Economics and Quantitative Analysis

Answer

1. What is the price elasticity of demand for courses at the universities that increased their fees by 35%? (1 mark)

Price elasticity of demand            = Percentage change in quantity demanded

                                                                                Percentage change in price

                                                                = -7/35 = 0.2

2. Is the demand for these courses elastic or inelastic? (1 mark)

The demand for these courses is price inelastic.

3. What factors do you think are responsible for this degree of elasticity? (2 marks)

In as much as consumers will feel the pain of the extra cost, not many can afford to trade of the courses for others.  Consumers feel that the courses are important enough and as such despite the increase the value attachment does not reduce for a significant number (Rittenberg and Tregarthen, 2015).

4. Is tuition fee revenue likely to increase or decrease at these particular universities? (2 marks)

The fees will not decrease with the falling number of enrolment but with increase.  The revenue due from the students who dropped the course is more than covered by the additional revenue due as a result of the increase in fee.

5. 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? (2 marks)

 The cross elasticity of demand =  percentage change in courses demanded that did not increase fees a ratio of the percentage change in the price courses that increased fees that brings about the change in quantity demanded.

Cross elasticity of demand = 12/35 = 0.3

6. Are courses at different universities substitutes or complements? (2 marks)

Given that a rise in the fee charged in some courses has resulted in an increase in the number of students registering in courses that did not increase their fees, this courses are thus substitutes.

7. 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 importance of this degree of elasticity? (2 marks)

Elasticity = 12/-7 = -1.7.  The demand is price elastic.  The degree of elasticity is important as it point to the direction one factor will move as a result of the change in the other factor under consideration. 

8. 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? (3 marks)

Some of the factors that support the view that changes in demand for courses are not necessarily related to fees changes include, the fall additional enrolment in the courses that did not increase their fees is not commensurate with the fall in enrollment on the courses that increased their fees.  Similarly, the increase in fees should have resulted in the reduction of overall revenue on account of falling number of enrolments but this is neither the case.  Finally, despite insinuation, there can be no direct relations between the increases in fees with the drop in enrollment (Layton, Robinson and Tucker, 2012).

Purpose (2 marks)

Elasticity is a measure of response.  As such price elasticity of demand is a measure of how demand responds to price changes.  In the case study about changes in university fees on some causes, the price elasticity thus becomes an important tool in measuring how the enrollment will be affected and by extension the revenue collected – it is this revenues that run the university (Rittenberg and Tregarthen, 2015). 

Price elasticity of demand will ,thus, guide the analysis to understand how much a particular change in fees charged will affect the number of students seeking enrollment in the particular courses whose fees has been increased. In addition, it will also influence how much this increase in fees coupled with expected fall in number of application for enrollment affects the revenues generated by the courses, how the fees increase in some courses will affect the expected increase in the number of students seeking enrollment in the courses that have not increased their fees. Moreover, it would dictate who this increase will affect the revenue generated from the additional students enrolled in courses that did not increase their fees, how this increase in fees will cover any all in fees that might as a consequence of the reduced enrollments in the courses that increased their fees, among others (Layton, Robinson and Tucker, 2012).

Method (3 marks)

To understand these changes and be able to capture the demographics that will be used to calculate the changes, it is important to capture the actual number of enrollments in the past years.  This will act as a guideline of what has been achieved and will be reliable data in projecting what to expect.  The revenue figures should not be hard to generate since, the fees charged is public knowledge.  This when considered against the number of students enrolled will provide the total revenue generated by a particular course (Albuquerque and Bronnenberg, 2009). 

This will thus offer insights in to what the additional fees will generate given the number of students who enroll for the courses.  Similarly, it will offer insights into how the additional students generate additional fees for the courses that did not increase their fees.  Even where the actual figures are not available, it is possible to use the elasticity of demand to determine whether the increase in fees and subsequent fall in registration will affect the revenues generated positively or negatively (Taghvaee and Hajiani, 2014).

. Results (3 marks)

Using the elasticity of demand, the figures of the case study reveal that the increase in fees is such that it does not affect the revenue generated.  Though the demand is affected by the price, the relationship is such that the demand is price inelastic.  This inelasticity means that the increase in fees charged in some courses resulted in the university generating more revenues since the fall in revenue on account of reduced enrollments was easily covered by the additional fees generates (Mhatre, Seong-Jong Joo and Lee, 2014).

Using the cross-elasticity of demand, it is possible to understand how the increase in fees in some courses affected enrollments in other causes.  Similarly, it will help reveal where the courses that did not increase fees are viewed as substitutes or complementary of each other by the consumers – students.  The results reveal that the increase in fees in some of the courses does indeed affect positively the number of students enrolling in the courses that did not increase their fees (Graves and Sexton, 2009). 

Additionally, the results reveal that the university gains by being able to generate additional revenues to fund its operations.  The challenge is for it to have adequate facilities to cater for the additionally enrollments in the course that did not increase their fees. It is assumed that the additionally fees generated from the courses that did not increase their fees do not result in the university having to invest even more funds just to be able to enjoy the additional income.  Should this be the case, the university is best advised not to take on the additional students, since as a result of demand being price inelastic, additional revenues has been generated that more than adequately covers the lost revenue of account of reduced enrollment (Albuquerque and Bronnenberg, 2009).

Discussion (4 marks)

Having established that the demand for courses that increase their fees is price inelastic, this means that despite the price increase, the fall in demand does not adversely affect the total revenue generated.  The resultant fall in revenue as a result of reduced enrollments, it is easily and adequately covered by the additional revenues of account of the reduced number of students paying the higher fees.  This price inelasticity of demand is good to the university, since it does not undermine its strategic position (Taghvaee and Hajiani, 2014).  Should the need to raise additional revenue arise in the future, the university is aware that an increase in fees charged remains a viable option that will not affect total revenues collected on account of reduced enrollments from the fee increase (Mhatre, Seong-Jong Joo and Lee, 2014). 

The cross-elasticity of demand reveals that the fee increase in some courses has a positive effect in the courses that do not increase their fees.  There seems to be a shift in the demand of the cheaper causes on account in increase in fees of others.  The fee increase resulted in a 7 percent fall in enrollments but resulted in a 12 percent jump in enrollment among in the cheaper courses.  This additionally students who flock to the cheaper courses can be assumed to include the additionally enrollments that could have been experienced in line the annual increase in the number of students enrolled (Graves and Sexton, 2009).

This further revels that the universities gain from the newly adopted strategy, since the revenues generated increase all round.  Additionally, this strategy actually strengthens the universities position with regards to raising fees to generate additional revenues.  Given that demand is price elastic, the university can afford to raise fees further without affecting the revenues generated (Graves and Sexton, 2009).

Recommendations (3 marks)

It is clear that demand for course is price inelastic.  The government thus needs to monitor the fees charged very closely to ensure the students are not exploited and not given quality.  The government has to ensure the universities have the proper facilities to cater for the additionally students seeking enrollment for the courses that did not raise their fees. The quality should not be affected by the increased numbers. 

Even more critical, the government has to ensure that the students get greater quality on account of the additional fees charged on the courses that had their fees raised.  This is critical since the inelasticity of demand results in more revenues being generated from the additional fees charged notwithstanding the reduced enrollments numbers.