How the Cost of College Went from Affordable to Sky-High by Sanchez - Article Example

Name Student Id Unit Name Tutorial Day & Time Tutors Name Signature Contents Contents 1 1.0 Article Summery Sanchez, Claudio. 2014. NPR. March 18. Accessed May 3, 2014. www.npr.org/2014/03/18/290868013/how-the-cost-of-college-went-from-affordable-to-sky-high. Higher education tuition fees skyrocketed in the recent years in America. For example, in the past five years, Arizona State has experienced an increase of 77%, Georgia 75% and Washington 70%. The increasing trend has been similar across the other states. This increase is not expected to lower in the near future. The citizens, however, realize that Education is very important and they are willing to go an extra mile to raise the fees required for themselves and their dependents. This is despite the fact that the rate of unemployment is high; people have not had an increase in their wages. Clearly, college education is not for the wealthy anymore as it was in the past. Increased demand could have caused the increase in price of higher education. Borrowing to pay for college education took off especially since public investment in higher education went down. Therefore, colleges have to spend more money to replace some of the lost funding from the state. Some institutions took advantage of the situation to charge high fees to meet the public perception that high tuition means quality education. Parents are becoming more aware and informed consumers and are seeking other colleges like community colleges, which are not as expensive as the mainstream colleges. 2.0 Introduction Globally, the increasing price of higher education has caused many people to express their concerns. In America, college fees are growing at a faster rate than cost of housing, consumer product prices, and wages. Therefore, American families have been finding it hard to be able to pay for college education. Source: (The Economist 2010) There are several microeconomic factors driving this rise in tuition fees. This analysis seeks to use a demand and supply framework to bring out the forces that are behind the increase of price of college tuition. It will also explain the rise of tuition fees over consumer price index. This analysis will also present other factors in the economy driving the increase (Christine 2012). Then, this analysis will present specific factors in the supply curve for higher education on the long run. It demonstrates how supply cannot meet the demand. This causes increase in the price. This is possible owing to the inelastic elasticity of demand of higher education where parents will struggle pay school fees for their children even when it is expensive. The paper will demonstrate that it due to failure of demand meeting supply that cost of higher education has skyrocketed. 3.0 Article Analysis 3.1 Cost and price relationship Distinguishing the cost and price as terms in critical in successful analysis of higher education. Cost talks about the collective resources value consumed to come up with a product, or a service. An example of a service is higher education. It can be said to be how much the education institution spends per student. Price on the other hand is the amount of money the institution receives per student per admitted student. It depends on several factors, at time it includes a markup. It is generally the amount charged per student. If there is any financial aid awarded, the price will therefore be less the financial aid. From this definition, it is expected that private universities to charge higher fees. Their revenue are made up mainly of fees and tuition. Public universities obtain their revenues mainly from the state federal and local governments. However, it is worth noting that these institutions, both public and private are not-for-profit. The fees collected from the students pay only a proportion of the total cost of day-to-day running of the institutions. Additional revenues come from subsidies from the government, alumni donations, grants for research, etc. 3.2 Supply and Demand Analysis It is worth appreciating that the higher education market is unique and different from the market for other goods and services like rice, financial products, etc. Most visible difference will be prices - they will not discriminate the users of the products in the higher education market. In the other market, e.g. rice market will not choose who buys the rice, but institutions of higher education do care, they will actually select the customers. This is because this is part of the colleges’ value proposition – there are keen to create a nurturing and enjoyable environment to the students. This can be achieved by selecting specific kinds of students. Some willing and able buyers can therefore be turned away. Another difference is that unlike other markets, the higher education can charge price below cost. The implication is that for any market whose price is below the market clearing price, excess demand will occur, no matter how the slope of the supply curve is. Demand and supply in higher education is difficult to define. Several authors have come with varying definitions. One of the easy definitions is that supply is associated with the levels of production, i.e. the capacity available for students (Rothschild and White 1993). The total supply will therefore be the number of institutions multiplied by the number of spaces available per institution of higher education. Demand hand is measured best by the rates of high school completion, the college application numbers. These are credible indicators how many qualified individuals who desire high school education. This defines higher education demand. There are several other ways of determining demand and supply of higher education given the type and availably of information and data. In this analysis, we shall use the definitions above. 3.3 Long Run Supply Long run situation will allow higher education institutions to respond to increased demand by expanding their facilities, physical buildings, class, staff members etc. This essentially increases supply of higher education. Several arguments have been put forward that long run supply is vertical, horizontal, or upward sloping. If the university increases production, there will be an increase in cost per student resulting to an upward sloping curve. Studies on this subject have not demonstrated that the costs incurred by every student increase with production increase. Therefore, the pertinent curves to analyze are horizontal and vertical sloping. 3.4 Increased Demand Data clearly shows that higher education demand has been on the increase over the past few years. We have discussed above the approaches to measure demand. The graph below provides information to explain this excess demand. Source: Source: Day and New burger (July 2002), “The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings”, pg. 3 http://www.census.gov/prod/2002pubs/p23-210.pdf The figure shows the growing wage difference gap between workers of deference levels of education. A worker qualified with a bachelor’s degree in 1975 was earning about 1.5 or more times higher than a staff qualified by high school diploma. The figure had increased to over 1.8 or more times by 1999, and the rate grow do date. In fact relative wages for high school diploma workers dropped because of the increase of wages of degree workers. This has led to more individuals seeking to take university degrees to better their lives. In addition, the National Center for Educational Statistics show that rates of completion of high school have steadily increased since 1972 and beyond. In the 1980’s the trend has been constantly upward. More students completing high school means that more students seek enrollment to higher education institutions. This is a show of increased demand. (National Center for Education Statistics 2011) Price inelasticity of demand The article points that despite that fact that the cost of college has gone to sky high and the parents are frustrated, the families somehow are still paying for it. There is a perceived long term benefit of education which prompts individuals to go for education despite the price. This means that, holding all factors constant, demand for higher education will not be greatly affected by increasing in price. 3.5 Flat Long-Run Supply Curve Analysis Archibald & Feldman in their report “Why Does College Cost So Much” explain deeply that economic growth itself causes tuition prices to rise. They argue that beyond looking at factors, which are specific to higher education, there are variables in the economy that have blanket effect in all service related industries. They argue that the curve shifts and this should be attributed to economic growth and technological advancement. It means that in the long run, institutions can increase facilities and enrolment capacity infinitely, at zero extra cost to students. According to them, demand will therefore not affect costs. Cost will only increase if the supply curve has been shifted up increased expenditure e.g. on technology (Robert and Feldman 2011). 3.6 Vertical Long-Run Supply Curve Analysis This section analyses that prices of higher education have risen because of inability of higher education institutions to meet the demand. The imbalance caused has driven prices high. Microeconomic theory holds that for higher education price to remain the same when demand increases there must be an increase supply to take up the excess demand. This is the point where a time lag sets and prices rise. As shown in the figure below, the rate at which the number of degree granting institutions has increased is still very low compared to the increased demand we have seen in sections above. (National Center for Education Statistics 2011) 4.0 Conclusion After looking into economic variables as presented by Felldman and Archibald in addition to looking into education-related factors, this analysis uncovered that the rise in prices for college education is usual in this increase in demand. The demand function has it that the higher the demand the higher the supply. The increased wage differentials, increased high school graduation, and price inelasticity of demand have led to increased demand for higher education. The supply has not been able to keep up with the pace of demand. This time lag has caused prices of higher education to skyrocket. As well since the economy is growing, wages for professor and university staff will increase. If increase in wages is not accompanied by improved productivity, prices will rise. This situation certainly needs a quick solution. It is unacceptable that this increase places citizens in adverse position to pay huge fees for education. The higher education institution and government then enjoy the increased revenue at the expense of citizens suffering. Without intervention, this situation is set to aggravate. Prices will continue growing further in the long run. To control this condition, an action taken needs to improve the enrolment capacity in the institution and improve the marginal productivity of labor of the university academic staff. By simply providing financial aid to students, there will be no improvement in the long run since this step does not affect the equilibrium condition of the market. The findings of this analysis support the proposition of using online education, the regulating body to formulate a policy to urge the institutions to build and expand their online education platforms. It will enable the university to serve a larger student population thereby addressing the surging demand. This measure is meant to increasing enrollment capacity. It will as well improve the marginal productivity of professors. Online education enables students to learn at their pace of learning and thus more impactful. This will not be achieved in the short run. However, in long run, the price of higher education will come down to equilibrium. 5.0 References Allen, Ellaine, and Seaman, Jeff. 2009. Learning on Demand: Online Education in the United States. Accessed May 3, 2013. http://www.sloan-c.org/publications/survey/learning_on_demand_sr2010. Alvord, Catherine J. 2005. "Undergraduate Enrolment Trends." Cornell University. Accessed May 3, 2014. http://www.dpb.cornell.edu/documents/1000339.pdf. Baumol, William J. 1967. "Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis." The American Economic Review 415-26. Christine, Amario. 2012. Average Cost of Four Year University Up 15%. June 13. Accessed May 3, 2014. http://usatoday30.usatoday.com/money/economy/story/2012-06. Day and New burger. 2002. "The Big Payfoff: Educational." July. Accessed May 3, 2014. http://www.census.gov/prod/2002pubs/p23-210.pdf. Learn Liberty. 2014. Why is higher Education so expensive? Accessed May 3, 2014. www.learnliberty.org/videos/why-is-higher-education-so-expensive/. National Center for Education Statistics. 2011. "Trends in High School Dropout and Completion Rates in the United States: 1972-." October. Accessed May 3, 2014. http://nces.ed.gov/pubs2012/2012006.pdf. Robert , Archibald, and David H Feldman. 2011. Why Does College Cost So Much? New York: Oxford University Press. Rothschild, and White. 1993. Sanchez, Claudio. 2014. NPR. March 18. Accessed May 3, 2014. www.npr.org/2014/03/18/290868013/how-the-cost-of-college-went-from-affordable-to-sky-high. Snyder, T D, and S A Dillow. 2012. Digest of Education Sciences 2011. Washington DC: Department of Education. The Economist. 2010. "www.economist.com/node/16960438." The Economist. September 2. Read More