Raise or Lower Tuition at Nobody State University

Topics: Price elasticity of demand, Supply and demand, Price elasticity of supply Pages: 7 (1662 words) Published: September 19, 2014


Raise or Lower Tuition at Nobody State University
Student Name
ECO 204: Microeconomics Principles and Policies
Instructor: Name
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Raise or Lower Tuition at Nobody State University
Increase in Tuition Fee and Total Revenue
In an effort to determine how an increase in the tuition fee of Nobody State University (NSU) will affect the total revenue of NSU we will need to look at the price elasticity of demand to see whether an increase in the tuition fee would cause a total revenue increase or decrease. This is dependent on whether the demand is elasticity demand or inelastic demand. To better understand how this works allow me to explain the term elasticity. According to Amacher & Pate, Microeconomics Principles and Policies, “Elasticity measures the way one variable responds to changes in other variables” (Amacher & Pate, 2013, section 4.2). The formula “Elasticity = Percent change in the dependent variable/Percent change in the independent variable” and it is used to measure elasticity “of how the dependent variable responds to changes in any one of the independent variables” (Amacher & Pate, 2013, section 4.2). So if you have a quantity of goods that you demand (dependent variable) then the independent variables would be; price, income, tastes, and the price of complements and substitutes. Therefore, changes in price that have a small effect on the quantity of goods demanded are considered inelastic and changes in price that have a large effect on the quantity of goods demanded is elastic. When looking at the price elasticity of demand we are able to determine how increase in tuition fee would affect the total revenue of NSU. An example of whether the increase in tuition fee would cause total revenue to increase, decrease or remain the same depends on the fact whether the demand is elastic, inelastic or unitary. Price Elasticity and Inelastic Demand Defined

Amacher & Pate, 2013, explain elastic demand as, “When the coefficient is greater than 1, the quantity demanded changes relatively more than the price and the demand is thus described as elastic” and inelastic demand is explained as, “When the coefficient is less than 1, demand is said to be inelastic; the percent change in quantity demanded is less than the percent change in price”, (Amacher & Pate, 2013, section 4.3). Unitary (Unit elastic demand) is when the coefficient of price elasticity of demand is equal to one, (Amacher & Pate, 2013, section 4.3). Price Elasticity and Inelasticity of Demand and Tuition Increase

As we look at the measures of which the degree of responsiveness in quantity demanded of a good due to changes in its price we can see how the price elasticity of demand will affect the total revenue if the tuition price were to increase. When looking at the price elasticity of demand the absolute value of elasticity is greater than one; therefore, the proportionate decline in quantity demanded of a good (as in the result of increase in the tuition price) will be larger than the proportionate increase in its tuition price, causing the total revenue to fall due to the increase in the tuition price. On the other hand, if we look at how the price inelastic of demand will affect the total revenue we will find that the absolute value of elasticity is less than one, therefore, the proportionate decline in quantity demanded of a good, due to the increase of the tuition price, will be less than proportionate increase in the price, causing the total revenue to increase due to the increase in the tuition price. So when using the elasticity of demand the increase if tuition price would affect the demand by causing a decrease of students, therefore, creating a loss in the total revenue of NSU. When using the inelastic of demand the increase in price would not affect the demand (or the number of students), which will give an increase in the total revenue of NSU. Therefore, the supply and demand of a good or service is...

References: Amacher, R., Pate, J., (2012). Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc
Bell, J., & Michelau, D. K. (2001). MAKING COLLEGE AFFORDABLE. State Legislatures, 27(9), 19.
MARCUS, J. (2013). Some Colleges Reduce Tuition as Consumers Seek Lower Costs.
Community College Week, 26(3), 9.
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