Dancing to the marginal cost of a student

Jive swings in student marginal cost are not good for further education.

Many further education colleges and universities are gearing themselves up for an increase in student numbers. To cater for this much higher demand many institutions have builders on site that are busy refurbishing and adding extra space.

A Guardian survey reveals some institutions setting ambitious targets by as much as 50%. The impetus behind this new confidence is the removal of government limits to student numbers. Now institutions can take on unlimited numbers of home and EU undergraduate students. However removal of the limits does not necessarily mean that colleges should throw financial caution to the wind or that the demand will be there.

Increases in student numbers to the level that some educational institutions are predicting will have an impact on courses taught and staffing. Some courses cost more than others and the combined effect of a rise in total cost can dramatically change the marginal cost of a student.

Why is the marginal cost important?

Marginal cost is an important concept in education. It is the increase or decrease in the total cost that a college or university will incur by enrolling one extra student where economies of scale are important. If the student fee is greater than the marginal cost then university funds will be greater than the added cost. However if the fee is less than the student marginal cost then the institution will lose money.

Political intervention can make or break education finances and any careful financial forecasting and planning by the college as costs, income and student numbers dance to different tunes could waltz smoothly into the red.

Labour were looking to lower tuition fees to £6,000 for students starting university in September 2016 a move which could result in a dip in student enrolments in September as school leavers look to delay starting their courses. This kind of yoyo forecasting is difficult for colleges because while lower student fees may be great for the student the marginal cost can vary greatly and could have a detrimental effect on the college.

Expansion requires significant investment and is a long term decision. Short term political decision taking for populist voting can have significant financial impact on colleges and make financial planning precarious to say the least. Blaming the Principal for such jive swings in the finances is not always fair and reasonable yet many governing stakeholders try to do this as a way of explanation.

Courses can be cross subsidised, but using the marginal cost for student intake is a way to decide whether a college wants to quick step or rumba into the new student year. Diseconomies of scale will show if more lecturing staff, more management, or more equipment is required for the extra numbers of students and if student enrolments have been fully tapped up if moving into the high marginal rate is economic or not. Removal of the limits on student numbers may sound tempting but the laws governing business economics still need abiding.

Chris Wimshurst is education director at Morgan Hunt, which works in partnership with the FE sector, offering consultancy around recruitment solutions from lecturers to principal level