Saturday, February 28, 2009

Fixed Costs vs. Variable Costs

Colleges unlikely to cut financial aid, because they need enrollment to bring in money
Students considering a wide range of private schools, as well as those who are already enrolled, can expect to get more aid this year, not less.

The increases highlight the hand-to-mouth existence of many of the nation’s smaller and less well-known institutions. With only tiny endowments, they need full enrollment to survive, and they are anxious to prevent top students from going elsewhere.

Falling even a few students short of expectations can mean laying off faculty, eliminating courses or shelving planned expansions.

This makes sense, I suppose. Most of your costs at a college should logically be relatively fixed: it's probably a lot harder to lay off your professors than it is for non-unionized companies to lay off line employees. And that labor cost likely is a big portion of the budget: then you have your normal fixed costs (like buildings).

But what's surprising is that these students receiving aid, on the margin, are not costs to the university...they are actually assets, because the marginal cost of adding a few more students isn't very significant. What's the extra cost of moving a lecture from 100 to 101 students, after all? Sure thing, we'll take $10,000 per year in tuition for that!

It's a result that surprised me, anyways.

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