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Over the last 30 years, the real price of college education in the United States has increased remarkably. At the same time, the number of high school graduates seeking a college education has increased. Faculty wages, administrative staffing and capital costing have also increased remarkably while government spending on universities has been reduced. In as much as these changes have been observed, the major determining factors are demand and supply of college education services.
College enrollment increased in the United States accompanied by a dramatic rise in average tuition. This contradicts the law of downward-sloping demand which states that, if the price of a good or service falls, with all other economic factors held constant, then the quantity demanded increases (Deepashree, 2006, p.3-7). The price of a college education is the tuition the students are required to pay while the quantity demanded is represented by the number of enrollments. In this case, however, the higher number of enrollments is not a result of a reduction in tuition. Therefore, if other influencing factors like population increase are held constant, then the change observed does not follow the law of demand. According to microeconomics, the number of enrollments would have risen if the average tuition fell to obey the law of downward-sloping demand.
The dramatic rise in the price of a college education
As noted earlier, the trends in quantity demanded and the price of college does not follow the law of downward-sloping curve. The major reason is that other factors have a greater influence on demand and supply. Thus, the dramatic rise in price can best be explained by considering other influencing factors such as administrative expenditures, capital costs and faculty wages among others.
Supposing that the market was initially at equilibrium and the demand and supply was determined by the market price, a fall in price would cause an increase in demand and a decrease in supply (Keat & Young, 2009). However, other factors have caused the whole market to shift. In this case, these factors are not held constant meaning that price and quantity demanded can rise simultaneously. That is there are shifts in demand and supply.
A shift in demand occurs when there are changes in factors other than the price of a good which affects the quantity purchased (Samuelson & Marks, 1999). Demand increases or decreases when the quantity demanded at each price increases or decreases. As elements underlying demand change, the demand for a college education is affected and the demand curve shifts rightward as shown below.
A shift in supply occurs when there are changes in factors other than the price of a good which affects the quantity supplied (Samuelson & Marks, 1999). Supply increases or decreases when the quantity supplied at each price increases or decreases As elements underlying supply change, the supply of college education is affected and the supply curve shifts rightward as shown below.
At every instance of the shifts, the demand for a college education is higher than the supply causing a rise in the price. Therefore, the failure to achieve equilibrium as the demand and supply shift has resulted in a dramatic rise in the price of a college education over the years.
An increase in college enrollments and the accompanying rise in tuition does not reflect the law of downward-sloping demand. The rightward shift in both the demand and supply curves causes a rise in price. Over thirty years, this increase is nothing but dramatic.
Deepashree. (2006). Microeconomics and macroeconomic environment for Ca Pe I. New Delhi, India: Tata McGraw-Hill Education.
Keat, P. G. & Young, P. K. (2009). Managerial economics: economic tools for today’s decision-makers. Upper Saddle River, NJ: Prentice-Hall.
Samuelson, W. & Marks, S. G. (1999). Managerial economics. Fort Worth, TX: Dryden Press/Harcourt Brace College Publishers.