1. Elasticities of demand
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2. Elasticities experiment: Round 1
You have an income of £6 and a choice of purchasing the following goods. You can purchase as many or as few of the products below as you wish, but you must spend all of your income.
Good
Price
Can of Cola Brand 1 £1
Can of Cola Brand 2
2 pint bottle of milk
Loaf of bread
King size Cadbury’s chocolate bar
Punnet of strawberries £2
In your table, note down how you will allocate your income in Round 1.
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3. Elasticities experiment: Round 2
As a result of the employees at Cola Brand 1 demanding higher wages, the price of a can of Cola Brand 1 has to be increased to £2. A rise in the price of grain and cocoa increases the cost of production of both bread and chocolate, causing the price of these to also rise to £2.
Good
Price
Can of Cola Brand 1 £2
Can of Cola Brand 2 £1
2 pint bottle of milk
Loaf of bread
King size Cadbury’s chocolate bar
Punnet of strawberries
Your income remains at £6. You should make decisions in this round independent of decisions in the last round and must again spend all of your income. In your table, note down how you will allocate your income in Round 2.
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4. Elasticities experiment: Round 3
Prices have now returned to the level they were at in Round 1. A pay rise means your income has increased to £10.
Good
Price
Can of Cola Brand 1 £1
Can of Cola Brand 2
2 pint bottle of milk
Loaf of bread
King size Cadbury’s chocolate bar
Punnet of strawberries £2
In your table, note how you will spend your income in Round 3.
Task: You now need to find out what everyone else in your class bought in each round to find the market quantities. Fill in the appropriate columns of your table when you have done this.
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5. Insights: price elasticity of demand
Plot the market quantities you have for Cola Brand 1, bread and chocolate at a price of £1 and £2 (from Rounds 1 and 2) on the diagram below. Join the two points together to construct the three demand curves.
Task: Use the formula PED = % change in QD / % change in P to calculate the price elasticity of demand of the three goods.
Extension tasks
a Which of the goods have price elastic/inelastic demand? Use your diagrams and calculations to explain.
b What do you think determines whether a good has price elastic or inelastic demand?
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6. Insights: income elasticity of demand
Between Rounds 1 and 3, the price of all of the goods remained the same but income changed. Using your market quantities data from Rounds 1 and 3 and the formula YED = % change in QD / % change in Y calculate the income elasticity of demand of all of the goods.
Good
YED
Can of Cola Brand 1
Can of Cola Brand 2
2 pint bottle of milk
Loaf of bread
King size Cadbury’s chocolate bar
Punnet of strawberries
Extension tasks
a Which of the goods have income elastic/inelastic demand?
b What do you think determines whether a good has income elastic or inelastic demand?
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7. Insights: cross elasticity of demand
In Round 2, the price of Cola Brand 1, bread and chocolate changed. Cross elasticity of demand tells us how changes in the price of one good can affect the demand for another. To see this, complete the following table.
% change in quantity demanded of good A (between Rounds 1 and 2)
% change in price of good B (between Rounds 1 and 2)
Cola Brand 1
Cola Brand 2
Milk
Bread
Strawberries
Chocolate
Task: Use the formula XED = % change in QD of good A / % change in P of good B to calculate the XED between:
Cola Brand 1 and Cola Brand 2
milk and bread
strawberries and chocolate
Extension: What relationship exists between these pairs of goods? Use your XED estimates to help you.
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