Cynthia A. Richardson
ECO 204: Principles of Macroeconomics
Instructor: Greg Kropkowski
January 27, 2015
There are many reasons why colleges and institutions of higher learning raise their tuition for attendance, Nowhere State University (NSU) in on such institution. The reason for the increase could be anything from increase of the cost of living, creating an increase of salaries for employees to cost shifts caused by the cut in state subsidies. When deciding whether to raise tuition, NSU has to: make an assessment, check the conditions in which the revenue will decrease on increase, consider how increase will affect student enrollment and decide which would be the overall best situation for the university.
Assessing a raise in tuition; will it necessarily result in more revenue? With an increased enrollment, NSU is feeling the strain on their current budget. You would think with an increase in enrollment NSU would see more income, but that is not the case. As the enrollment increases, the increase in revenue is replacing the lost funds from the state budget cuts, so NSU does not see an increase in income. NSU can do what many other colleges are doing, which is freeze employee salaries or offer early retirement, reduce faculty and delaying any projects that require a large amount of capital. A raise in tuition may increase total revenues or decrease total revenues, or total revenues may stay constant. The price-demand function of tuition is measures by price elasticity of demand. If demand is inelastic, then increasing tuition will increase total revenues. This ignores a number of other factors assumed constant, such as artificially reduced prices for state-subsidized universities, price/availability of alternatives, available financial aid and other third party funding, economic. These are assumed constant unless specifically mentioned. The price elasticity of demand for tuition will specify if an increase in tuition will result in an increase in total revenues. If demand is inelastic, the price could cause a revenue increase of more than 1%. If demand is inelastic, reducing price should be considered, and should be done until elasticity = 1, which could maximize revenues. If price-point elasticity is elastic, an increase in price will result in a decrease of buyers of more than 1%, and total revenues will fall. Since we don’t have any demand information, we may have to rely on traditional price elasticity, which does not allow us to ‘hone in’ on the demand curve to measure more precisely.
If tuition is raised under current conditions due to the economic industry, revenue would more likely remain the same. Tuition have risen in the past and it has not stated the same or lowered while economic crisis continues to rise tuition cost would also increase. Concentrating on the relationship between the increased revenue from students enrolling at NSU despite the higher tuition and the lost revenue from possible lower enrollment. The raise in tuition fees is due to the government cuts and other institutional cost are a problem. College education has raised sharply in most developed countries not only the United States. The government is the real reason why tuition is raised and it is to replace state revenues or other private revenue sources because state subsidies are going down. Tuition has been rising steady for decades because once subsides get cut they never get reinstated which effects the proportion of the cost of college. There are other reasons that tuition cost rises is simply the ever increasing amounts of money being spend on administration rather than instruction. (O’Shaughnessey, 2013)
Total revenue (price times quantity demanded) will increase when the relationship between the two is less than -1. If a 5% increase in price causes a decrease in demand of less than 5%, total revenues will increase. This is price inelasticity. In fact, economic theory indicates tuition should be raised…