In a discussion of tuition rates, a university offical argues that the demand for admission is completely price inelastic. As evidence, she notes taht while the university has doubled its tuition(in real terms) over the past 15 years, neither the number nor quality of students applying has decreased. Would you accept this argument? Explain briefly, and illustrate diagrammatically.(Hint: The official makes an assertion about the demand for admission, but does she actually observe a demand curve? Is the demand for university education perfectly inelastic? What else could be going on?)
Answer:
No, with this argument, the college education could not have a perfectly inelastic demand.Although demand for university admission could have inelastic demand be as it useful in getting good jobs, but saying that it has perfectly inelastic demand is not true. A good has perfectly elastic demand if its quantity demanded do not changes with increase in price but in case of college admission, the number of applicants keeps on increasing on yearly basis and therefore we do not see a decline in number or quality of student applying for university admission even though its price has increased substantially. This can be explained as follows; when number of applicants rises, demand for university education rises, causing rightward shift in the demand curve (from DD1 to DD2). As a result there is increase both price level and quantity demanded for university admission. Hence we say that the initial claim about perfectly inelastic demand curve does not hold. [refer the figure1]
Figure1:
