Market Demand and Elasticity Simulation

Day 1

You are a consumer of goods for sale in our classroom "store". You have a total income of $5 to spend on four goods. You may buy any number of the products that you desire (as long as you spend only $5) and you certainly donít have to purchase all of the products, but you must spend all of your income. Write down the number of each product you decide to buy next to the product price in the "Quantity" column column on the worksheet (the "Market Quantity" column will be dealt with later). The prices of the products for sale are listed on the worksheet.

Day 2

Due to a production catastrophe the price of Good B increases to $2, and all of the other product prices remain unchanged. Once again write down the number of each product you decide to buy next to the product price allowing only for the change in the price of Good B, your income is still $5.

Day 3

The production catastrophe gets all straightened out (i.e., the price of Good B decreases to its original market price of $1). Further, a university donor has offered more scholarship support to students, leading to increased income for all. Once again, log your purchases next to the product price remembering to spend all of your income ($8).

Exercise

As a student of economics, you are interested in how these various factors impact the market demand for these products. Therefore, you need to develop a market demand curve. Get in a group of 3-5 people, and determine the "Market Quantities" for day 1 and day 2 only (simply sum the quantities demanded for each product at each price level over all individuals) and log the values in the spaces provided above. We will deal with situation 3 later.

  1. Draw the market demand curve for Good B.
  2. Compute the price elasticity of demand for Good B.
  3. Go back and fill in the Market Quantities column in day 3. Draw the new demand curve for Good B (assume a parallel shift).
  4. Compute the income elasticity for Good B.
  5. Compute the cross-price elasticity of demand for Good A and draw the appropriate curves on the graphs (assume a linear demand and a parallel shift.

Source:

Cynthia D. Hill, "A Classroom Game for Developing Market Demand and Demand Elasticities: The Snicker Effect," http://www.marietta.edu/~delemeeg/expernom/Fall2001/hill.html.