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Introduction

The demand for college education comes with the desire for some institutions to increase tuition fee to raise more funds. Certain studies have reported that the impacts of tuition increases on the demand for new places or enrolment is that students always respond to price changes (Dynarski, 2003; Coelli, 2005). In other words, students are sensitive to price increase, which mostly come in the form of tuition hikes, or reduction in the financial aid. However, same studies also show that students show some sort of insensitivity towards price change than other market consumers of products and services. In effect, colleges use this relative insensitivity to raise their tuition fee so as to boost their income from revenue.  Nobody State University, in an attempt to raise more revenue, has raised its tuition fee for its students. However, what is not certain is whether this approach will help them raise the required revenue or not. Student’s responsiveness towards change in tuition fee by institution is likely to bring changes that can either be positive or negative, depending on the amount of students agree to join or continue with the institution’s programs. In technical terms, this is the percentage change in the number enrolled, divided the percentage change in the college cost or what someone may refer to as tuition rates.

Generally, the law of demand states that, other things remaining constant, consumers are likely to buy more of a product or service when the price goes down, and less when the price goes up. However, the inherent question is always related to how much more or less buyers responding to price change likely to buy (Cameron & Heckman, 1999). This change in consumer buyer behaviour varies from product to product, or service to service. For instance, a business entity intending to make price change will check if that change will result to more or less sales. If the ratio of percentage change in enrolment divided by the tuition rates is higher, it shows that students are more sensitive to tuition fee change. The overall result should be that potential students’ response affects the University’s goal of raising more revenue positively. Higher institutions of learning like Nobody State University rely on this price elasticity so as to determine how to standardize their sources of revenue for sustainable operations.

For instance, the university can raise its tuition fee once they have established that students are relatively less sensitive to such a change. However, any tuition elasticity that is more than one (1) is likely lead to rise in tuition fee, and consequently results into lower enrolment rate and lower revenue (Cameron & Heckman, 1999). The reason is that these students are highly sensitive to price change. However, if tuition elasticity is less than one, then it shows that students are less sensitive to price change, thus the university will benefit from increased revenue from more raised tuition fee. On the other hand, if the elasticity is one (1) then it shows that rise in tuition fee will not change the amount of revenue collected. It thus shows that the rate of enrolment will not affect the amount of revenue collected, thus the university will not be able to achieve its intended goal of more revenue. The relationship between enrolment and tuition is illustrated in the table below.   

 

Price

Elasticity

Increase in Tuition

Decrease in Tuition

Enrolment

Revenue

Enrolment

Revenue

Elasticity

N>1

Decrease

Decrease

Increase

Increase

Unitary

N=1

Decrease

Constant

Increase

Constant

Inelastic

N<1

Decrease

Increase

Increase

Decrease

Table: How enrolment and tuition relate (source: hanoverresearch.com).

From the table above, it can be illustrated that if the price elasticity is -1.2, it means it is less than 1. Thus, there is need to understand NSU’s attempt to increase tuition will reduce enrolment but increase revenue. It would therefore be sensible for the university to increase its revenue by increasing its tuition. However, this would be different if the university decides to decrease its tuition, as the revenue will decrease.

Studies have revealed that there is direct link between costs of education to the enrolment (Dynarski, 2003). However, some institutions exploit the changes in tuition fees by subsequently increasing tuition fees. One of the main weaknesses of this strategy is that it is based on certain assumptions students will not respond to the increase in tuition fee. That if it does not hold much impact, students will find it difficult to change their mind and continue paying higher tuition fee as long as the quality of education remains higher. This thus informs the institution management to increase tuition fee, with the hope that the negative backlash from rate of employment will be small. Another profound impact that can adversely affect students’ enrolment is if the government reduces or terminate education aid programs for higher learning institution (Coelli, 2005). The main concern for students who rely on aid for their tuition fee is that when university administration decides to raise fee, the decision unanimously affect the entire students’ fraternity.

Elastic demand means that if tuition fee is reduced, the number of students enrolled will increase, which subsequently lead to increased revenue. Although it can be noted that a lesser price is received per student, additional admission capacity will mean that more revenue will make up for the lower prices charged per student (Coelli, 2005). In this aspect, what the administration of NSU should do is increase the capacity for intake, in case they realize that students are more sensitive to price change like any other market. On the other hand, if demand is inelastic, a price decrease is likely to lead to reduced revenue. The rise in sales of new admissions will not necessarily offset the revenue gap left by declined price per unit, and subsequently the institution will realize decline in total revenue. In other words, the total revenue declines due to the decline in the cost of tuition fees charged on students. The price and total revenue both have fallen, in almost equal measure. When this trend is reversed, inelastic demand is likely to give room for price increase which will increase total revenue. Thus, other factors constant change in price and total revenue will mean that graph moves in the same direction, thus the inelasticity. Elastic unit, on the other hand, means that increase or decrease in tuition fee leads to no change. The increased sales of the admission spaces cover for the lower tuition charged on students, but leaves the total revenue constant.

Conclusion

The relative sensitivity or insensitivity of students’ response to tuition fee changes is consistent with studies that show that students will react to price change in certain way, normally different from other markets. In many ways students demand for higher education is normally inelastic, but only to some extent. If students of Nobody State University are very sensitive to tuition fee adjustment, the institution’s administration should increase the admission capacity to enrol more students. With this strategy, the revenue collected will cover for the reduced per unit fee charged, thus increased total revenue.

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