What is the percent change in quantity? What is the percent change in price? What is Price Elasticity of Demand? Is the price elasticity of demand for student parking permits elastic or inelastic? What does this mean? What impact does the price change have on the college and their goals for students?
How elastic is the
The answer to this question likely varies based on the profile of the institution, but we are going to explore a particular example. Let’s consider a community college campus where all of the students commute to class. Required courses are spread throughout the day and the evening, and most of the classes require classroom attendance (rather than online participation). There is a reasonable public transportation system with busses coming to and leaving campus from several lines, but the majority of students drive to campus. A student parking permit costs $40 per term. As the parking lots become increasingly congested, the college considers raising the
If the college increases the price of a parking permit from $40 to $48, how many fewer students will buy parking permits?
If you think that the change in price will cause many students to decide not to buy a permit, then you are suggesting that the demand is elastic—the students are quite sensitive to price changes. If you think that the change in price will not impact student permit purchases much, then you are suggesting that the
In this case, we can all argue that students are very sensitive to increases in costs in general, but the determining factor in their demand for parking permits is more likely to be the quality of alternative solutions. If the bus service does not allow students to travel between home, school, and work in a reasonable amount of time, many students will resort to buying a parking permit, even at the higher price. Because students don’t generally have extra money, they may grumble about a price increase, but many will still have to pay.
Let’s add some numbers and test our thinking. The college implements the proposed increase of $8, taking the new price to $48. Last year the college sold 12,800 student parking passes. This year, at the new price, the college sells 11,520 parking passes. Let’s do the math.
- What is the percent change in quantity?
- What is the percent change in price?
- What is
Price Elasticity of Demand ?
- Is the price elasticity of demand for student parking permits elastic or inelastic? What does this mean? What impact does the price change have on the college and their goals for students?
- Calculate the revenues the College earned by selling the parking passes.
Year 1: 12,800 parking permits sold x $40 per permit =
Year 2: 11,520 parking permits sold x $48 per permit =
- Did the college earn less or more money by raising the price of parking? What is the difference? Did the College achieve its goals: “the college considers raising the price of the parking passes in hopes that it will encourage more students to carpool or to take the bus?”
- If you attended an institution that offers courses completely or largely online, do you expect the price elasticity for parking permits to be elastic or inelastic. Why?
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