Economic Analysis : Tertiary Business Assessment Answer

Under the price ceiling, the price or the cost of tertiary education in Experimentia would be set at a price below the market equilibrium price level (Varian, 2009). Hence, the supply will be lower than the equilibrium level. On the other hand, the demand would be higher. This will generate a shortage of supply or an excess of demand in the market for tertiary education. This is illustrated in the following diagram:

In the above figure, the supply and demand for tertiary education equilibrate at E* with a price P* and quantity Q*. A price ceiling of P’ < P* is imposed. The supply reduces to QS’ and the demand increases to QD’. Thus, there is a shortage of supply of the amount (QD’ – QS’) under the price ceiling.

When the price ceiling is removed, the market for tertiary education operates freely and will hence generate free market outcomes (Krugman and Wells, 2014). On removal of the price ceiling, the price goes back to the original equilibrium level. The demand and supply equilibrate once again under the free market situation. This is illustrated in the following diagram:

When the price ceiling is removed, the demand and supply of tertiary education equilibrate at E* where the equilibrium price is P* and the equilibrium quantity is Q* (Pindyck and Rubinfeld, 2009).

When deregulation of the market for tertiary education occurs, it affects the market according to the relative elasticities of the supply and demand curve. The elasticity of supply and demand will determine the relative changes in the price and quantity of tertiary education in the free market (Varian, 2009).

If the elasticity of supply is low, the change in supply due to a change in the price level would be relatively low as compared to the change in quantity under a relatively higher elasticity. This is shown in the following diagram:

In the above figure, D is the demand curve for tertiary education. S is the elastic supply curve and S’ is the inelastic supply curve. When the supply curve is represented by S, that is, the relatively elastic supply curve, the equilibrium is established at E*. The price is P* and the quantity is Q*. When the supply curve is S’, representing a relatively inelastic supply, the equilibrium is established at E’ with a price level of P’ and quantity Q’. (Mankiw, 2014).

Under price ceiling, the market was actually operating inefficiently. This is because price was set by the government at a fixed level. This led to demand-supply mismatch in the market for tertiary education. The price ceiling being below the equilibrium price, the demand was high and the supply was low. Hence there was a shortage in the supply (Pindyck and Rubinfeld, 2009). Thus, many people wanting to avail of tertiary education will not be able to do so because of the dearth of supply of the same. On the other hand, the education authorities will benefit less due to the fall in the price as well as the quantity. Hence, there will be a net deadweight loss on the society. Social welfare falls and overall people are worse off. Hence, under deregulation, the market will perform better and more or rather the most efficiently than under the price ceiling – the policy change will improve the efficiency of the market (Varian, 2009).

The deregulation of the market hampers the equity in the Tertiary education market. Under the price ceiling, since the price was less, many people in the economy could afford tertiary education (Pindyck and Rubinfeld, 2009). The number of people availing of tertiary education would be high. Thus there will be some amount of equality in the market. However, when the ceiling is removed and the market is allowed to operate freely, the price level increases. Hence the level of affordability on the whole falls. The increased price will eliminate a section of the society from availing of tertiary education – a part of the society that could afford tertiary education under the price ceiling. The level of inequality will increase among the population. Thus, market equity declines as a result of the deregulation of prices in the market for tertiary education (Krugman and Wells, 2014). The policy change actually worsens the overall equity in the market for tertiary education.

References

Gregory, Mankiw N. Principles of Microeconomics. Boston: Cengage Learning, 2014.

Krugman, Paul, and Robin Wells. Microeconomics. New York: Worth Publishers, 2014.

Pindyck, Robert, and Daniel Rubinfeld. Micreconomics. New Jersey: Prentice Hall, 2009.

Varian, Hal R. Intermediate Microeconomics: A Modern Approach. New York: W. W. Norton & Company, 2009.