10/2/03 Intro Econ of Ed

Alternatives to Market Allocation

Q^S=6,000

Q^D=10,000-100P

150 teachers

40 students/class

Developing country A has fixed supply of schoolplaces (Q^S=6000) (all private) - totally inelastic supply curve.

How do we find the market clearing price?

Set them equal to one another:

6000=10,000-100P

100P=4,000

P^E=40

Government comes in and nationalizes all private schools in order to give free place to all children. New Q^D: 10,000 (when P = 0 Q^D=extreme end of X axis.

How much is government paying for each spot?

6,000 x 40(the P^E) = $240,000

How going to allocate the fixed Q^D (6,000)

Options:

Lottery

• What about the kids who won't go to school no matter what?
• Are slots transferable? Can they be sold on the black market? Fraud?

Means testing

• What about the next elections? What will the 4,000 rich/politically powerful denied people do?
• Fraud?
• Rich subsidize poor?

Ability testing/exam

• Assuming level playing field prior to testing
• Accuracy/validity – who sets the test, what's on it

Larger class size

Alternative scheduling

Incentive programs for students who would become teachers – long-term

Little stats:

Malawi 1 in 8 students has seat, 1 in 80 has desk

NE Brazil 1 in 3 teachers has 4 years or less of ed

Bolivia - $.80 per student for materials

Elasticity

A responsiveness measure – how responsive the market is to change

Demand elasticity

Inelastic demand curve trends toward vertical, like an "I"

Elastic is more horizontal, like an EEEE.

What contributes to elasticity:

Luxury goods are more elastic

Substitutes

Time available

Green peas –2.8

Beer –1.19

Shoes –0.7

Opera – 0.18

|h | >1 elastic

|h | < 1 inelastic

3 types of elasticity

1. Own-price elasticity: % change in demand resulting from a 1% D in P of that good
2. Cross-price elasticity: % change in demand resulting from a 1% D in P of a different good
3. Income elasticity: % change in demand resulting from a 1% D in individual income

Examples:

h_Q1P1 = own price elasticity

h_Q1P2 = cross price elasticity

h_Q1Y = income

1 = demand for private higher ed

2 = demand for public higher ed

h_Q1P1 (own-price elasticity of good 1) –0.72

h_Q2P2 (own-price elasticity of good 2) –1.78

• There's more of an effect when the price of public education increases (the market is more elastic)
• Negative numbers indicate that Q_D goes down when P goes up

h_Q1Py(income elasticity of good 1) 1.10

h_Q2Py (income elasticity of good 2) 0.30

h_Q1P2 (cross-price elasticity of good 1) 0.2

h_Q2P1 (cross-price elasticity of good 2) 1.38

• positive because complements?

Deifnitions:

Qf-Qi

-------

%DQ Qi

h = -------- = ----------

%DP Pf-Pi

-------

Pi

Qf-Qi

-------

%DQ Qi

h = -------- = ----------

%DY Yf-Yi

-------

Yi

if h = -1.8 (a 1% increase in price leads to a 1.8% decrease in Q_D)& price decreases by 20%, what happens to Q?

%DQ

-1.8 = -------- (20%)

20%

If P is $10 and normally I buy 100 …

If the price changes to $7 & demand increases to 120, What is elasticity?

120-100

------

%DQ 100

h = -------- = ---------- h = -0.67

%DP 7-10

-------

7

Size matters: we are comparing magnitude when we talk about elasticities.

Q: Why is it important to talk about it in percentage increases?

A: We need a measurement that's unit-independent.

When doing problem sets, always look for immediate effect first.

Show your work.

Supply/demand curve weird because Y (vertical) is independent variable, and X (horizontal) is dependent

Alfred Marshall – would go to country markets and observe. Noticed that as more sellers came in with fruits and veg price changed – he considered Q to be independent and P to be dependent, which is why S/D curve is still plotted "in reverse".