Wednesday, January 20, 2010

The Elasticity of Demand and Student Access

By Richard Vedder

If CCAP had a marketing guru, he would probably say "change the title of this blog; no one will read anything with the phrase "elasticity of demand" in it. Yet this technical economic concept is immensely important to higher education policy.

Dave Narcotte, of the University of Maryland Baltimore County, and Steven Hemelt, a former UMBC student now teaching at Cornell College (which in CCAP's estimation offers at least a good of an education as Cornell University) have estimated the elasticity of demand for higher education at four year schools, especially research universities.

They estimate overall the elasticity of demand is -.10 --- a 10 percent increase in tuition fees will lower the quantity demanded be one percent. That is a low elasticity. To be sure, the elasticity varies some with the type of institution (I suspect it is higher at community colleges, for example), and there is the old issue of gross vs. net tuition. Indeed, colleges price discriminate (give scholarships) to precisely those students who they think are price sensitive --who have a high elasticity of demand.

Let us suppose that Narcotte and Hemelt are fundamentally correct, that in general the demand for higher education is highly inelastic. What are the implications of that? For starters:
1. Attempts to generally keep tuition low to expand student access are not likely to be terribly successful --across the board tuition reductions will only modestly boost the quantity demanded;
2. Enrollment restriction strategies like those currently being followed by the California State university system will lead to sharp increases in equilibrium (market clearing) tuition fees; the economic feasibility of increasing fees a lot increases, although legislative restrictions or other political considerations often prevent universities from following an equilibrium pricing strategy;
3. The strategy of raising sticker prices a lot and price discriminating more makes financial sense to universities ---many students are prepared to pay whatever the market will bear.
4. Student loan, Pell Grant and other programs probably have less of an access impact than supporters believe, probably explaining in part why the exponential growth in federal student loans has actually accompanied a slowdown, not growth, in the rate of increase in higher educational attainment.

Boring economic concepts have big implications. The Marcotte and Hemelt research is useful and needs to be replicated and/or challenged by others.


Overlook said...

I don't find this boring, I find it interesting because in a manner it answers part of a larger issue I posted about in an earlier blog. I also remember someone teaching me about elasticity, and the subject of elasticity comes up often when I converse with eldest daughter about the economy and investing. I am very much hoping she will major in Econ when she goes off to college this fall.

Oh, by the way; if colleges punt English, they should also punt the Sociology and Education schools.

But schools need to keep grammar classes. I read books with spelling errors. News on the internet is so poorly written.

And maybe it is time for more non-athletic schools. Athletic schools could teach RR&R and offer majors in HPER (or whatever they call it these days). In other words, Athletic schools would have a very narrow scope and would be small. Non-athletic schools would be focused solely on academics, and that is what the money would be used for.

Overlook said...

And another thing. I have to comment on textbooks. It has been my experience that a significant number of students and professors use only part of a class textbook and to a lesser degree, none of the textbook. And then there are some students and professors who read a college textbook cover to cover - the whole round trip.

During my first two years of college there were some classes in which I did not buy a textbook for the class. Instead, opting to utilize my resources for "other purposes". My transcripts may bear this out in my first two years. But it might not bear this out. If I determined that I needed a textbook (when I didn't buy one) then I would go buy the book.

I spend $80 to over $100 for a textbook now. The last class I took used approximately 5% of the book (although I did read more than what was assigned).

My opinion is that textbooks are full of "fluff". The fluff needs to be eliminated, and the textbook costs reduced. The class that I am currently in will cover the textbook completely - I will read every chapter of the book.

Just some thoughts.

Daniel L. Bennett said...

The cost of textbooks is often not included in the discussion of rising costs of college. The latest numbers that I've seen indicate that the cost of course materials has risen by 8.2 percent per annum over the past decade, and that the average student (I believe this includes both full and part-time) spends more than $700 per year on textbooks.

There is an exciting new publisher called Flat World Knowledge that offers e-textbooks for free, but also offers students low-cost print options. The other cool thing about this company is that instructors using their textbooks can customize the content for the purpose of their course.