Economics and Qualitative Analysis
Order Instructions:
Instructions
As a policy analyst you have been asked to calculate the elasticity of demand for university
courses. Questions 1 to 4 are based on the assumption that the universities that increased their
fees by 30% experienced an overall decrease in student applications of 3%.
- What is the price elasticity of demand for courses at the universities that increased
their fees by 30%?
- Is demand for these courses elastic or inelastic?
- What factors do you think are responsible for this degree of elasticity?
- Is tuition fee revenue likely to increase or decrease at these particular universities?
Questions 5 to 8 are based on the assumption that the 30% fee increase at the universities that
increased fees caused an overall increase in student applications of 8% at those universities
that did not increase their fees.
- What is the cross-elasticity of demand for courses at universities that did not increase
their fees with respect to the price of courses at universities that did increase their
fees?
- Are courses at different universities substitutes or complements?
- Is demand for courses at the universities that did not increase their fees elastic or
inelastic with respect to universities that did increase their fees? What is the
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importance of this degree of elasticity?
- Finally, what are some of the factors that might cause the Minister for Education to
argue that changes in demand for course are not necessarily related to the fee changes?
Date Due: 18 Sep 2014
Abstract
The purpose of elasticity is to measure the responsiveness of changes or the relationship that
exists when price are changed and the quantity demanded of the products also changes or
remains constant. The purpose of this paper is to show the relationship that exists when the fees
chargeable to students are increased and the students’ applications decreases. The theory of
elasticity and its relationship to the fee increment and student applications is analyzed to
determine the rate of elasticity and whether the relationship is elastic or inelastic.
Methodology
Elasticity explains or reflects the sensitivity or changes in a variable as compared to the changes
on the other variable. The price elasticity of demand (PED) compares or measures the
responsiveness of changes in the quantity demanded to the changes in prices. Price elasticities
are in most cases negative but their signs are mostly ignored. When the calculated Price
Elasticity of Demand (PED) is less than one (>1) then it’s inelastic. (Frank, 2008) It means that
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the overall changes in prices of the products sold have little effect on quantities of products
demanded. (Melvin & Boyes, 2002) But when the Ed is greater than <1 then the overall changes
in prices of goods or products sold have a large effect on the average quantities of goods
demanded. The PED is said to be elastic. Ed represents the elasticity coefficient that is used to
calculate the rate or degree of elasticity. (Kreps, 1990)
Results
- To calculate the Price Elasticity of Demand for the University fee increment and its reactions,
the following formula is utilized to obtain the PED = %∆Q/%∆P i.e. the % change in the
quantities demanded / the % change in the prices of products or goods. ( Henderson, 2008)
The percentage change in the number of students is -3% while the fee increment was 30%
The price elasticity of demand is equal to %∆Q/%∆P = -3 %/30%
= 0.1
Ed = 0.1
- The PED for the university courses is 0.1 i.e. it’s less than one hence the university courses are
inelastic. Ed of 0.1 indicates that for every 1% of price increment, the number of students
reduces by 0.1% or alternatively if the fee decreases by 1% then the number of student’s
application also increases by 0.1%. (Colander, 2008) - The factors that are responsible for this inelasticity maybe other factors which are not directly
related to the fees being charged at the university. The most probable cause maybe the marketing
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strategies that the university has adopted and the lack of publicity for the courses being offered at
the institution. The marketing strategies maybe ineffective or there are other factors like the
competitiveness of the qualifications being offered at the institution. (Frank, 2008)
The other factors maybe the presence of other colleges or institutions nearby or other substitute
alternatives than going to that college. These substitutes maybe the availability of jobs or other
alternative courses or job training that maybe available. Students are more likely to opt for other
alternatives if the terms are favorable. The other reasons may be a recent increment of fees that
may have resulted in negative reactions and the consumer’s ability to pay the fees.
- The fee is likely to reduce in order to attract more students at the institution though it would
not result in significant increase in student applications. - Cross price elasticity refers to the ratio or the rate of % change in the quantity demanded of a
product or service to a given % change in the price of the other good or service.
Ex = %∆QA/∆PB
Cross Elasticity of Demand = Percentage change in the quantity demanded of service A/
Percentage change in the Price of service B
Ex for the university courses = 3%/8% = 0.38%
- The percentage change in cross elasticity is positive which means that the universities are
substitutes.
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- The cross elasticity is inelastic as the Ex is less than one i.e. 0.38. The importance of cross
elasticity is that since consumers are more price-sensitive and switching to close substitutes is
very easy if alternative goods or services are available, the cross elasticity will be helpful in
determining the behavior of consumers or the students. ( Henderson, 2008)
Discussion
- Students are more likely to opt for other alternatives or substitutes if the terms at the respective
university are unfavorable. The presence of alternatives and substitutes makes it difficult for the
universities to act unilaterally as consumers evaluate their alternatives carefully when prices
change. When the demand of services being offered is elastic then the consumers will be affected
more with the price changes. The other reasons that may have contributed to the inelastic nature
of the PED is that may be the university management may have had a recent increment of fees
that may have resulted in negative reactions from the students also the consumer’s ability to pay
the fees may have contributed to the inelasticity of demand.
The other factors maybe the change in income or the increased costs in fees maybe unaffordable
to some students. These factors may have contributed to the inelasticity of demand for the
university fees and student application. (Pindyck & Rubinfeld, 2001)
The factors that are responsible for this inelasticity maybe other factors which are not directly
related to the fees being charged at the university. The most probable cause maybe the marketing
strategies that the university has adopted and the lack of publicity for the courses being offered at
the institution. These strategies maybe inadequate and ineffective. The university management
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should evaluate all its marketing strategies and involve professionals to develop its marketing
communication strategies to promote its revenues.
Recommendation
The recommendation to the university management would be reduce the fees to the rates they
were before the increment and also exploit other methods of increasing the student application
processes. Though, the increment of the fees will have very little effect on the general
application processes and also on the number of enrolment. The inelastic nature of the price
elasticity of demand makes it difficult for the management to raise more revenues it would be
better to engage the students on their needs in order to attract more student application. Other
alternatives would be to adopt different strategies to market the institution and the courses
available. (Heather, 2004)
Conclusion
The management of the university should exploit other methods of encouraging more student
applications like offering special packages at reduced rates and conducting more promotional
activities to create awareness of its academic calendar and the courses offered to increase its
revenue instead of depending on increased fees to raise its revenues.
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References
Colander, D. C. (2008) Microeconomics, 7th ed., Page 288 McGraw-Hill, 2008.
Frank, R. (2008). Microeconomics and Behavior (7th ed.) McGraw-Hill ISBN 978-0-07-126349-
8
Heather, K. (2004) Economics: Theory and Action. Harlow: Prentice Hall.
Henderson, D. R. (2008) “Demand” . Concise Encyclopedia of Economics (2nd Ed) Indianapolis:
Library of Economics and Liberty . ISBN 978-0865976658 . OCLC 237794267
Kreps, D. A. (1990) Course in Microeconomic Theory, Princeton.
Melvin & Boyes (2002) Microeconomics 5th ed. page 267. Houghton Mifflin 2002
Pindyck, R & Rubinfeld, D. (2001) Microeconomics 5th ed. Prentice-Hall.
