South-Western College Publishing - Economics  
It's Getting a Little Cheaper to Attend School - But Not Much
Subject Financing a College Education Both Publicly and Privately
Topic Supply and Demand
Key Words

Supply, Cost, Price, Tuition Increases, State Budgets

News Story

The average cost of a public university education will increase by about 9% next year, compared to about 14% last year, compared with the average private-university cost, which will increase by about 6% for the 2004-05 academic year.

Part of the significant increase last year came about as state governments faced enormous, unexpected budget shortfalls. State governments were thus unable to provide public institutions with as much support as in the past. As a result, institutions significantly increased tuition to counterbalance the shortfall. Now, as the economy begins to pick up, and state governments see tax revenues increase, state revenue shortfalls are not as significant as before. For example, last year, Arizona public students saw tuition increase 39%, and this year tuition is only increasing by 13%.

Quality of instruction has also been affected here as well, as budget-pressed institutions resort to larger classes, fewer instructors (with no salary increases), and fewer services offered. Now that revenues are back up, existing services may increase as funding increases.

Private institutions have been able to enjoy smaller tuition increases, partly because they begin at a much larger tuition price anyway (a 5% increase in a $30,000 tuition rate [$1,500] can bring in a significant amount of money), but also because private schools do not rely on state government revenues. Rather, private institutions rely on private endowments for operating revenues. With the stock market increasing faster than state budgets, endowments have increased. Thus, students lucky enough to attend private schools have enjoyed more success in financing their educations.


(Updated August, 2004)

Questions
1.

Do you think that tuitions for students who attend public institutions tend to be more or less price elastic than those who choose to attend a private institution? Does this have any impact on schools' ability to raise prices? Explain carefully.

2. How do reduced government revenues that cut support for public institutions impact prices of public educations for students? Illustrate your answer using a graph of supply and demand.
3. How does the need to increase faculty salaries, campus technology, utilities and health insurance affect prices of public educations? Illustrate your answer with a graph of supply and demand.
Source Mark Landler. "Europe Reluctantly Deciding it Has Less Time for Time Off." The Wall Street Journal. 7 July 2004.

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