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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 35% experienced an overall decrease in student applications of 7%.
Questions 5 to 8 are based on the assumption that the 35% fee increase at the universities that increased fees caused an overall increase in student applications of 12% at those universities that did not increase their fees.
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As a policy analyst, my aim is to evaluate the response of the students to the proposed variations in the fee structure in different universities. By using various examples the report aims to understand the concept about the various terms like the price elasticity, degree of elasticity, cross elasticity etc.
Elasticity may be defined as the measure of the changes in a variable as due to the changes in the different variable (Imbs & Mejean, 2015). The value of elasticity is evaluated on the following basis:
When all the factors and parameters remain unchanged then the ratio of the % of the change in the quantity of a commodity to the % change in the cost of the commodity is called the own-price elasticity.
The cross-price elasticity may be defined as the measure of the changes in the demand of a particular commodity when the cost of another commodity is changed.
Price Elasticity of Demand:
Price elasticity of demand = % change in quantity demanded/% change in price
Thus in this situation the % change in the quantity demanded is equal to the % changes in the number of applicants for the courses, i.e = Decrease of 7%
Further, the % change in the price can be said to be the % change in the fees of the University = increase of 35%
Hence the Cross-Price Elasticity of demand can be given as:
Cross-price Elasticity = % change in the demand for a particular commodity(X)/ the % change in the price of another commodity(Y).
In the given situation, commodity X may be referred to those courses for which the fees are not increased by the university.
The % in the demand for these Universities = Increase of 12%
The commodity Y can be referred to those universities where the course fees have been raised.
The % change in the price of such universities = Increase of 35%.
Hence the Price Elasticity Of Demand for those universities where the course fees are increased by 35% = 7÷ 35 = 0.2
The Cross-price elasticity of demand is obtained as the ratio of those universities where the price of the course is not increased to those universities where the fee structure of the courses is changed. This can be given as,
= 12÷ 35
= 0.3428 ≈ 0.34