Question

b) Explain, with the aid of a diagram, what would happen to the market for High School education if there is a decrease in the population. Indicate the effect on the equilibrium price and quantity.

Answer 1

In the absence of additional information, there ought to be two parts to the answer:

1) The general effect on a representative industry

2) Effects specific to the high school market

Markets related to high school education: teachers, books

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The criteria is whether GDP growth rate is more than population decline rate.

% GDP = %Population + %GDP per capita where %X is percentage change in X.

First case: If population decline rate is greater than % GDP/capita growth rate (first term in above larger in magnitude and negative in sign) , GDP contracts. Interest rate also falls.

if the decline in total population is not matched by an equal or greater increase in productivity (GDP/capita), and if that condition continues from one calendar quarter to the next, it follows that a country would experience a decline in GDP, known as an economic recession. If these conditions become permanent, the country could find itself in a permanent recession.

This can be seen from the IS-LM diagram.

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Substituting the new output into the Keynsian consumption function C = a + bY shows that consumption will contract. This consumption function itself is a super-additive sum of component functions across individuals and commodities in the economy.

It is reasonable to assume that education also has a positively sloped consumption function, say E = c + dY. Thus equilibrium consumption demand for education reduces from ( c + dY0) to (c + dY1).

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Now for the price level.

We know the equation for the LM curve: (M/P) = kY - hr => given constant money supply M

P = { M / (ky - hr) }. One of three cases: price level decreases, stays the same or increases, depending upon whether the RHS denominator increases, stays the same or decreases.

Plugging in the actual values of del-r and del-Y and comparing against k/h, we find the effect on price - which is not unambiguously positive, negative or zero - given exogeneous parameters k and h which determine whether the RHS denominator goes up or down.

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Second case: % GDP / capita growth > % Population decline. Here the IS curve shifts right, with increased interest rate and output. Analysis for LM curve and parametric indeterminancy in determining price level remains.

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Other than the above economy-wide analysis for a representative industry, there may effects specific to the market (for high school education).

For example, in an effort to raise labor factor productivity and thus (%output/capita), the government could initiate measures to augment the Education demand parameters c and d e.g. by subsidizing cost to student (tuition, books) and Education supply by subsidizing cost to institute (e.g. tax relief). This would cause the education market equilibrium conditions to deviate from that of a representative industry in the economy, necessitating additional information for further analysis.