Demand and Supply Application The College Market

If you look at the last 20 years or so in the United States you will see that enrollment at colleges and universities is up. We also know that the price of going to college has increased a great deal. It seems that a college degree is today what a high school degree was years ago. One last point, many states have reduced the amount given to colleges in the sense that they pay a lower percentage of the full cost of a student going to school. How can we explain all this in terms of a model of supply and demand? Of course we want to start with a model of supply and demand. Let’s call S1 and D1 the supply and demand 20 years ago with the resultant price and quantity traded P1 and Q1 (in the graph on the next slide).

P S1 D1 Q Q1 P1 This is the college market 20 years ago.

P S1 D1 Q Q1 P1 The story I have here is incomplete based on the facts because we not only see higher prices but higher enrollment. That doesn’t happen with just looking at the reduction in subsidies. S2 The reduction in state subsidies to schools reduces the supply. This would have the price increase (higher tuition), but reduce the quantity traded (enrollment numbers). P2 Q2

P S1 D1 Q Q1 P1 So, even with reductions in subsidies to colleges and universities, tuition and enrollment are up because of the increase in demand overwhelming the decrease in supply. S2 The demand for college has gone up as folks see the need for one to build a career. I have the demand shift out more than supply shifted in. This has to be to get the enrollment higher than before. P2 Q2 D2 P3 Q3