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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.
Based on your economic analysis of the above matter, prepare a 1,200 word report using the following structure:
Please ensure that you clearly define your terms and explain your results.
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The report aims at understanding the microeconomic factors that affect demand and supply of higher education. As a policy analyst, the researcher evaluates the responsiveness of the students to any change in the fee structure at the various universities. It is a comparative quantitative analysis where the change in demand for the courses in a particular set of universities is compared to the change in the price of courses for another set of universities. By taking few examples (as given), the report attempts to conceptualize vital economic terms like own-price and cross-price elasticity of demand.
Elasticity: This is defined as the degree of responsiveness towards a (1 unit) change in price (Imbs & Mejean, 2015). A change in the price of a product generally changes the quantity demanded that particular commodity. To measure this change in quantity demanded, elasticity is used (Salvatore, 2008).
If elasticity is > 1, it means that a slight change in price will affect the quantity demanded.
If elasticity is = 1, it means that a slight change in price will affect the demand for 1 unit.
If elasticity is < 1, it means that a slight change in price will not affect the quantity demanded at all (Baumol & Blinder, 2015).
Own-price elasticity: This is the rate of response to the demand for the commodity with a change in its own price (Rios, et al., 2013).
Cross-price elasticity: This is the rate of response to the demand for the commodity with a change in the price of some other commodity or commodities (Otani & El-Hodiri, 2012). This is a comparative analysis which shows that the set of commodities is substitutes or complementary (Hursh & Roma, 2015).
Price elasticity of demand formula:
Source- (Nicholson & Snyder, 2014)
Here, % change in quantity demanded is the % change in students' application for the courses in these universities = 7% (decrease)
And, % change in price is the % change in universities' fees = 35% (increase)
And, Cross-Price Elasticity of Demand formula is;
Source- (Salvatore, 2008)
Here, good X are the courses offered in those universities that did not increase their fees. Change in Demand for these universities is = 12% (increase)
And good Y are the courses offered by the universities that have raised their fees. Change in Price of these courses at the above-considered universities is = 35% (increase)
Thus, the Price elasticity of demand for the courses at the universities that increased their fees by 35% is calculated as,
Cross-price 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 is calculated as:
= 12/ 35 (since it is given that due to a 35% increase in the fees at few universities, caused a 12% increase in demand for the courses in the remaining universities)
= 0.34 (approx.)