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Economics 101: Colleges and Current Economic Realities Sandy Baum March 2009 The Economy and Higher Education • Recession • Credit crunch • Background on prices and aid • Basic economic concepts Why Economics? • Understanding the context of student aid • Analytical approach to prices and student aid • Supply, demand, incentives • Equity, efficiency Changing Policies • The stimulus package • More Pell funding • Institutional funding • The Obama budget • Pell • Student Loans • Tax Credits • Simplification? The Credit Crunch • Availability of student loans • Parent financing options • Institutional financing options Supply • Affordability / access conversation has to combine supply and demand. • Relationship between price and quantity • Holding constant costs of production • As price increases, quantity supplied increases • Supply is more price-sensitive in the long-run. Where is your institution or system on the supply curve? Supply 120 100 Price 80 60 40 20 0 1 2 3 4 5 Number of Students 6 7 Examples of Supply Shifters • Higher input prices • Technical change • Lower government appropriations (publics) • Lower endowment (privates) Demand and College Affordability Demand shifts out • when incomes increase • when preferences change • when the value of higher education changes How price sensitive is your applicant pool? Demand 2 2 1.5 1.5 Price Price Demand 1 0.5 1 0.5 0 0 1 2 3 4 5 Number of Students 6 7 1 2 Number of Students 3 Family Circumstances • Income • Savings • Uncertainty Percentage Growth in Mean Family Income by Quintile (in Constant 2007 Dollars), 1977–1987, 1987–1997, and 1997–2007 Source: U.S. Census Bureau, Current Population Survey, Table F-1, Table F-3, and FINC-01; calculations by the authors, where available. How price sensitive is your applicant pool? Demand 2 2 1.5 1.5 Price Price Demand 1 0.5 1 0.5 0 0 1 2 3 4 5 Number of Students 6 7 1 2 Number of Students 3 Labor Market Changes and Demand for College • Reduced ability to pay • Reduced opportunity cost of student time Marginal Costs and Benefits • Marginal vs. total • Diamonds and water • Do we need more technology? • Marginal vs. average • Should we enroll additional students? Institutional Aid • Institutional aid is a form of price discrimination • Price discrimination may increase number of students enrolled at individual school • Impact on total revenue • Need-based aid discriminates based on ability to pay • Other forms of aid discriminate on willingness to pay Financial Aid: Price Discrimination Tuition Price full price D full-pay students total students students on aid Quantity Need-based vs. Non-need-based Aid • Price sensitivity • Horizontal and vertical equity • Short-term vs. long-term • Foundations for need analysis: income, assets, snapshot view Finding Solutions • Short-term measures • Long-term strategies Sandy Baum [email protected] A Primer on Economics for Financial Aid Professionals http://www.collegeboard.com/prod_downloads/highe red/fa/Economics-Primer-2004.pdf