Econ of Ed 9/30/03

"I definitely need to get control of my life" (I like her.)

Perfectly competitive markets model

Three assumptions (won't necessarily hold for education)

1. Many people who want the good (demand side)
2. Many people or firms willing to make the good (supply side)
3. The good is homogenous (no quality differences)

Many consumers & producers is important because a single consumer/producer can't influence the market in this model.

1. Demand Side

2. What influences: How much a person wants

i. Price

ii. Education/Reading habits/Tastes

iii. Leisure time/trends

iv. Income

v. Price of other goods (movies, books on tape)

3. To get the market demand, we sum the people's demand.

Price	Person A	Person B	Person C	Market =Q^D
12	0	0	0	0
10	0	2	2	4
6	1	4	3	8
4	2	6	4	12
2	3	7	4	14

Assuming all else is fixed. This can also be graphed as a demand curve. The demand curve is an "If…then…" statement.

If the price of another good, income, or tastes change, the line shifts.

1. Supply Side
2. What influences: How much people/firms produce

i. Price of inputs

ii. Price of the good (affected by demand)

iii. Available technology

As price rises, quantity supplied rises. As P^, Q^S^

Changes in the price moves us along the line, Changes in input or available technology shift the line.

Putting Supply and Demand together (Market Equilibrium)

1. Equilibrium = a price at which all supplied is bought and all demanded is sold. Supply curve rises to the right, Demand curve moves downward left to right – the point at which they intersect is the equilibrium point.

^a. Price Equilibrium point = P^E

^b. Quantity Equilibrium point = Q^E

2. Markets differ widely in terms of how fast they push toward equilibrium.

a. Equilibrium is not the PERFECT place to be necessarily, but it's the NATURAL place to be.

b. Glut = supply exceeds demand

c. Shortage = demand exceeds supply

Example: The teacher labor market.

P = salary, Q = teachers

· In the 1970s the student population dropped as the baby boomers got out of school. We went from 46 million to 40 million in 1980.

o Drop in students = Decrease in demand for teachers (SHIFTS curve)

o For each price (salary) they demand less

o Teacher labor equalizes very slowly, so quantity supplied didn't change – GLUT of certified teachers, high teacher unemployment

· Slowly, over time, the price came down (salaries for teachers fell by 20% after the drop in demand)

· Then the baby boomers' children went to school and in the mid-90's demand rose again. Suddenly, shortage!

Equilibrium can be calculated algebraically:

Q^D = 25,000,000 – 16,000P

Q^S = 7,200,000 + 1,800 P

Let's say P=500

à Q^D = 25,000,000 – 16,000(500) = 17,000,000

à Q^S= 7,200,000 + 1,800 (500) = 8,100,000

SHORTAGE (by ~9,000 spots)

Equilibrium: Q^D = Q^S

7,200,000 +1800P – 25,000,000-16,000P

P(17,800) = 17,800,000

P=$1000

QS=QD = 25,000,000 – 16,000 (1000) = 9,000,000

DISEQUILIBRIUM

Shock pushes market out of equilibrium.

Example: Market for Catholic schools

• Reduction in clerical vocation à supply goes down. At each price, quantity available drops. Supply curve shifts to the left. The new equilibrium is at a higher price for a lower quantity.

• Positive press (Coleman writes a book saying Catholic schools do better with kids than public schools – for urban and low-income areas specifically) à Demand goes up, demand curve shifts to right. P^, Q^

• Increase in Hispanic immigrants (Hispanic children are more likely to attend Catholic school) à Demand goes up, demand curve shifts to right, P^, Q^.

• Tuition tax credit for private school tuition - $200.
• This shifts demand curve right to Q^D +$250
• This seems like it would make it cheaper for people to go to private schools.
• If the demand curve shifts right, we get a new equilibrium. P^E rises.

These graphs are the theory – To find out the extent of the effect you actually have to go and estimate these things.

1. Flat supply curve = Elastic.
1. For a small change (D) in P, you get a BIG change (D) in Q^S.

b. Change = D

2. Steep supply curve = Inelastic
1. DP doesn't change Q^S much.
2. Tuition tax credit example – steep supply curve.

The responsiveness of the supply curve is important to understand. Demand curve also can be elastic or inelastic.