Aug 09 2007

Return to Shanghai, and a supply/demand paradox

While students and teachers across America settle into their summer routine and look forward to three more weeks of summer vacation, the first week of August marks an unseen exodus of thousands of international students and teachers in countries on every continent. For some reason, international schools all seem to start about two weeks earlier than the post-Labor day start date enjoyed by most public school in the US. Here at Shanghai American school, teachers arrive in droves around the 7th and 8th of August, just in time for our first work day on the 9th.
Shanghai then
My wife and I returned to 95 degree heat from the pleasant 70’s of Seattle last night to begin preparing for our second year at Shanghai American School. In a week SAS will welcome around 2900 students, making it one of the largest international schools in the world. As part of our orientation this morning, our director, Dr. Dennis Larkin, shared a bit of SAS’s 95 year history with the faculty, enlightening many of us to the school’s storied past stretching back to the concession era of Shanghai’s “golden age” when thousands of Westerners made their settlements in the city’s center. 100 years ago Shanghai underwent a renaissance unseen in China’s thousands of years of history. European influence brought the city into the 20th century architecturally, culturally, economically, and perhaps more notoriously in the realm of criminal activity as gangsters took over the city through much of the 20’s and 30’s.

With the large Western presence came a demand for Western schools, thus in 1912 Shanghai American School welcomed its first class of 12 students. By the 20’s enrollment rose to 600, and by the 30’s it approached 1,000. In 1937 China was invaded by Japan, and foreign firms and embassies began nervously moving their people out of Shanghai. By 1939 Shanghai had fallen to the Japanese and the school grounds were occupied by Japanese troops. But with the surrender of the Japanese in 1945, the school was back in operation, albeit for only a short time as a civil war between the Chinese Communist Party and the US backed Nationalists brought violence to the streets of Shanghai once more. By 1950 Beijing had fallen to Mao and the Communists, and SAS was shut down “for good”. Its doors would remained closed for 30 years until 1980, when Mao had died and Deng Xiaoping had ushered in the era of “Reform and Opening”, a euphemism for westernization. Once again SAS opened for business.Shanghai American School now

In the 27 years since the school’s rebirth, the student body has grown from the seven children of American diplomats to 2,900 students from over 50 countries. In the last five years alone the student body has nearly doubled in size, as the school has added a second campus and countless new buildings to serve the growing population of foreigners in Shanghai. Over the same 27 years, around ten other international schools have opened in Shanghai, some with two or three campuses spread across the vast city, several serving over 1000 students also from scores of foreign countries. What impact has the opening and expansion of SAS and other international schools had on tuition paid by foreign students in Shanghai? You may think that with so many schools competing to attract students, each school would have to lower its fees in order to attract students away from its competitors. Well, you’d be wrong. SAS increased its tuition fees by 10% this year, bringing a year’s tuition to around $22,000. Its competitors charge something in the same ballpark, meaning a year of schooling at any of Shanghai’s international schools will cost a family more than a year’s tuition at most state universities in the US.

Discussion Questions:

So, what does all this history and data have to do with economics? Here’s a simple supply and demand question for you. In 1980, international schools in Shanghai had room for, let’s say 20 students total. I am not sure, but I’d guess tuition in 1980 probably ran around $2,000. Today, there are somewhere around 10 international schools with room for probably around 10,000 students, and the average tuition is somewhere in the realm of $20,000.

  1. How would an economist explain the 1,000% increase in tuition over the last 27 years, given the fact that today international schools in Shanghai have the capacity to serve 500 times as many students as they could in 1980?
  2. Could you draw a supply and demand diagram illustrating the changes that have occurred since 1980 in the market for international education in Shanghai?
  3. Let’s be honest, $22,000 is a lot of money for a year of school. What would have to happen in the market for international education in Shanghai for the tuition fees to go down? Identify two scenarios that would result in a tuition decrease. Illustrate these scenarios on your diagram.

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

22 responses so far

22 Responses to “Return to Shanghai, and a supply/demand paradox”

  1. Myles Tappeineron 30 Nov 1999 at 1:00 am

    I genuinely enjoy looking at on this website, it contains good posts. “Never fight an inanimate object.” by P. J. O’Rourke.

  2. kevin chiuon 10 Aug 2007 at 8:10 am

    It's an interesting notion that while SAS has increased it's tuition, it is still one of the top school's in demand to get into. Personally, I believe the reason for the high demand in SAS is due to the vast number of facilities and activities, along with the number of successful graduates, that SAS offers in comparison to the other international schools in Shanghai. For instance, how many international schools in Shanghai offer an indoor heated swimming pool and enormous theater to hold well-directed productions?

  3. Chan Min Parkon 10 Aug 2007 at 11:53 am

    For the international education fees to decrease, I believe that there has to be more high-quality international schools in Shanghai. As of now, nearly everyone considers Shanghai American School the best international school in Shanghai. However I believe if there was a school good enough to compete against Shanghai American School, then the tuition fees would decrease, since they will have to compete against each other.

  4. Angel Liuon 10 Aug 2007 at 4:52 pm

    The supply and demand of Shanghai’s international schools is an interesting scenario. One would expect tuition to decrease when international schools increase; however, although there are far more international schools than 27 years ago, there are still not enough international schools to satisfy the growing foreign population in Shanghai. Since demand cannot be satisfied, the supply can uphold its price. If looking from a supply and demand diagram over a period of three decades, demand is always greater than supply. In order for the average tuition to decrease, the number of international schools must out grow the pace of incoming foreign students.

  5. Helen Chuon 10 Aug 2007 at 5:30 pm

    I don't believe that the capacity of Shanghai international schools plays a huge role in setting their tuition. It doesn't matter if the capacity decreases or increases over time; as long as the demand stays well above the supply, the tuition stays high and keeps climbing. China has been opening its doors more and more widely over the past few decades, and therefore the influx of foreigners into China has continued to increase. As a result, the demand for international schools rises at a steady rate and naturally, in this supply/demand situation where the growth of international schools cannot keep up with the demand for them, upwards follows the tuition. Unless there happens to be a sudden drop in the number of incoming foreigners or a huge surge in the number of top-quality international schools in Shanghai, the tuition will most likely remain high or even keep climbing.

  6. Cassy Changon 10 Aug 2007 at 9:57 pm

    Things like the PAC's fancy equipments, our new lap tops, teachers' packages are the reasons why tuition is increasing. It's costing the school more and more each year to sustain everything.

  7. Conrad Liuon 11 Aug 2007 at 12:11 pm

    The reason why Shanghai American School has such a high tuition fee is largely due to the lack of competition the school has against other international schools. As many regard SAS to be the best in Shanghai, its reputation coupled with other schools' inability to compete allows SAS to increase its tuition. On the other hand, if a different, able-to-challenge SAS's reputation rose, there is no doubt that the tuition fee for both would have to decrease, as both now have competition, thus must win their consumers over.

  8. Karen Chenon 11 Aug 2007 at 5:16 pm

    Over the past few decades, the world has experienced yet another wave of globalization. China, of course, wants to take part in this "richness" so it has opened itself to foreigners. This inevitably causes a sharp rise in the demand for Western education. However, it is easier – and faster – to admit more students into a school than to build a whole new one. Thus for the ever increasing number of the student body at SAS. Since it is required that children go to school, the school feels safe increasing its tuition. Besides, most of the foreigners are in Shanghai because of their companies, meaning that most companies would take care of the children's tuition. Therefore, the parents don't mind sending their children to SAS, even though the tuition has increased. Most people see it as a long-term investment.

  9. Katherine Yangon 11 Aug 2007 at 11:59 pm

    From what I've heard, alot of companies are moving their headquarters to Shanghai because of China's new uprising. Naturally, along with their headquarters, companies would also be moving boss's in from around the world which would lead to an increase in foreigners, and in turn lead to an increase in demand for foreign schools. Combine that with the SAS's many facilities (i.e. PAC, heated swimming pool, large campus with a lot of greenery) and you get SAS both needing to, and feeling secure enough to continue increasing its tuition.

  10. Howard Linon 13 Aug 2007 at 12:13 am

    1. First of all, the money values much more 30 years ago.

    When there is more demand and less supply, the payment naturally goes up. For example, SAS is the only school in China that has the SAT test; other students from other schools have to go to Hong Kong to take the SAT test.

    2. ( I drew a graph but I can't insert it in here…)

    3. What would make our school fee go down?

    Episode One

    As more people come to China to work, more international school is need. I would say SAS is one of the best in Shanghai, but it’s definitely the most expensive. As more international schools open up, eventually one would be good enough to compete with SAS. Then SAS fee would decrease because there is more supply than demand.

    Episode Two

    When Westerner or any other business people find that China is no longer profitable, they will start finding new places to earn money. This means bring their family with them to a new place. And gradually no one will study in SAS (because it’s only for foreigners) and it has to lower its fee in order to attract more people. (That would be a good time to study in SAS)

  11. Daniel Yeungon 13 Aug 2007 at 1:55 am

    Well, first of all, the price of everything experienced a dramatic raise in Shanghai. For example, local buses used to cost 1 cent, now its usually 2 rmb, 200 times more. Therefore, it is the rising of living standard along with the overall change in the value of money that resulted in the increase in tuition. (20,000 dollars would be a huge fortune in the old days).

    As for the supply demand diagram, demand for international schools is certainly increasing at an extreme speed as numerous families have to stay in line waiting to get into the international schools. At the same time, however, supply does not increase as fast as demand as the technology updates or construction of new international schools are not nearly as dramatic as the increase in demand. As a result, with demand shifting right more than supply does, an increase in price results. (sry, I really cant bother drawing it)

    If there is a sudden dramatic increase in the construction of new international schools, then the supply curve will be increased radically, resulting in a decrease in equilibrium price.

    Also, if there is a sudden political crisis, resulting in government restrictions on the number of foreign company that comes to China for business, then the demand curve will decrease, also decreasing the equilibrium price.

  12. Yun Qi Mokon 13 Aug 2007 at 2:45 pm

    It is true that the tuition fees have increased dramatically; however, it is important to keep in mind that due to inflation, the money today is not worth as much as the money was worth 27 years ago. People earn a lot more now than they did back then, so to those people $2000 dollars feels as much as $22,000 means to people nowadays. Nevertheless, the increase also has to do with the huge demand for good international schools. SAS is a school with an unending waiting list of students despite that it can accommodate more students than before. To many parents nowadays, tuition fees are paid by the company, and most want the best for their children anyway. It seems unlikely that the tuition fees will go down, unless a catastrophe hits Shanghai, and the international community has to evacuate. When there are no more students, then the prices will automatically go down. Also, SAS is still one of the biggest and most famous international schools in Shanghai. If another school starts to expand and make its name known worldwide, then it will be a threat, and the competition will cause SAS to consider lowering its tuition fees.

  13. Howard Jingon 14 Aug 2007 at 2:28 pm

    I also realized that I actually did a supply vs time chart but I can’t edit my comment.

  14. Howard Jingon 14 Aug 2007 at 3:26 pm

    1. I think that SAS has been able to increase its tuition so much because it is the oldest international school is Shanghai, or at least one of the oldest, while all the other schools are new. This means that SAS is well established, with a very good reputation, while other schools may be seen as second tier with an untested curriculum. Because some parents don't really care about money when it comes to a good education, and some parents don't have to worry about tuition (since their company pays for it), SAS has been able to get away with an increasingly higher tuition. Since there are so may new expatriates each year coming to Shanghai, there will always be a fresh supply of new students to teach.

    2. I have no idea what a supply and demand diagram is but I did a quick graph in MS Paint. I don't know how to post images, so here is a link:
    http://img329.imageshack.us/img329/5995/graphsu7….

    3. If tuition were to go down, two things would happen. Either people who go to other international schools in Shanghai, who were deterred from enrolling in SAS because of the cost would come to SAS, or SAS' reputation was also based on its high tuition, and more people go to the other international schools.

  15. Howard Jingon 14 Aug 2007 at 3:31 pm

    Or maybe students are demand as they are demanding to enroll?

  16. Dannyon 14 Aug 2007 at 11:20 pm

    1. Between 1980 and now, inflation has increased by who knows how much. All types of products have experienced drastic price increases in the last 27 years. Also, in 1980, a foreigner in Shanghai would be extremely scarce. Now foreigners can be seen all over the city. As Shanghai has industrialized over the past 2 decades, foreigners have fled the city and consequently, the kids need a western education.

    2. Both demand and supply have increased but demand more than supply.

    3. One scenario would be the chinese government would subsidize the construction of new foreign schools in Shanghai. This would result in a massive increase in supply and thus lowering costs. Another scenario would be if Shanghai suddenly goes through a recession. Foreigners would be fired from companies or relocated and thus decreasing demand.

  17. Michael Chowon 15 Aug 2007 at 6:03 pm

    For an economist, the 1,000% increase in tuition would be justifiable due to both the progression and development of international schools over the last 27 years. Although the international schools in the modern day can now occupy up to 500 times more than it did in the past, the competition against some of the top international schools in Shanghai such as our school, Shanghai American School can be factored in. Education these days could not be anymore competitive as it already has become, Shanghai American School feels no threat into increasing its tuition because there is no such threat that rises against the school. For the tuition in SAS were to be lowered the competition would have to increase dramatically than its day current status.

  18. Jack Loon 15 Aug 2007 at 6:59 pm

    1. The reason for the increase in tuition over the last 27 years is simple. There are many more foreign students in Shanghai today than there were 27 years ago. When the demand (number of students who want to attend SAS) is higher than the supply (the number of students SAS has room for), the supply can increase its price. Another reason why there is a dramatic increase in tuition fee is because of the rise of the standard of living. There were only a handful of people who could afford to pay a 20,000 tuition fee 27 years ago.

    2. I have no idea how to draw a supply and demand diagragm.

    3. One scenario that could force SAS to consider lowering their tuition fee is if there was another international school in Shanghai with the reputation and capacity to challenge SAS. Right now, SAS is undisputedly the best international school in Shanghai. I do not wish to sound discriminative, but other international schools in Shanghai such as YCIS, Rego International School, and Concordia are no competition for SAS. Another scenario that would lower the tuition fee is if the foreign investors are no longer interested in Shanghai. This could happen if there was a political instability or if there are better developing countries to invest their money in. However, I doubt either of those two things happening within the recent future.

  19. soyeon yoonon 16 Aug 2007 at 12:59 am

    1.The school might need tution fee to afford high-quality facilities and experienced teachers, as well as expanding the size of the school.

    2. I don't know

    3. scenario a)Sufficiency of experienced teachers and decrease in students

    scenario b)Advents of new international schools

  20. Wan Jin Parkon 16 Aug 2007 at 10:12 pm

    1. Not only are the members of the expat community in Shanghai richer–profiting especially from China's amazing economic growth (China has recorded a 10.8% in economic growth the past year)–the demand for a private education has dramatically increased. In addition to the growing belief that college education is crucial to success in life (hence, many believe that a better seconday education will place students at a better university), our generation is the generation of the baby boom era (population growth = increase in demand).

    2. The supply curve shifts outward. The demand curve shifts outward at a greater magnitude than that of the supply curve. The demand curve nears a vertical line as the demand for private education becomes inelasic as secondary education becomes almost a necessity.

    3. The supply has to shift outwards, meaning the number of schools must increase. The government can also intervene by placing a price ceiling. A price decrease will lead to an increase in the number of students enrolled in an international school. However, in the second scenario (gov intervention), the price ceiling may drive many suppliers out of the market; this will effectively drive out many students from the international schools.

  21. Dennison 16 Aug 2007 at 10:29 pm

    1. In the last 27 years, inflation has continued to increase especially in that of education/international school systems.

    2. Demand for school systems would have shifted outwards in the last 27 years, as well as the supply for international schools but not enough to satisfy the over-demand.

    3. The most likely situation to happen is that the Chinese decide to subsidize education overall, which would increase the supply of schools overall to match the optimum supply.

  22. edtangon 20 Aug 2007 at 12:46 am

    1.During the last 30 some years, China's economic growth has skyrocketed. Renowned companies have set up factories and offices here. Also, many international students have moved here due to their parents jobs. To meet the standards of the international families, international schools have had to upgrade their facilities and provide a better education.

    2. I don't know how to draw a supply and demand diagram

    3. The school would be filled with students who couldn't have afforded going to SAS before.

    There would be a need to increase the size of the school or to create another campus.