The demand curve in the supply and demand model can be derived from the behavior of a utility maximizing consumer facing a budget constraint. The agent's optimal consumption of a good depends on his income and on the price of the good.
Model Link: Two Goods - Two Prices
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Printable PDF Exercises
The Two Goods - Two Prices application begins by challenging you to manually maximize utility given a budget constraint. Tinkering with your consumption choices gives you an intuitive feel for the problem. EconModel then shows you how to maximize utility with an automatic iterative procedure.
These techniques are then used to derive the demand for the good X1. You
maximize utility given an initial price P1 for X1 and then change that price.
Graphing the resulting change in the optimal consumption of X1 traces out the
demand for X1 as a function of its price P1.
Movie: Derive a Demand Curve (32 seconds)
A follow-on exercise then decomposes the changes in the demand for X1 into income and substitution effects.
This analysis is then repeated for a complicated "translog" utility function, demonstrating that an optimizing agent (or an EconModel user!) can solve complicated problems without understanding the details of the math.
Classic Economic Models
Microeconomics
Introduction
Overview of Micro Models
Supply and Demand
Basic Supply and Demand
Who Pays a Sales Tax?
The Cobweb Model and
Inventory-Based Pricing
Theory of the Firm
Perfect Competition
Monopoly and
Monopolistic Competition
Price Discrimination
The Demand for Labor
Theory of the Consumer
Two Goods - Two Prices
Intertemporal Substitution
Labor Supply, Income Taxes,
and Transfer Payments
Macroeconomics
Introduction
Overview of Macro Models
Models in Chronological Order
The Classical Model
The Simple Keynesian Model
The Keynesian IS/LM Model
The Mundell-Fleming Model
Real Business Cycles
The IS/MP Model
The Solow Growth Model
Financial Markets
Utility-Based Valuation of Risk
Mean-Variance Analysis:
Risk vs. Expected Return
Fixed Income Securities:
Mortgage/Bond Calculator
Growth Investments:
Present Value Calculator
Resources