Economics Case

The issue that I am investigating is about Obama's plan to lower university prices. Obama plans to limit the increase of tuition fees at the U.S. universities by setting a price ceiling to the tuition fees. According to him, the increase of tuition fees has been high and suggested that if the universities do not stop the increase of tuition fees, the funding from taxpayers will decrease. The increase in demand for universities can be exemplified in the difference of the undergraduate enrollment. Dartmouth College reported to have 4,118 undergraduate enrollment in 2001, and 4,194 enrollments in 2011. This shows an increase of only 76 students. However, Dartmouth reported to have received 22,385 enrollments for one of the 1,113 undergraduate enrollment slots for class of 2015. This shows the increase of 18, 191 students (U.S News Weekly, 2012). The increase of tuition fees and the lack of good universities caused the demand of higher education in the U.S to be very high which leads to a term called shortage.

Why there is a change in demand (a schedule or a curve which shows different amounts of products a consumer is willing and able to pay at each of the possible price during a period of time given) is due to a few factors. These factors are known as the determinants of demands. Among the determinants are the change in buyer tastes (when a healthy lifestyle is promoted, the demand for fruits and healthy food will increase), change in number of buyers (when many people want to get new iPhone, the demand for iPhones will increase), change in income (when income increases, the demand for normal goods such as high technology equipments increases too, while the demand for inferior goods such as cabbages decreases), change in the prices of related goods through substitute goods (the increase in price of Haagen-Dazs ice-cream will increase the demand for Ben & Jerry's ice cream) and complementary goods (when the price of staple bullets decreases, the demand for staples will increase), and the change in consumer expectations (The inclement weather of South Africa develops an expectation of higher prices of coffee beans in the future, therefore increasing the demand of coffee beans today) (McConnell, Brue and Flynn, 2009, pg 50). In this case, the cause of the increase in demand for universities is due to the increase of number of buyers. In general, when there is an increase in the number of buyers in a market, it is very likely that there will also be an increase in demand of the product or service. A change in demand will shift the demand curve. Consequently, the demand curve will be shifted to the right. (As shown in Figure 1)

FIGURE 1 Increase in demand

The increase in demand which exceeds the supply of universities is called shortage. Shortage happens when the quantity demanded is more than the quantity supplied at a given price (shortage shown in Figure 2). This means that many students who want to enroll into a good university will not be able to, thus, causing them to be willing to pay more than the given price to enroll. Competition among these students will drive the price of enrollment up, eventually causing them to pay more. The positive change in demand has caused the rise of both equilibrium price (the price of when the buyers and sellers intend to pay for match) and equilibrium quantity (the quantity demanded and quantity supplied at the equilibrium price in a competitive market).

FIGURE 2 Shortage

The shortage of universities because of the higher demand led to the price increase of universities. The unfairly high cost of universities has caused a burden to the citizens of the U.S.'s pockets which directed President Obama to set a price ceiling. Price ceiling is a setting of maximum legal price a seller is allowed to charge for a product or a service. Prices charged at the price ceiling price or below is legal, while prices charged above is not. Government set prices to regulate the unfairly high prices for buyers or unfairly low prices for sellers. In this case, it is set to regulate the unfairly high prices for buyers (students). The setting of price ceiling is established to enable customers to obtain necessary goods or services that customers could slowly not afford at the equilibrium price. The rapid raise of tuition fees has cause a burden to citizens of the U.S. who have lower or moderate income. Due to the fact that higher education is very important to the society we live in today to get a job and the knowledge, our president is pressured to react to the situation. To cause an impact to the market, the price ceiling has to be below than the equilibrium price.

FIGURE 3 Price ceiling in Demand & Supply curve

In spite of the benefits of the setting of price ceilings, price ceilings usually prevents the usual market adjustment which competition among buyers bids up the price, inducing more production and rationing some buyers out of the market. This will keep on happening until the shortage in the market disappears at the equilibrium price and quantity. In my opinion, there will always be a slight defect or negativity when it comes to setting something right. More universities should be built to satisfy the demands of the citizen. With more universities brought into the market, the price of tuition fees would be brought down and

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