Classroom Expernomics: Volume 10 (Fall 2001)

 

A Classroom Game for Developing Market Demand and Demand Elasticities: The Snicker Effect

Cynthia D. Hill
Department of Economics
Idaho State University


Abstract

This simple experiment of market demand has students create their own individual demand curves based on principles of consumer choice and then has them combine to create a market demand curve. The experiment further introduces students to the various types of elasticity associated with the demand curve; price elasticity of demand, income elasticity, and cross-price elasticity. Students are asked to hypothetically "buy" from a "store" in the classroom where product price and income change throughout the different stages of the experiment. The students are grouped and develop market demand curves for various products from which elasticities are then calculated. Including a 5 minute introduction, and a 5-10 minute concluding discussion, this experiment fits into a 50 minute class period. The author has used it in her introductory microeconomics course, with class sizes ranging from 20 to 70.

Introduction

Classroom experiments give students the opportunity to grapple with everyday events in a controlled environment. The unique hands-on experience gives way to a dynamic classroom and the potential for tremendous learning based on concrete experience. Experiments stimulate students to a height that is not matched by textbook readings or lectures (Yandell, 1999a). A great deal of research has recently been concluded to determine some of the enjoyment and learning outcomes associated with experiments, particularly in the microeconomic classroom. Although the research is not definitive, experiments are generally found to be enjoyed by students more, and lead to either increased or neutral test scores as compared to the standard lecture format (Beil and Delemeester, 1999; Mullin and Sohan, 1999; Yandell, 1999b).

In their survey of 113 non-computerized classroom games for college economics Brauer and Delemeester, (2001) point out that the overwhelming number of existing experiments have been written for the principles of microeconomics course. However, they note a lack of games which use the principles of consumer choice to construct a market demand curve and only one game which includes elasticity of demand and/or supply. Brauer and Delemeester further argue that, "As fundamental as demand is to microeconomics that seems an odd omission indeed," (Brauer and Delemeester, p. 6). This experiment of market demand hopes to make some headway toward filling this void that was pointed out in the survey described above.

In this game the student is introduced to market demand and the related elasticities in a setting which is quite familiar—a grocery store. These concepts are therefore realized at a rudimentary level which leads to a fundamental understanding of these microeconomic concepts.

Description of the Experiment

The market demand experiment provides a basic introduction to market demand and the related elasticities, demonstrating price elasticity of demand, cross-price elasticity, and income elasticity. Students take the roles of hypothetical buyers of various products held for sale in a "store" in the front of the classroom. Students all have the same income and face the same prices. Outside influences cause one of the product’s prices to change in the second stage of the experiment; in the third stage, the income level changes while the prices revert back to their original levels. When the students get in groups to create "market" demand curves, they internalize (and often simply realize for the first time) the idea of "market" demand as the summation of individual willingness to buy at various prices. Further, students use the newly developed "market" demand curves to experience first-hand the relative responsiveness of quantity demanded to changes in price and income (i.e., elasticities).

At the start of class, each student is provided a copy of the "Market Demand Experiment Instructions" (see Appendix A). The instructor begins the first stage of the experiment by explaining that each student has an income of $5 and an option of buying any of the products (or any combination of the products) in the store. The students are then told that they must spend all of their income. The "store" (possibly a table in the front of the class) has four products (any products will work, although products that vary in desirability and that relate somehow to each other help to facilitate the experiment) and the prices are listed clearly. For example, the four products might be a 20 ounce bottle of Coke ($1), a package of Twinkies ($1), a King Size Snickers candy bar ($1) and a carton of milk ($1). The prices do not necessarily have to be the same, but keeping things simple is important. It is also fairly important to find products that are priced somewhat close in actuality to the price that you are charging (from my experience, students will simply not buy products that they perceive to be a "bad deal"). The instructor then asks the students to log their purchases on the log sheet provided for the experiment. (For the instructions and information sheet, see the next section of the paper, and also Appendix A.)

Market Demand Experiment Instructions

Situation 1

You are a consumer of goods for sale in our classroom "store". You have a total income of $5 to spend on goods. You may buy any number of the products that you desire (as long as you spend only $5) and you certainly don’t have to purchase all of the products, but you must spend all of your income. The prices of the products for sale are listed below.

Write down the number of each product you decide to buy next to the product price in the "Individual Quantities" column (the "Market Quantities" column will be dealt with later).

  Individual Quantities Market Quantities
Can of Coke =$1    
Snickers Bar =$1    
Twinkie =$1    
Carton of Milk =$1    

In the second stage of this experiment, an outside force changes the price of one of the products (e.g., there is a decrease in the total number of Snickers bars available in the U.S., causing supply to shift to the left and price to increase). In actuality, the instructor simply changes the price of one of the products and asks the students to provide the same information as above. For example, the price of the Coke, the package of Twinkies, and the carton of milk all remain $1, but the price of the Snickers candy bar has doubled to $2. The students are asked to log their purchases on the log sheet associated with this change in the price of one of the products (i.e., the Snickers bar).

It is necessary to state before the second stage begins that the students are wiping their slates clean (or starting over as if they hadn’t previously made any of the purchases in stage 1). I often simply state that situation 2 is a "new day" to simplify matters. Students must consider purchases made in situation 2 completely independent of situation 1 due to the relationships between the products. For example, a student may wish to buy 3 Cokes and 2 Snickers bars in situation 1. If a "new day" is not made clear before beginning situation 2, that same student may buy 3 packages of Twinkies and 2 cartons of milk in situation 2 because she already has plenty of Snickers bars and Cokes in her possession, thus causing the student to move along her demand curve rather than creating one demand curve with various prices and quantities. The example above further emphasizes the necessity of this experiment being conducted as a hypothetical one; because there would be no way in which to "wipe a student’s slate clean" if she were buying real products (partial instructions are once again listed below).

Market Demand Experiment Instructions

Situation 2- "A New Day"

Due to a peanut production catastrophe the price of Snickers Bars 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 (below) allowing only for the change in the price of Snickers Bars, your income is still $5.

  Individual Quantities Market Quantities
Can of Coke =$1    
Snickers Bar =$2    
Twinkie =$1    
Carton of Milk =$1    

In the third stage, the instructor starts again with all of the original prices (i.e., changes the price of the Snickers bar back to $1), and asks the students once again to wipe their slates clean. The instructor then explains that a university donor has offered more scholarship support to students, thus leading to increased income for all students. All students in the class now have $8 to spend on the products from the "store". The students log their purchases (remembering to spend all of their income) on the log sheet.

Market Demand Experiment Instructions

Situation 3 - "Another New Day"

The peanut production catastrophe gets all straightened out (i.e., the price of Snickers Bars 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 students. Once again, log your purchases next to the product price (below) remembering to spend all of your income ($8).

  Individual Quantities Market Quantities
Can of Coke =$1    
Snickers Bar =$1    
Twinkie =$1    
Carton of Milk =$1    

The students then form groups of 5 or 6 (groups may be larger if necessary, larger groups simply necessitate more time to organize). Each group develops a market demand curve for the product that changed price during the second stage (i.e., the Snickers bar). Students simply sum the total purchases of that product at each price and then plot the two points. This turns out to be a significant learning experience for a large number of students. Deriving the market demand curve and actualizing ownership helps students to internalize the concept of market demand, often for the first time. Once the market demand curve is graphed according to the instruction sheet, a price elasticity of demand is then calculated.

Although students do not have much of an understanding as to what they are doing when they originally calculate elasticity of demand, these initial calculations lead to a lively dialogue and thoughtful discussion at the end of the experiment. We are able to discuss when the quantity of a product might be considered "elastic" or "responsive" to given changes in price. Invariably someone comes up with the idea that when the numerator (percentage change in quantity demanded) is greater than the denominator (percentage change in price) then certainly the product should be considered "elastic" or "responsive".

After price elasticity of demand is calculated, the various groups of students are then asked to contemplate income elasticity. Each group is asked to examine once again the market for Snickers bars. They examine the responsiveness of the quantity of Snickers bars to the given change in income. An income elasticity is calculated and the students are asked to formulate ideas about the relationship between this product and income (i.e., normal good or inferior good). Although it is extremely difficult in this type of experiment to develop a product which is an inferior good, in the discussion following the experiment it is straightforward to include a discussion of the way in which an inferior good would have behaved (i.e., the curve would have shifted to the left rather than to the right).

Finally, each group of students examines how the change in one product’s price affects the quantity demanded of another product (cross-price elasticity). The group is asked to examine the responsiveness of each of the other three product’s quantity to the given change in the price of the Snickers bar. A cross-price elasticity is calculated and the students formulate ideas about how the other three products are related to Snickers bars (i.e., complementary goods, substitute goods, or non-related goods).

Students seem to have the most difficulty with this part of the experiment. Students who do not read the instructions carefully will often attempt to make the two points that they find into one demand curve rather than two separate points on two separate demand curves. This problem can be alleviated if the instructor can walk around the classroom and read through the instructions with the groups who are having difficulty. The instructor may also remind students of their earlier practice with complements and substitutes and the shifting demand curves. When a group of students has a product with a cross-price elasticity equal to zero, it is often quite enlightening as well. Students come to a realization that not all goods are related, and those goods that are not related would have cross-price elasticities of zero.

Once the groups are finished with the above scenarios, the class as a whole should come together and talk briefly about some of the findings. This may bring to light variations in elasticities and various group findings as to whether these products are normal or inferior goods, and complements or substitutes. It may also be interesting to discuss the distinction between expectations (in terms of which types of goods might generally be thought of as complements or substitutes for example) and the actual signs of the elasticities computed by the groups.

Concluding Remarks

I usually perform this experiment after we have had the traditional two day introduction and discussion of demand and supply, and before any true elasticity "lecture". Having said this however, I have found that a brief introduction or a simple general description of elasticity in terms of responsiveness, at the beginning of the experiment is helpful to students so that they can see where the game is headed. Students also should be "reminded" of how to calculate a percentage change before the experiment begins. I have an "Economics and Math" review the first day of class during the semester, so that we don’t have to take time throughout the semester to "brush up" on our math skills. Including a 5 minute introduction, and a 5-10 minute concluding discussion, this experiment can be completed in a 50 minute class period.

I have found that reading and working through the first page of the instructions with the class as a whole works best. Once the students split up into groups they clearly work most efficiently with minimal instructor interference. However, it is definitely important to emphasize the necessity of reading all of the instructions in a step-by-step manner.

As a final note, I would like to point out that the focus of this experiment is on the concepts of market demand and the associated elasticities. The elasticity calculations are purposefully simple and therefore not as accurate as they otherwise might be. The goal of this experiment is to have students walk away with a fundamental understanding of market demand and the elasticities of demand, it is not meant to teach them all of the various ways to calculate an elasticity. My experience with this experiment is that more students come away with a broader comprehension of market demand, price elasticity of demand, income elasticity, and cross-price elasticity after having experienced the experiment, than when I simply introduced the topics and had the students compute various calculations in order to "cement" the ideas.

 

References

Beil, Richard and Greg Delemeester. "The Double Oral Auction: Is it an Effective Teaching Tool?" Proceedings. Economics and the Classroom Conference, Idaho State University and Prentice-Hall Publishing Co., March 1999, pp. 12-32.

Brauer, Jurgen and Greg Delemeester. "Games Economists Play: A Survey of Noncomputerized Classroom-Games for College Economics." Journal of Economic Surveys Vol. 15, No. 2. 2001, pp. 221-236.

Mullin, David and Gerald Sohan. "Benefit Assessment of Classroom Experimental Economics." Working Paper, United States Air Force Academy, April 1999.

Yandell, Dirk. Using Economic Experiments in the Classroom. Upper Saddle River, New Jersey: Prentice Hall, 1999a.

Yandell, Dirk. "Effects of Integration and Classroom Experiments on Student Learning and Satisfaction." Proceedings. Economics and the Classroom Conference, Idaho State University and Prentice-Hall Publishing Co., March 1999b, pp. 4-11.


 

Appendix A: Market Demand Experiment Instructions

Situation 1

You are a consumer of goods for sale in our classroom "store". You have a total income of $5 to spend on goods. You may buy any number of the products that you desire (as long as you spend only $5) and you certainly don’t have to purchase all of the products, but you must spend all of your income. The prices of the products for sale are listed below.

Write down the number of each product you decide to buy next to the product price in the "Individual Quantities" column (the "Market Quantities" column will be dealt with later).

  Individual Quantities Market Quantities
Can of Coke =$1    
Snickers Bar =$1    
Twinkie =$1    
Carton of Milk =$1    

Situation 2- "A New Day"

Due to a peanut production catastrophe the price of Snickers Bars 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 (below) allowing only for the change in the price of Snickers Bars, your income is still $5.

Individual Quantities Market Quantities

  Individual Quantities Market Quantities
Can of Coke =$1    
Snickers Bar =$2    
Twinkie =$1    
Carton of Milk =$1    

Situation 3 - "Another New Day"

The peanut production catastrophe gets all straightened out (i.e., the price of Snickers Bars 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 (below) remembering to spend all of your income ($8).

  Individual Quantities Market Quantities
Can of Coke =$1    
Snickers Bar =$1    
Twinkie =$1    
Carton of Milk =$1    

As an Economist, you (yes 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 5 – 8 people, and determine the "Market Quantities" for situation 1 and situation 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.

You now have the ability to develop a demand curve for Snickers bars (remember that a market demand curve is simply the summation of individual demands at various prices).

Draw the demand curve below.

We also now have information regarding the responsiveness of quantity to a given change in price.  This is known as "elasticity" or more specifically "price elasticity of demand" which can be computed by dividing the percentage change in quantity demanded by the percentage change in price:

 Ed = Percentage change in quantity demanded
                 Percentage change in price

Note:  A simple way to compute the percentage change in a variable is to divide the change in the value of the variable by the initial value.

 Compute the price elasticity of demand for Snickers Bars.

You know that income also impacts the demand for a product.  Go back and fill in the Market Quantities column in situation 3.  Examine specifically how the market quantities of Snickers Bars changed when income increased.  Graph this new point (comparing situations 1 and 3).  An increase in income leads to a shift in demand (in our case since we have only one point on our new demand curve, we’ll assume that it is a parallel shift).  Draw the new demand curve below.  We also have information regarding the responsiveness of quantity to a given change in income.  This is known as income elasticity which can be computed by dividing the percentage change in quantity demanded by the percentage change in income.

 EI = Percentage change in quantity demanded
                 Percentage change in income

Compute the income elasticity for Snickers Bars.                                                                                      

You know that when the price of one good changes, that change often affects the demand for another good (e.g., a price change in Pepsi affects the demand for Coke). Go back and look at the Market Quantities columns in situation 1 and situation 2 again.  Examine specifically how the market quantities of the other goods changed when the price of Snickers Bars changed, ceteris paribus.  Remember, when the price of one good changes, it causes a shift in the demand for a related good.  Therefore, the two different market quantities that you have for each product (in situation 1 and 2) are points on two different demand curves.  You do not have any information regarding the slopes of the demand curve, you simply need to draw them with some kind of a negative slope.

This specifically gives us information regarding the responsiveness of quantity of one product to a given price change in a related product.  This is known as cross-price elasticity of demand which can be computed by dividing the percentage change in quantity demanded of one good (X, or in our case one of the other products) by the percentage change in the price of a related good (Y, or in our case Snickers Bars).

Exy = Percentage change in quantity demanded of X
                Percentage change in price of Y

Compute the cross-price elasticity of demand for the other goods, and draw the appropriate curves on the graphs below.

 

 

 

 

 


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