Elasticity of demand for university courses
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%.
1. What is the price elasticity of demand for courses at the universities that increased
their fees by 30%?
2. Is demand for these courses elastic or inelastic?
3. What factors do you think are responsible for this degree of elasticity?
4. 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.
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?
6. Are courses at different universities substitutes or complements?
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?
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?
Based on economic analysis of the above issue, prepare a 1,200 word report using the
following structure:
- Purpose
- Method
- Results
- Discussion
- Recommendations.
Please ensure that you clearly define your terms and explain your results.
SAMPLE ANSWER
Elasticity of demand for university courses
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.
Introduction
The price elasticity of demand (PED) or (Ed) measures the responsiveness or compares the changes in the quantity demanded to the changes in prices while the Cross price (Ex) 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. There are many factors that may be responsible for these inelasticity’s or elasticities other than the price factors that are not directly related to the quantities demanded which in this case is the fees being charged at the university and the rate of student’s applications.
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 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 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.
- 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 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.
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.
ASSIGNMENT 1 (30 MARKS)
Question 1 Total marks for Q1. (20 marks)
Financial statements of Nimbin Pty Ltd are presented below:
Nimbin P/L
Statement of Financial Position
As at 30 June 2013 and 2014
($000)
2014 2013
Current assets
Cash and cash equivalents $1,645 $2,110
Accounts receivables (all trades) 4,100 3,675
Inventories 7,000 6,930
______ _____
Total current assets 12,745 12,715
______ ______
Non-current assets
Property, plant and equipment 17,190 15,330
_______ ______
Total non-current assets 17,190 15,330
_______ _______
Total assets $29,935 $28,045
======= ======
Current liabilities
Payables $5,780 $5,990
_______ ______
Total current liabilities 5,780 5,990
_______ ______
Non-current liabilities
Interest-bearing liabilities 9,940 9,450
_______ _____
Total non-current liabilities 9,940 9,450
_______ _______
Total liabilities $15,720 $15,440
====== ======
Equity
Share capital $7,700 $7,700
Retained earnings 6,515 4,905
_______ _______
Total equity $14,215 $12,605
====== ======
Nimbin P/L
Income Statement
As at 30 June 2014
($000)
Revenues (net sales) $55,000
Less: cost of sales 35,100
_______
Gross profit 19,900
_______
Less: Expenses
Selling and distribution expenses 7,100
Administrative expenses 4,970
Finance costs 1,560
______
Total expenses 13,630
______
Profit before income tax 6,270
Income tax expense 1,908
______
Profit $4,362
=====
Nimbin P/L
Statement of changes in Equity
For the year ended 30 June 2014
($000)
Share capital
Ordinary (7,200.000 shares)
Balance at start of period $7,200
______
Balance at end of period 7,200
_______
Preference (250,000 shares)
Balance at start of period 500
______
Balance at end of period 500
______
Total share capital $7,700
======
Retained Earnings
Balance at start of period $4,905
Total income for the period 4,362
Dividends paid – ordinary (2,702)
Dividends paid – preference (50)
______
Balance at end of period $6,515
======
Additional information:
Payables include $5,620 (2014) and $5,730 (2013) trade accounts payable; the remainder is accrued expenses. Market prices of issued shares at year-end (2014): Ordinary $12; Preference $6.70.
Required:
- Calculate the following ratios for 2014. The industry average for similar businesses is shown. (14 marks)
Industry average
- Rate of return on total assets 22%
- Rate of return on ordinary equity 20%
- Profit margin 4%
- Earnings per share 45c
- Price-earnings ratio 0
- Dividend yield 5%
- Dividend payout 70%
- Current ratio 5:1
- Quick ratio (acid ratio) 3:1
- Receivables turnover 13
- Inventory turnover 6
- Debt ratio 40%
- Times interest earned 6
- Assets turnover 8
- Given the above industry averages, comment on the company’s profitability, liquidity and use of financial gearing. (6 marks)
Question 2 Total marks for Q5. (10 marks)
- A local restaurant is noted for its fine food, as evidenced by the large number of customers. A customer was heard to remark that the secret of the restaurant’s success was its fine chef. Would you regard the chef as an asset of the business? If so, would you include the chef on the balance sheet of the business and at what value? (2 MARKS)
- Accounting provides much information to help managers make economic decisions in their various workplaces. You are required to provide examples of economic decisions that the following people would need to make with the use of accounting information: (3 MARKS)
- A manager of human resources
- A factory manager
- The management team of an Australian Football League (AFL) club
- The manager of a second-hand clothing charity
- c) Indicate the effect of each of the following transactions on any or all of the three financial statements of a business: (5 MARKS)
- Statement of financial position
- Statement of financial performance
- Statement of cash flows
Apart from indicating the financial statements (s) involved, use appropriate phrases such as ‘increase total asset’, ‘decrease equity’, ‘increase income’, ‘decrease cash flow’ to describe the transaction concerned.
- Purchase equipment for cash.
- Provide services to a client, with payment to be received within 40 days.
- Pay a liability.
- Invest additional cash into the business by the owner.
- Collect an account receivable in cash.
- Pay wages to employees.
- Receive the electricity bill in the mail, to be paid within 30 days.
- Sell a piece of equipment for cash.
- Withdraw cash by the owner for private use.
- Borrow money on a long-term basis from a bank.
THE END
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