Answer to Question #125618 in Microeconomics for Nomveliso

Question

You have been appointed as an economic advisor to the principle of Bright Sparks College, a firm operating in the market for tertiary education. Over the past 18 months the following simultaneous changes have been noticed in the market for tertiary education:  A decrease in consumer income;  An increase in the cost of providing tertiary education services. Explain, with the aid of a graph, the impact of the above changes on the equilibrium price and equilibrium quantity in the tertiary education market. (Note: Seven marks for a graph and 8 marks for the explanation.) Marks will be awarded for your ability to integrate theory with the scenario provided.

Answer 1

Two aspects will alter in the market. A decline in the consumer income will appear to shift the demand curve towards the origin, and a rise in the education cost tends to change the supply curve left. Depending on the scope of the change, there might be the following three cases.

1. A shift in demand exceeds the shift in supply. This case is illustrated below. In this scenario, the equilibrium price and equilibrium quantity both will fall.

2.A shift in demand below the shift in supply. This case is illustrated below. In this scenario, the equilibrium price will rise, but the equilibrium quantity will fall.

3.The shift in supply equal to the shift in demand. This case is illustrated below. In this scenario, the equilibrium price will be the same, while the equilibrium quantity will fall.