Economic terminology in managerial economics and organizational architecture

Demand

There are two aspects to this analysis, the tuition rates and the financial aid. They must be discussed separately. The evidence shows that the tuition rates have reverse price elasticity of demand. As a consequence, schools that have increased their tuition in recent years have experienced an increase in applicants. There are a few factors at play here. The first is that if our school is a small liberal arts school, it has the same profile as the other schools that have experienced this phenomenon, so we can extrapolate the findings of the other schools to ours. The next factor to consider is that the applicants do not necessarily realize that tuition prices have increases recently. Applicants in 12th grade were not applying in the previous year. Thus, the price increase is essentially hidden from the consumer.

It is clear from the demand curve for university education that a higher quality of education. This message is actually sent by market leaders in the Ivy League and other prestigious institutions that combine a high price with high quality. At the low end, this association for consumers is often reinforced by community college programs or vocational training, which have a lower level of prestige. Consumers assume a relationship between the cost of a degree and the higher pay one will receive in the working world.

If this expected relationship between applicants and price holds, the university should increase its tuition. Doing so will increase the number of applicants. The marginal revenue will increase because the fixed costs associated with educating the students need not increase. There is going to be a point when the relationship will not hold. This point will occur when the tuition is so high that the consumers begin to actively seek out information about the quality of education and their post-graduation income. If the tuition increase is kept at a level where this increased scrutiny does not occur, the number of applicants is likely to be higher.

Student aid is a different matter. The proposal to eliminate student aid does not work the same way. Increasing tuition does not increase demand because the applicants are masochists who want to be put in a worse financial position; demand increases because applicants think they are getting a better or more prestigious education. The tuition number that is available publicly to new applicants is what they are responding to.