Building a Model in Excel
There are two different types of models on this site. In the first type the solutions to the model are directly embedded in the sheet itself. All of the partial equilibrium models and the 'live' versions of the HOS model take this approach. This technique has the advantages of being easy to use, even for an Excel novice, not requiring any special add-ins to the default Excel installation, and providing instant feedback on the effect of changes in the underlying system.
The main disadvantage of this approach is that to create these models requires a closed form solution (although Excel can help with the process of substitution). For some cases, especially partial equilibrium models with linear functions, this is relatively straightforward. For non-linear problems it can be much more difficult or impossible.
The alternative approach is to enter the equations of the model in Excel directly, and use the Solver add-in to solve the system. This technique works for nearly any problem, but requires a little more investment in getting students familiar with the mechanics of using the models. The models must be re-solved whenever a change is made in the parameters, so this type of approach also does not provide instant feedback. Nonetheless, it some cases the disequilibrium state is a useful teaching device. We provide an example of both approaches using a familiar problem: maximizing a Cobb-Douglas utility function subject to a budget constraint.
Approach 1: Embedding the Solution in the Sheet
Approach 2: Using Solver