may be reasonable in a static model, where we only have
the present time. However, agents in a dynamic market may develop
expectation regarding the price, according to its past trend. The idea
is that agents may assume price convey information on other agents
behaviour (and they may be right doing so). So, for example, we may
have agents who look at the price, and see that the price is going up
(p > 0), and going up quicker every minute (
p > 0) and so may change
their demand accordingly. So it may be that in this case change in
price is again due to change in excess demand, only now, demand and
supply are functions of p, p,
and p (the second derivative w.r.t time of
p), hence we will get the equation
(1.1.1)

p(t)
= (D(p(t), p(t),

p(t)) S(p(t), p(t),

p(t)))

This is a second order differential equation, as it functionally relates

together p(t) and its derivatives up to the second order. In many cases
of interest, such an equation can be re-written so that it presents the
second order derivative as a function of lower order derivatives, and
time. Namely, an expression of the form
(1.1.2)

x(t) = F (x(t), x(t),

t).

A general solution is a function x(t) = g(t, A, B) that satisfies the

equation x = F (x,
x, t) given that x(0) = A and x(0)

= B. A solution
will be determined by the initial conditions x(0) = x0 and x(0)

= x 0
(or, more generally, x(t0 ) and x(t
0 ) for some initial time t0 ).
1.2. Reducible equations. These are equations which are independent of x, namely x(t) = F (x(t),

t). By introducing z = x(t)

we obtain
1

MATH ECON II HIGHER ORDER ODES

the equation
(1.2.1)

z(t)
= F (z(t), t)

which is a 1st order equation. If we are able to solve this equation (by
the methods we introduced above), then we can write
Z
(1.2.2)
x(t) = z(t)dt.
Example 1.2.1. x = x.
Denote z = x.
Then we obtain the equation
z = z z(t) = Aet ,

(1.2.3)
R

and therefore x(t) = z(t)dt = Aet + B. Notice that indeed, x(t) is

determined by a specification of two initial conditions. For example,
suppose x(0) = 1 and x(0)

= 1. Then 1 = x(0) = Ae0 + B = A + B

0
and 1 = x(0)

= Ae = A, and hence A = 1 and B = 0 and the solution

is given by x(t) = et .
1.3. Homogeneous Linear Equations. These are equations of the
form
(1.3.1)

x + a(t)x + b(t)x = 0.

The term linear follows from the fact that if x1 (t) and x2 (t) satisfy
equation (1.3.1) then so does rx1 (t) + sx2 (t) for every r, s R. Indeed,
if r, s R and x1 (t) and x2 (t) satisfy equation (1.3.1) then
d2
d
(rx1 + sx2 ) + a(t) (rx1 + sx2 ) + b(t)(rx1 + sx2 ) =
2
dt
dt
r(
x1 + a(t)x 1 + b(t)x1 ) + s(
x2 + a(t)x 2 + b(t)x2 ) = r 0 + s 0 = 0.
Theorem 1.3.1. If x1 and x2 are linearly independent solutions of
equation (1.3.1) then every solution x of equation (1.3.1) has the form
x = rx1 + sx2 for some r, s R, with r, s R determined by the initial
conditions.
Theorem 1.3.1 states, in fact, that the general solution of equation
(1.3.1) is of the form x(t) = Ax1 (t) + Bx2 (t), where x1 , x2 are some
linearly independent solutions of equation (1.3.1).
Example 1.3.2. Consider the equation x + x = 0. What is the general
solution of this equation? Theorem 1.3.1 states that it is sufficient to
find two linearly independent solutions. Can we think of functions that
satisfy x + x = 0? We shall use a trick - multiply the equation by 2x.

We thus obtain 2
xx + 2xx
= 0. Integration w.r.t. t yields:
Z
(1.3.2)
C = (2
xx + 2xx)dt

= x 2 + x2 .

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HIGHER ORDER ODES

Do we a function x s.t., for example, x 2 +x2 = 1? This might remind us

of the trigonometric identity sin2 t+cos2 t = 1. Indeed, set x1 (t) = cos t
and x2 (t) = sin t. Then x 2i + x2i = 1 for i = 1, 2. We can also verify
now that xi + xi = 0 for every i = 1, 2. But are x1 (t) and x2 (t)
linearly independent? Linear independence means that there is no
R s.t. x1 (t) = x2 (t) for every t. Suppose by contradiction
that there was such . Then for every t we have cos t = sin t. In
particular this must hold for t = 0, in which case we obtain the equality
1 = cos 0 = sin 0 = 0, a contradiction. Thus, the assumption that
x1 and x2 are linearly dependent leads to a contradictions, meaning
that they are independent. Hence it follows by Theorem 1.3.1 that the
general solution for the equation x + x = 0 is given by
(1.3.3)

x(t) = A cos t + B sin t.

1.4. Homogeneous equations with constant coefficients. Suppose that a(t) = a and b(t) = b are constants. We wish to find the
general solution of the equation
(1.4.1)

x + ax + bx = 0.

The characteristic equation of equation (1.4.1) is the quadratic equation

r2 + ar + b = 0.

(1.4.2)

The roots of this equation are given by

r
a
a2
r1,2 =
(1.4.3)
b.
2
4
Denote =
equation.

a2
4

b. This is the discriminant of the characteristic

Theorem 1.4.1.
1. If > 0 then r1 6= r2 are real numbers, and
the general solution x to equation (1.4.1) is given by:
(1.4.4)

x(t) = Aer1 t + Ber2 t .

2. If = 0 then r1 = r2 = r is a real number, and the general

solution x to equation (1.4.1) is given by:
(1.4.5)

x(t) = (A + Bt)ert .

1. If < 0 then r1 6=r2 are complex numbers of the form r1,2 =

a2 + i with = , and the general solution x to equation
(1.4.1) is given by:
(1.4.6)

at

x(t) = e 2 (A cos(t) + B sin(t)) .

MATH ECON II HIGHER ORDER ODES

Example 1.4.2. We wish to find the general solution of x + 5x + 4x = 0.

The first step is to compute . In our case a = 5 and b = 4 and so
2
= 54 4 = 25
4 = 94 > 0. In this case we know that the general
4
solution for the equation is given by (see Theorem 1.4.1, section (1))
(1.4.7)

x(t) = Aer1 t + Ber2 t ,

where r1 , r2 are the roots of the characteristic equation r2 + 5r + 4 = 0.

Computing the roots yields r1 = 1 and r2 = 4, and thus the general
solution of the equation is
(1.4.8)

x(t) = Aet + Be4t .

Example 1.4.3. We wish to find the general solution of x + 2x + x = 0.

The first step is to compute . In our case a = 2 and b = 1 and so
2
= 24 1 = 44 4 = 0. In this case we know that the general solution
for the equation is given by (see Theorem 1.4.1, section (2))
(1.4.9)

x(t) = (A + Bt)ert ,

where r is the unique solution for the characteristic equation r2 + 2r +

1 = 0. Computing the root yields r = 1, and thus the general solution
of the equation is
(1.4.10)

x(t) = (A + Bt)et .

Example 1.4.4. We wish to find the general solution of x + 4x + 5x = 0.

The first step is to compute . In our case a = 4 and b = 5 and so
2
= 44 5 = 4 5 = 1 < 0. In this case we know that the general
solution for the equation is given by (see Theorem 1.4.1, section (3))
at

x(t) = e 2 (A cos(t) + B sin(t)),

where = . So in our case = = 1 = 1, and as a = 4

we find that general solution of the equation is
(1.4.11)

(1.4.12)

x(t) = e2t (A cos t + B sin t).

1.4.1. Nonhomogeneous equations with constant coefficients.

Example 1.4.5. Price adjustment model with speculative sellers and
buyers and temporal fluctuations. In this model the demand is D(p, p,
p) =
D0 (t) p + p + p, and the supply is S(p, p,
p) = S0 (t) ap + bp + c
p.
The price adjustment equation (the law of supply and demand) is
(1.4.13)

p = D(p, p,
p) S(p, p,
p) =
D0 (t) S0 (t) ( + a)p + ( + b)p + ( + c)
p.

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The equation (1.4.13) has the form

(1.4.14)

x + ax + bx = f (t),

where a, b R are constants, and f is some continuous function of t.

We refer to these equations as nonhomogeneous linear equations with
constant coefficients. In general (namely, for a general f ), it might
be quite difficult to solve equation (1.4.14). However, we will be able
to accomplish that in some specific, yet interesting, examples. The
fundamental theorem here is:
Theorem 1.4.6. Let xh be the general solution for the homogeneous
equation x + ax + bx = 0, and let xp be a particular solution for the
nonhomogeneous equation (1.4.14). Then the general solution for the
equation (1.4.14) is x(t) = xh (t) + xp (t).
The theorem suggests that finding the general solution for the nonhomogeneous equation (1.4.14) boils down into 1. finding the general
solution for the homogeneous equation x +ax+bx

= 0, and 2. finding a
particular solution for the equation (1.4.14). As we already know how
to find the general solution for the homogeneous equation, we shall now
explore methods for finding a particular solution in various cases.
Example 1.4.7. f (t) = C, with C being a constant. We will be looking
for a particular solution xp (t) = B with B being a constant. It is easy
to verify that the particular solution is in fact xp (t) = Cb .
n
P
Example 1.4.8. f is a polynomial. Namely, f (t) =
ci ti , with c0 , c1 , ..., cn
i=0
d2 n
R. Notice that dtd (tn ) = ntn1 and dt2
(t ) = n(n1)tn2 . This leads us
to look for a polynomial particular solution. Namely, we assume that
n
P
xp (t) =
di ti , where the degree n of the polynomial xp is the same as
i=0

the degree n of the polynomial f . For example, suppose that we wish

to solve x + 2x + x = t2 . We will be looking for a particular solution
of the form xp (t) = at2 + bt + c. Thus x p (t) = 2at + b and xp (t) = 2a.
Substituting this back into the equation yields:
2a + 2(2at + b) + (at2 + bt + c) = t2
at2 + (4a + b)t + 2a + 2b + c = t2 = t2 ,
for every t. The only possible way to for the equation above to hold
for every t is that the coefficients of the same power of t on both sides
must be equal. Hence
a = 1, 4a + b = 0, 2a + 2b + c = 0 a = 1, b = 4, c = 10.

MATH ECON II HIGHER ORDER ODES

Therefore the particular solution is given by xp (t) = t2 4t 10. The

general solution xh of the homogeneous equation x +2x+x

= 0 is given
by (verify that!)
xh (t) = (A + Bt)et ,
and thus, the general solution for the nonhomogeneous equation x +
2x + x = t2 is (by Theorem 1.4.6)
x(t) = (A + Bt)et + t2 4t 10.
Example 1.4.9. f (t) = A exp(t). We shall look for particular solution
of the form
(1.4.15)

xp (t) = B exp(t).

For example consider the equation x + 2x + 4x = exp(2t). So we ar

interested in a particular solution of the form xp (t) = B exp(2t), and so
x p (t) = 2B exp(2t), and xp (t) = 4B exp(2t). Thus (substituting back
in the equation):
(1.4.16)
1
.
12
1
exp(2t) is a particular solution of the equation
Therefore, xp (t) = 12
x + 2x + 4x = exp(2t).
4B exp(2t) + 4B exp(2t) + 4B exp(2t) = exp(2t) B =

Example 1.4.10. f (t) = A sin(t) + B cos(t). We shall look for a solution xp (t) = C cos(t) + D sin(t). For example, consider the equation
x + x + x = cos t. Here = 1, and we are looking for a particular solution of the form xp (t) = C cos t + D sin t. Thus x p (t) = D cos t C sin t,
and xp (t) = C cos t D cos t = xp (t). Therefore, by substituting
back into the equation we obtain:
cos t = xp + x p + xp = xp (t) + x p + xp = x p (t) = D cos t C sin t
(1.4.17)

cos t = D cos t C sin t.

Now, the only way to obtain an equality above, the coefficient of sin on
both sides of the equation should be equal ,and the same should hold
for cos. Therefore, D = 1 and C = 0 and we find that xp (t) = cos t is
a particular solution of the equation.
1.5. Market Model with Price Expectations. Lets go back to the
example of price adjustment with speculation and fluctuation. Suppose
D0 (t) = F0 cos(t), S0 (t) = 0, and that = 1 + a = k b + b = d + 1,
+ c = m Then the price adjustment equation transforms into
(1.5.1)

F0 cos(t) = kp + dp + m
p

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For the particular solution we look for a function of the form pp (t) =
A cos(t) + B sin(t). Then pp (t) = A sin(t) + B cos(t) and
pp (t) = A 2 cos(t) B 2 sin(t) = 2 pp (t). So
F0 cos(t) = kp + dp + m
p = kp + dp m 2 p = dp + (k m 2 )p =
d(B cos(t) A sin(t)) + (k m 2 )(A cos(t) + B sin(t))
(k m 2 )A + dB = F0 , dwA + (k m 2 )B = 0
A=

(k m 2 )F0
dF0
, B=
2
2
2
(k m ) + (d)
(k m 2 )2 + (d)2
2

d
Let 1 = [(kmkm
Notice that
2 )2 +(d)2 ]1/2 and 2 = [(km 2 )2 +(d)2 ]1/2 .
2
2
1 +2 = 1, so (1 , 2 , 1) is a Pythagorean triplet (i.e., these three nonnegative numbers obey
 the Pythagorean theorem). We thus deduce
that there is a 0, 2 s.t. 1 = cos and 2 = sin . We can now
write the particular solution of the equation as
F0
(cos cos(t) + sin sin(t)) =
pp (t) =
2
[(k m )2 + (d)2 ]1/2
F0
(1.5.2)
cos(t ),
2
[(k m )2 + (d)2 ]1/2
where the last equality above follows from the trigonometric identity
cos(x + y) = cos x cos y sin x sin y. So prices oscillate with amplitude
F0
(after the introduction of a phase). What happens as
(km 2 )2 +(d)2
2
0
k m approaches 0? In this case the amplitude [(km2 )F2 +(d)
2 ]1/2
F0
k
2
will increase and in the limit m it will approach d .

1.6. Inflation and Unemployment. The Philips relations depicts,

empirically, the relation between the rate of growth w in wages W
and unemployment U . In other words
(1.6.1)

w = f (U )

with f being some monotonically decreasing function (so more unemployment means slower growth rate w). A similar relation, baring the
same name, can be written for the empirical relationship between unemployment and the rate of inflation p, which is the rate of growth
of price index P . The relating economic factor between the two (w
and p) is the labor productivity `, which is given exogenously, and for
simplicity assume p = w ` (so the higher productivity is the lower
the inflation is, as you may produce the demand for lower costs, and if
wages increase sharply it will create inflation). So we can now write
(1.6.2)

p = f (U ) `.

MATH ECON II HIGHER ORDER ODES

A variant on Equation (1.6.1) is to add an expectation factor to it.

Namely, employers expect a certain rate of inflation to kick into the
future wage, and account for that. If the employer future discount rate
> 0 then Equation (1.6.1) transforms into
(1.6.3)

w(t) = f (U (t)) + (t).

For simplicity of calculation, suppose f (U ) = a + bU . So p + ` = w =

a + bU + . We should also say something about the expectation
variable . We will assume that employers adapt their expectation
according to the evolution of the real inflation, namely, of p. So if they
overshoot, they will lower expectations and decrease , and vice versa.
In other words, for some  > 0
(1.6.4)

(t)

= (p(t) (t)).

Finally, we shall need some feedback between U and p. This is given in

the most simple way (not the only way of course, just the most simple
and even simplistic) by the monetary policy, namely, if the money
growth rate is m = m(t), which is exogenously given to us, then we
shall assume
(1.6.5)
U (t) = (p(t) m(t))
with > 0, which means that if money supply growth exceeds inflation
rate then it happened as a result in direct saving in labor cost1, hence
more unemployment. So now, revisiting Equation (1.6.4 we have
(1.6.6)

(t)

= (p(t) (t)) = (a + bU + (t) ` (t)).

Taking the time derivative in Equation (1.6.6) we obtain

(1.6.7)

(t) = (bU + (t)

` (t))

=
(b(p(t) m(t)) + (t)
` (t)),

with the last equality following from Equation (1.6.5). Now, as by

Equation (1.6.4) we have p(t) = 1 (t)

+ (t) then we can substitute

that back into Equation (1.6.7) to obtain
1
(1.6.8)

(t) = (b( (t)

+ (t) m(t)) + (t)
` (t)),


which is a differential equation of the form
(1.6.9)

+ A + B = f (t)

Given `, a
with A =  b , B = b, and f (t) = bm(t) `.
central bank can control m(t) and thus influence inflation expectations,
1Notice, that a first possible tweak of the model would be to account for indirect changes, like
changing wages for hour, shorter hours, seasonal workers etc.

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HIGHER ORDER ODES

and through that (given that we solve the second order equation (1.6.9)
affect inflation rates (Equation 1.6.4) and unemployment (1.6.5).