Whiteboards are a fantastic tool in physics education for three reasons:

1) They encourage students to try out tentative explanations. I find that students are often loathe to write anything on paper unless they know it is the 'right' answer. However, they don't mind writing on a whiteboard because if you want to, you can erase it really quickly.
2) They encourage students to collaborate. Words or diagrams on a whiteboard provide them with a way of structuring and illustrating their discourse. The students like writing on these boards.
3) They provide you with a window on what your students are thinking. A diagram or graph on a white board is large enough that you can clearly see it. It is also obvious if nothing is being written.

Whiteboards are cheapest if you can by them from a building supply store like Home Depot. These large boards can be cut in a variety of sizes. I prefer boards that are about 12" x 16". They are big enough to allow collaboration in pairs or groups of three, but still small enough to store out of the way easily. When you buy the markers, be sure to get ones that are not smelly. The best whiteboard markers, also the most expensive, are the Steadtler brand. The tips don't collapse, they don't dry out as easily and best of all you can get refill stations for them. This is environmentally responsible and economical. Unfortunately no one seems to carry them However, if you pressure the manager at Staples, you can get them ordered. You want Refill station for 351 markers SKU 039631-6 at $10.95 each. Here is a link about the stations http://www.staedtler.ca/Lumocolor_whiteboard_marker_refill_ca.Staedtler . You don't need to buy the expensive erasers - just cut up an old towel.

For more information, see what Dan McIsaac has to say about whiteboarding.