Thursday, May 24, 2012

Can anyone help with price elasticity of demand?

Q: Have to write a short Synopsis of case (Elasticity studies have looked at the overall demand for higher education in general; some have examined the demand for specific sectors (public, four-year colleges and universities, for example); and some have considered demand at the level of the individual institution. Obviously, we would expect the elasticity’s to be quite different depending on the level of the analysis.) This is what I have thus far Elasticity studies, “The Impact of Tuition Increases on enrollment at Public Colleges and Universities” by Steven Hemelt and Dave Marcotte, is the study of data from public 4-year colleges and universities from 1991 to 2006. Hemelt and Marcotte write about the impact of increases to the total enrollment and credit hours and estimate differences by type of institution. On average tuition and fee elasticity of total headcount is -0.0958. Which indicates $100 increase in tuition and fees would lead to a decline in enrollment of about .25 percent. (Hemelt & Marcotte, 2011) I'm having trouble with individual institutions.

I also have to answer questions; which I have some answers for:
Would you expect the price elasticity of demand to be higher at the level of an individual school (e.g., Baker) or at the aggregate level (e.g., all 4-year colleges and universities)? Why?
I believe the price elasticity of demand would be higher at Baker. The price elasticity of demand for a university is more elastic than Baker, because people can switch to Baker if the price of the university goes up. (Baker is relatively cheaper than a regular four year college)

Despite the empirical evidence to the contrary, college decision-makers often believe that their price elasticity of demand is essentially zero. Is that right? How important were price considerations in making your college decision? Would a change of a few thousand dollars have mattered?
No, college price elasticity of demand I believe could not be zero; students can go to a technical school or get on the job training instead of going to a college.
However, a reason why demand for higher education often found to be inelastic would be Heller (1999) argues that the fairly recent, yet substantial, increase in the earnings of college graduates relative to non-college graduates helps explain tuition-rate insensitivity. Leslie and Brinkman (1987) postulate several reasons why the demand for a college education might be inelastic: relatively small tuition increases historically, after adjusting for inflation; the ability of students to move to lower-cost institutions and use financial aid to reduce the effects of tuition increases; an increasing consumer base resulting from the expanding participation of women, nontraditional students, and less-prepared students; and institutions engaging in aggressive marketing. (Craft, Baker, Myers & Harraf, 2012)
When it came to going back to school, price was somewhat of a matter; but the main reason for me choosing baker was their continuous help they provide when looking for employment. For myself, no; a few thousand dollars would have not mattered.

Would you expect the price elasticity of demand to be higher for financial-aid students or for non-aid students? Why?

How does a student’s income elasticity affect the demand for higher education at Baker College?

Can anyone help and let me know if I'm on the right path with my answers? thanks
(2012-05-22 04:46:45)

A: From wiki, see the determinants of PED below.

In your case you have many substitutes once you drop below the aggregate of higher education in general. Available substitutes make for greater elasticity.

Necessity makes for less price elasticity. We know that many people believe that a college degree is increasingly important for obtaining a middle class or higher income. This trend moves opposite of the substitution effect.

Tuition is a large percentage of income for most people, so that tends to increase price elasticity. For the question related to financial aid, perhaps the delay effect of paying for the loans would make the financial aid student's demand less price elastic, but there could be other factors at play there as well.

Income elasticity of demand for a student would affect demand at baker, but having the higher income student (student's family presumably) less sensitive to price, and therefore less interested in Baker if they are a lower tuition and lower prestige school. Don't ignore the value proposition though, just because tuition is low doesn't mean students believe Baker is less effective in getting them what they want out of college.

Determinants of PED

The overriding factor in determining PED is the willingness and ability of consumers after a price changes to postpone immediate consumption decisions concerning the good and to search for substitutes (wait and look). The greater the incentive the consumer has to delay consumption and search for substitutes and the more readily available substitutes are the more elastic the demand will be. Specific factors are:

Availability of substitutes: The more choices that are available, the more elastic is the demand for a good. If the price of Pepsi goes up by 20%, one can always purchase Coke, 7-Up, Dr. Pepper and so forth. One's willingness and ability to postpone the consumption of Pepsi and get by with a "lesser brand" makes the PED of Pepsi relatively elastic.
Necessity: With a true necessity a consumer has neither the willingness nor the ability to postpone consumption. There are few or no satisfactory substitutes. Insulin is the ultimate necessity, so the demand for it is inelastic.
Importance in terms of proportion of income spent on a good: Most consumers have both the willingness and ability to postpone the purchase of big ticket items. If an item constitutes a significant portion of one's income, it is worth one's time to search for substitutes. A consumer will give more time and thought to the purchase of a $3000 television than a $1 candy bar, so demand for the former will be more elastic than demand for the latter.
Duration: The more time a consumer has to search for substitute goods, the more elastic the demand.[27]
Breadth of definition: how specifically the good is defined. For example, the demand for automobiles is less elastic than the demand for Toyotas, which is in turn less elastic than the demand for Red Toyota Priuses.
Availability of information concerning substitute goods: The easier it is for a consumer to locate the substitute goods, the more willing he will be to undertake the search, and the more elastic demand will be.
So you know that Baker has lower tuition than the average or even the low cost university?

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