Economics of Education Part 1.pptx

Economics of Education
Part 1
Introduction
Rev. Dr. Venance Ndalichako

Meaning of Economics of Education
• Different branches of education, such as Sociology of
education, Psychology of education, Philosophy of
Education, Adult Education administration, Physical
Education, Educational Administration etc. have their own
peculiar bodies of knowledge distinct from others
•However, there are some common elements
• The branches are linked to one another e.g. we can talk
about Philosophy of educational administration

• Economics has also a number of its own branches such as
financial economics, quantitative economics, industrial
economics, agricultural economics etc.
• Each of the branches has its own body of knowledge distinct
from others, but has links with other branches
• Economics of Education derives from its major components:
economics and education
•We need to understand what Economics and Education are

Meaning of Economics
• Economics is the study of the allocation of scarce resources
to satisfy unlimited wants
•But we can define it to capture some of the basic economic
functions
• Economics is the study of how society chooses to allocate
scarce resources that have alternative uses, to produce goods
and services and to distribute them for consumption among
the members of the society
•Economics deals with planning, allocation of scarce
resources, utilization of human resources, production of
goods and services,

• Education is the process through which society transmits
knowledge, skills and values from one generation to another
• Knowledge has to do with understanding, skills are about
ability to perform certain specialized functions by using the
mind or body parts and values are the issues that are
concerned with doing the right or wrong things, acceptable
or unacceptable things to the society

• Economics of Education is the study and practice of resource
generation, allocation and utilization in education and the
relationship between education and the general economy of
the society
• The aim of Economics of Education is to ensure efficiency in
the allocation and utilization of resources
• In studying Economics of Education, we note the symbiotic
relationship between the education and the economy
•We emphasise that the economy influences education and
education influences the economy

Scope of Economics of Education
• Early Economists of Education were pure economists and
concentrated more on economic matters than educational
issues
• Educationists have come in and have enriched the scope of
Economics of Education
• Now Economics of Education covers the generation,
allocation and utilization of resources for education through
the creation of human capital
• In practice economics of education cover the following areas
as they are influenced by education

•Demand and supply of
education
•Education demography
•Educational finance:
sources and distribution
•Taxation for education
•Costing: cost benefit of
investment in education
•Cost-quality relation
•Wastage in education
•Productivity in Education
•Educational manpower
development
•Migration of school leavers
and labour market
•National economic growth
and development
•Consequences of schooling
on the economy
•Efficiency and equity

• Overall, the scope of economics of education embraces all
aspects of economics that describe, explain and justify
investments in education
• It includes the various economic considerations that are
relevant to education

Late introduction of Economics of Education
• Of all the branches of education, economics of education
came later than others
• What are the reasons for the early neglect of economics of
Education
1. Misconception by leaders that education is a non-productive
investment
• This made economic planners pay more attention to the
industrial, agricultural and other sectors of the economy
they consider more productive

Late Introduction of Economics of Education
2. Donors did not consider education as an area of investment
• World Bank provided capital investments in such areas as
infrastructure, agriculture, industries
• Education was overlooked as an area of investment
3. Lack of comprehensive model for an economic analysis of
education investment behavior
• Principles of Supply and demand appeared not to work in
education
• Economic interdependence between production and
consumption seemed not to apply to education
• Education was seen to be provided at no market price - free

Late introduction of Economics of Education
• So it was thought that education, which is delivered at no
price to consumers was thought not to be relevant to
economic theory built on the foundation of the price
mechanism and market forces of demand and supply
• But is it true that the study of economics of education is not
relevant? Is there any justification in the study of economics
of education?

Justification of Studying Economics of Education
• We justify the study of economics of education on the
following grounds:
1. The rising cost of education increases pressure on available
resources, making it necessary to introduce economics into
education
• There is a need to devise means of reducing the rising cost
of education, by looking at the human resources needs, and
addressing issues of efficiency and wastages in education

2. There is a need to match the type of education provided and the
type that is needed by the economy
• Currently there is a mismatch
• This causes high level of unemployment among graduates, while
some sectors of the economy have manpower shortages
3. There is a need to address the problem of quality of education
provided in schools
• Many employers of school products are complaining about the
poor performance of these products
• Low quality of education affects economic productivity and
intervention by economists of education is justified

4. There is a need to ensure education is properly linked to
other sectors of the economy
• Education is only one among several sectors of the economy
• The different sectors are interdependent on one another for
survival
• Education should be an essential ingredient in the long term
rational development plans of the country

5. Need to move away from politicization of education
•Politicization of education has resulted in uncoordinated
expansion of the educational system
• Direction of education, allocation of resources and control of
the learning environment have been purely political, and
result in wastages which are of concern to economists
• So there is a need to recognize that education is an integral
part of the economy, and require serious economic attention

Education a Consumption vs Education an Investment
• There is this controversy as to whether education is consumption
or investment
• We need to highlight special differences between education as a
consumption and as an investment
• There are four (4) key economic concepts that we need to answer
the question: production, consumption, savings and investment
Production
• Production: the process involving human labour, of generating
output of goods and services
• In factories, tangible goods are produced

• In schools, banks, hospitals etc. no tangible goods are produced
• Intangible goods are known as services
Savings
• Some of the tangible goods produced are consumed immediately
to satisfy people’s needs, but some are withheld for later
consumption
• These are referred to as savings
Investment
• This is the part of production that is not saved, but enter directly
or indirectly, the production process

• Investment is the act of increasing the stock of productive
capacity
• It is also known as capital formation

Education as Consumption
• Some people may view education as consumption
•This depends on the individual use of education
1. To widen his knowledge just for the sake of it
2. To achieve personal satisfaction
3. To achieve life ambitions
4. To maintain a certain level of enjoyment
5. To attain societal status
6. To acquire education for the fun of it

• All those benefits of education in the previous slide do not
involve economic benefits
• They focus on enabling an individual to enjoy a better life,
without expecting any financial benefits from the education
Example
• An engineer enrolling in a diploma program in social work
• A graduate employed in a graduate level job, who enrolls for an
undergraduate program in another discipline
• They do so for the knowledge, status symbol, not for money

• So education as consumption is the type of education which
does not contribute either to better employment or higher
financial remuneration
• This is not popular in developing countries, where people
still lack conditions for basic existence
• Education as consumption is predominant in the developed
countries
•There, people with high standard of living pursue education
as a social service, hence, a consumption good

• We would wish that Tanzanians aspire education as consumption
• This is because the nation would acquire these advantages:
1. Enhancement of quality of life
2. Realisation of one’s potentialities
3. Rapid economic and national development due to the presence
of highly knowledgeable population
• But the reality is education as consumption is a luxury which no
developing country can easily afford with scarce resources

Education as an Investment
• Education which provides one with skills and knowledge
• which enables one to improve one’s capacity to produce more
goods and services,
• is an investment
• Investment is generally the act of putting money in a business with
the aim of making profits
• In education, investment is the act of putting money or resources
into education with the aim of making returns
• Here the basic characteristic is economic motive
• Note the difference with education as consumption where non
economic objectives predominate

• An individual who sees education as an investment embarks
on it with the aim of enhancing his economic status through
increased salary or better job prospects
• A government that sees education as in investment, commits
its resources into it with the aim of improving its national
economy through educated labour force
• Actually, governments plan to invest in education to develop
human skills, knowledge and expertise to increase the rate
of economic development
• Tanzanian government has the same goal right from the time
of independence up to the fifth phase government

• To conclude, Education is seen as an investment in these
ways;
1. To an individual because his/her earning capacity and
income are enhanced
2. To a nation because the increase of productivity and the
supply of qualified manpower contribute to national
development
3. Education as investment serve as consumption as well, for
in addition to economic benefits, the individual enjoys the
non-economic benefits of education as well

Education an investment vs education a consumption
• Education for its own sake (a consumption good) is a luxury
which few developing countries can afford
• In the competition for the scarce and limited resources,
education plans must satisfy the criteria of a sound
economic investment, and such plans have greater chance
for success

Supply and Demand for Education
• Supply and demand analysis examines the effect of a single
change, holding constant the other factors that affect
demand and supply
Assumption necessary for Supply and Demand Analysis
Competitive Markets
• A market for private education is said to be competitive if
there is a sufficient number of buyers (families) and sellers
(private schools) so that no individual buyer or seller can
determine the price (fee charged by the private school) on
his own

• A competitive market is one in which the following
assumptions are fulfilled
1. Output is homogeneous: there are no quality differences in
the output provided by different producers
2. All consumers can purchase all of the commodity they
want at the given market prices, but no consumer can
individually influence the market price
3. All producers can sell all of the output they care to produce
at the given market price, but they cannot sell any at a
price above the market price

• There are no markets for educational services in which all
these conditions are satisfied.
• However, the assumptions of competitive markets enable us
to understand how prices and quantities are determined in
educational services, and provides valuable insights into the
operation of markets for various educational services

• It can be said that the market price of education is
determined by the interaction of demand and supply.
• The market clearing price (the school fees at which the
supply of school places equals the demand for education) is
the price at which the total number of units demanded
equals the total number of units supplied
• We will understand this better if we look separately at
demand and supply and their determinants
• We will start with Demand

Demand
Definition
•Demand is the quantity of a particular economic good or
service that a consumer/group of consumers will be willing
and able to purchase at a given prices in a given period of
time, when other things remain constant (ceteris paribus)
• Normally, the consumers will want to buy more as price
decreases
•But the demand for a good/service is determined by many
different factors other than price

Determinants of Demand
• When we were defining Demand, we put the condition:
when other things remain constant
• What are these other things, and what if they do not remain
constant?
•These other things are what are known as determinants of
demand
• They are factors apart from price that can cause the people
to buy more or less of a given good/service in a period of
time

Determinants of Demand for Education
1. Price of other goods and services
a) Complements: these are goods/services that go together with
education, such as uniforms, books, transport costs etc.
• Normally, the higher the price of complements, the lower the
demand for education
b) Substitutes: these are goods/services that will provide the consumer
with the same utility as the good/service under consideration
(education), e.g. apprenticeships, on the job training etc.
• Normally, the higher the price of substitutes, the greater the demand
for education

2. Opportunity cost of children’s time; this is the value of the
child’s time if the child were to work instead of going to
school
• Normally, the higher the opportunity cost of children’s time,
the lower the demand for education
3. Number of families in the country (assuming all families
have equal number of children of school age)
•Normally the greater the number of families in a country, the
higher the demand for education in that country

4. Income distribution among families in the country, usually
summarized by the average income
• The higher the average income, the higher the demand for
education

Demand Curve
• It is conventional to graph the market quantity demanded
(Qi
D) as a function of its own price (Pi)
• The demand curve illustrates the relationship between Qi
D
and Pi for education, a negative relationship, i.e. the demand
curve is downward sloping
• If the price were 10, then 4 units would be demanded
• If the price were 4, then 12 units would be demanded
•Note that a change in price leads to a movement along the
demand curve

Demand Curve
• So a reduction in school fees would lead to an increase in the
quantity of school placed demanded by families
• Note that, in this case, the demand curve itself will not move

Upward Shift in Demand
• A change in the price of substitutes or complements,
opportunity cost of children’s time, number of families in the
country, average income of the families, will all lead to a shift
in demand curve
• The shift will be towards the right if the price of substitutes
increases, or the price of complements decreases, or the
opportunity cost of children’s time decreases, or the number
of families in the country increases, or the average income of
the families increases

Upward Shift in Demand
• We would expect that, ceteris paribus, an increase in
population would result in an increase in the number of
families that would want to send a child to primary school,
because there are more families in the country with primary
age school children
•In terms of a diagram, an increase in population shifts the
demand curve to the right, this is illustrated in figure 2 in the
next slide

Social Demand for Education
• Social demand for education is the sum of individual
demand for educational places over time
• The social demand for education is dictated by the social,
political and economic situations of the time
•Sometimes the social demand for education exceeds
learning needs, when young people desire to enter into the
university just to obtain diplomas or degrees for jobs rather
than for the satisfaction of the yearning to learn
• This brings pressure on the scarce financial, human and
material resources for education to cope with demand

Supply
Definition
•Supply is the quantity of goods or services that the suppliers
are willing to bring to the market and sell at a given market
price, when other things remain constant
•Normally supply is positively related to price
• The higher the price the higher the supply of educational
places

Supply
Determinants of Supply
•The supply of educational services depends on the prices
educational services providers must pay for inputs, including
teachers, books, teaching material, building rent, etc.
•Normally the higher the price of inputs, the lower the supply
of educational services

The Supply Curve
• Holding constant the prices of
inputs, the owners of
educational institutions
would provide more places
the higher the price families
were willing to pay
• Ceteris paribus, increase in
price (fees) of educational
services will lead to increase
in the number of educational
places available

Backward shift in Supply
• We would expect that if the
price of a key input rose (e.g.
the rise in teachers’ salaries),
it would provide a given level
of places only if families were
willing to pay a higher fee for
a year of education
• So the increase in price of an
input results in a reduction
of the supply of educational
services
• The supply curve shifts
backwards from XY to VW
Fig. 4: A backward shift in supply

Equilibrium Price and Quantity
• The equilibrium price Pe is the price at which the market
demand QD is equal to market supply QS
•But market supply and demand are not always in equilibrium
• We have excess demand when the prevailing price is below
equilibrium price
•At that price the demand for educational services exceeds
the supply of places, the supply will be short to satisfy the
demand for education
•The converse is true, leading to excess supply

•At any price below Pe , for
example P1, there is excess
demand (shortage)
•QD>QS
•This creates the pressure
for price to increase
•Sometimes the adjustment
process is very fast, but
most of the time it is slow

• At the equilibrium price,
there is neither a shortage
nor a glut
• So when you hear about
excess demand for university
education, then see if the
price increases, and if not ask
yourself why
• Sometimes the government
puts regulation on fees

Why Disequilibrium
• Disequilibrium situations result from the shift of demand or
supply
• The change in demand results from the change in the
determinants of demand: prices of complements or
supplements, change in the opportunity cost of education,
change in the number of families, and change in the average
income of the families
•The change in supply results from the change in the prices of
inputs of educational services such as teachers’ salaries, rent
etc.

Cost in Education
Cost of education reflects the real resources (material, human,
time) used up (spent) in the production of educated
individuals, as estimated in monetary terms
Direct vs Indirect Cost
Cost can be direct or indirect
Direct cost include cost of all items purchased or used for the
educational system, the total value of those items constitutes
the direct cost of education
Sometimes the direct costs are referred to as real costs

Cost in Education
Indirect Costs of Education
•Investment made in education could have been used to
invest in other sectors of the economy
• So the cost of education could be expressed in terms of
foregone alternative opportunities in the use of resources
• This type of indirect cost to education is also called
opportunity cost
•Cost of Education = Expenditure + Opportunity Costs

Cost in Education
Another Classification of Costs
•Generally costs can be classified into three types of costs:
1. Institutional costs
2. Private cost
3. Social cost

Cost in Education
Private costs: (also known as household cost)
• This comprises of the money which the family, household or any
private body expends on education as well as the opportunity
costs
• Such costs include students tuition fees, students’ clothing,
students’ food, books and stationery, transport fare to school
• But income foregone by the student by being in school is also a cost
• The university student should have been gainfully employed in
the production of goods and services instead of being in
university

Cost in Education
Institutional Costs
• This is made up of capital costs and recurrent costs
• Capital costs are associated with durable educational inputs:
land, site, utilities, buildings, furniture and equipment which
render services for not less than one year
•Usually depreciation is made on the original cost of each
item, to adjust for repairs and additions
• Recurrent costs include costs of non durable items such as
salaries, allowances, stationeries, utilities, repairs etc.
•Recurrent costs are the cost of operating the school

Cost in Education
Social Cost: is usually estimated through appropriate
adjustments in private and institutional costs
• Social Cost is regarded as the total cost of education to the
entire society
•Both institutional and private costs are regarded as social
cost, except that the cost of scholarship and tuition are
removed from institutional and private costs respectively

Why consider costs in Education
• The following reasons justify cost analysis in education
1. To test the economic feasibility of educational plans
• This is necessary to avoid unrealistic and unrealizable plan targets
without proper costing
• So effective cost analysis will ensure plans are matched with
available resources
2. To undertake educational reforms:
• It is important to consider cost implications before embarking on
major educational reforms
• UPE was not prepared based on cost implications – failed
• What about recent free basic education?

Why consider costs in Education
3. Encourage Efficiency in utilization of resources
• Efficiency criteria demands that investments be made in areas
with minimum wastages
• Cost analysis is an important tool in this direction
• It ensures that factors that lead to wastages are identified and
eliminated
4. Adapting Innovations to Education
• Cost considerations of the old and new technology could help in
reaching decisions to change existing practices and adopt
innovations, such as computer and multi-media facilities

Factors Influencing Cost of Education
• Cost of education per learner has continued to rise
•Factors influencing the cost of education should therefore be
considered, and include
•the demand for educational services,
•teacher force,
•operation techniques and
•the size of enrolment of learner
•We will consider these factors one after another

Factors Influencing the cost of education
1. Demand for Education
•From observation there is increased demand for education
due to the fact that the government is universalizing
educational opportunities
•Increased demand inevitably mean expansion of educational
facilities
• Expansion of educational facilities accounts for the rising
cost of education
• This has led to increase in public education expenditure

Factors Influencing the Cost of Education
2. Teacher Force
• Education industry is labour intensive
• This is responsible for the rising salary payroll of teachers who take
over 90% of the recurrent cost of primary and secondary
education put together
3. Operation Techniques
• Most educational institutions are resistant to change
• The operation techniques have for many years relied on handicraft
technology
• There is a fear of trying out innovations
• In this type of situation, the cost of education increases

4. Size of Enrolment of Learners
•Where enrolment increase then the unit cost of education
decrease
• In Tanzania we have small schools in some places which are
costly to run
• However, since it is the policy of the government to provide
education for all, the government continues to maintain the
small schools

5. Institutional Variables
•Institutional variables include such factors as age of the
school, design of buildings, curriculum in operation, location
of school and student teacher ratio
•Age of school has a strong influence on the capital
expenditure of education
•New schools spend less on repairs and more on the
learning facilities, equipment and instructional materials
to make learning process more meaningful
• Complex design increase cost of education

Factors influencing cost of Education
• Curriculum also influence the costs: for example technical
schools require more inputs for the specialized structures
and workshops, science schools also
• Student teacher ratio varies according to educational level
and courses offered
•The student teacher ratio is higher in secondary schools
than in universities
•The higher the student-teacher ratio, the lower the cost
of education

Benefits of Education
• The following are the benefits of education
1. Education fosters economic growth and development
2. Education increases productivity and incomes of the
workers through the diffusion of skills and the
reorganization of the production process
3. Education promotes technological change through
research and development
4. Education raises flexibility and mobility of the labour force,
this is useful when there is a change in demand for labour

5. Education promotes good values such as social cohesion, peace,
stability and democratic values
6. The educated take with them their knowledge, skills and values
to the workplace, to the public sphere and their own home
• This creates the diffusion of the good values to the benefit of
the society
7. When more people are educated, fewer people experience
alienation and general distrust of others and the government
8. Education improves individual decision making abilities and
make the educated stay out of trouble, thus live better, healthier
and longer

9. The educated are likely to educate their children too
•By parental imitation
• Earning ability of the educated make them afford to pay for
the best education for the children

Economics of Education Part 1.pptx

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Economics of Education Part 1.pptx

Similar to Economics of Education Part 1.pptx (20)

More from VenanceNDALICHAKO1

More from VenanceNDALICHAKO1 (9)

Recently uploaded

Recently uploaded (20)

Economics of Education Part 1.pptx

Editor's Notes