Question

SIU is a university in the UK catering for international students. There are currently 950 students. Fees were £16,000 for the last year and the president is concerned that adverse changes in the economic and educational environment are threatening the university’s future. The income of the market is expected to decline next year by 2%, and it is also expected that the average fee of competitive institutions will fall from £14,000 to £12,000. 10% of revenue is currently spent on promotion. The president does some research and estimates that the relevant demand elasticities are as follows:

PED = -1.6, YED = 2.2, AED = 1.8, CED = 0.8.

1. Briefly outline other marketing mix options for achieving the target (50 words).

Answer 1

Price elasticity of demand P_ED = -1.6

With elastic demand curve, with fall in price of SIU, its quantity demanded rises. Now, total revenue rises with elastic demand curve for a fall in price.  

Again, Income elasticity of demand Y_ED =  Percentage change in quantity demanded of SIU/Percentage change in income

or, Percentage change in quantity demanded of SIU = Y_ED * Percentage change in income

or, Percentage change in quantity demanded of SIU = 2.2 * -2

or, Percentage change in quantity demanded of SIU = -4.4%

Thus, with fall in income, quantity demanded of SIU falls. This means, SIU is considered as a normal good.

Similarly, Percentage fall in price of competitive institutions = ($12,000-$14,000)/$14,000 * 100 = -14.3%
Now, Cross-price elasticity of demand C_ED = Percentage change in quantity demanded of SIU/Percentage change in price of competitive institutions

or, Percentage change in quantity demanded of SIU = C_ED * Percentage change in price of competitive institutions

or, Percentage change in quantity demanded of SIU = 0.8*-14.3

or, Percentage change in quantity demanded of SIU = -11.44%

Thus, quantity demanded of SIU falls as the price of competitive institutions falls. This means, SIU and competitive institutions are substitutes.

Again, advertising elasticity of demand A_ED = 1.8. 10% of revenue is used for advertising. This means, with increase in revenue, rate of advertising increases and thereby, quantity demanded of SIU increases.