Economics of

education- EdPM3071

Prepared
By
Omer, A .
July/2024
 UNIT ONE

The Nature and Concepts

of Economics of Education
Content

1.1.Unit objective
1.2. The Meaning of Economics
and Economics of Education
1.3.Scopes and Major Issues in
Economics of Education
1.4. Functioning of Economy
1.5. Factors of Production
Unit Objective

 At the end of this unit, you should be able to:

• Define economics of education;
• Differentiate between ordinary economics and
economics of education;
• Identify the fundamental problem of economics of
education; and
• Explain what an economist of education can do to
solve the fundamental problem in the educational
system.
 Identify Major Issues in Economics of Education
 Explain the Functioning of Economy
 Identify Factors of Production
1. The 1.The
Meaning ofand
Nature Economics
Concepts and
of
Education
Economics of Education

A. Economics
 Is a social science that studies how society chooses
to allocate its scarce resources, which have
alternative uses, to provide goods and services for
present and future consumption.
 It studies how society decides what, how and for
whom to produce goods and services.
Education:-
 Is the process of training and developing the
knowledge, skill and attitude, mind, character,
etc
 Educational activities, then, involves production and
distribution of knowledge
If this is the definition of the two terms, What is
Economics of Education?
  Meaning and Scope of
Economics of Education
 Economics of Education as an area of study
cannot be said to be a separate field of
inquiry that is totally different from the
ordinary economics.
 Economics of Education is the application of
Economic principles, concepts, laws to the
process of Education.
 Economics of education studies human behavior
(in terms of human decisions), action(s) and
reaction(s)) about schooling (Babalola, 2003).
 It further looks into how human behaviour affects
economic development.
Cont.,,
 It is the study of how educational
managers make official or approved
choices from scarce available
resources which is meant for the
realization of the best possible
educational outcomes.
 Economists analyze the production of
education in this world where resources
such as the capital invested in
buildings or technology and the labor of
the teacher workforce are necessarily
scarce.
Cont.,,
It seeks to study how resources
are allocated among
educational institutions and
activities, and what benefits
or returns are obtained by both
the individuals and nations.
It aims at an analysis of the
economic value of education on
the one hand, and the economic
aspects of educational
systems on the other.
Cont.,,
This scarcity of resources means
that policymakers must decide:
1. How much to spend on each stage
of education (i.e. what to produce?);
2. How to provide educational services
in a way that maximizes its
benefits to society (i.e. how to
produce education?); and
3. Who should have access to each
stage of education (i.e. for whom is
education provided?)
Cont.,,,,,
There are three decision makers
or stakeholders in the educational
system. These are
 (1) The society
 (2) The institutions or providers
(suppliers) of education and
 (3) Individual or households (purchasers
of educational services).
The twin problem of scarcity and
choice face these major
stakeholders.
 Cont.,,

 The fundamental problem of economics

of education is how the society,
institution and the households make
use of the limited human and
material resources they have, to
best satisfy their unlimited wants
for education.
 The solution to the fundamental
problem requires the application of
certain economic concepts.
 2. Scopes and Major Issues in
Economics of Education
The analysis of the economic and social
determinants and consequences of
education is the realm of the economics
of education.
analyze the effects of education on
wages, employment, economic
growth and social equality.
Scrutinize(inspect, examine) the role of
education in a society’s capability to
advance knowledge through research,
entrepreneurship and innovation.
Cont.
Estimate how family backgrounds,
schools’ resource endowments and
institutional features of the
education systems determine the
quality of education, using
observational and experimental data to
estimate the effectiveness of education
policy interventions.
It deal with the public and private
financing of different levels of
education
Cont.,,,,
 Theissue of scarcity calls for economic
analysis in the education system of a
country in terms of:-
◦ Demand of schooling,
◦ Educational expenditure,
◦ The contribution of education system to
GNP.
◦ Manpower planning
◦ Out comes of education
 educationinvolves the use of a
substantial amount of scarce resources.
 Interdependence between
Education and Economics

 Education is defined as the acquisition of the art of

utilizing knowledge for moral and material
development.
 the discipline of economics deals with the study of
how individuals choose to deploy resources on
various activities for maximizing social and
economic returns.
 While the economy of a society provides
resources to fulfill the educational aspirations
of its members, the education systems, in
turn, help in equipping the society and the
economy with the required types and levels of
manpower which are needed for expediting
(speed up) the process of socio-cultural
transformation and economic modernization.
1.3 Factors of Production
 Capital;-refers to the
improvements made to natural
resources
 Capital includes items such as buildings
and machinery
 Land;- includes all natural resources,
such as land, air, water, forests, wildlife
Labor;- includes all mental and physical
effort exerted by human beings,
1.4 functioning economy
 education as a functioning
economy involves analyzing it as a
system that involves the production,
distribution, and consumption of
educational services and resources.
Just like any other economic system,
the education sector interacts with
various stakeholders, resources, and
processes to achieve specific
outcomes.
UNIT TWO

Demand and Supply

Analysis in Education
Introduction
Demand and supply analysis in
education is a fundamental
economic concept that can be
applied to understand the
dynamics of the education sector.
Just like any other market, the
education sector operates based
on the interaction between the
demand for education services
and the supply of educational
resources.
Demand for education
 The demand for education can be defined
as the desire or need for educational
services and opportunities within a specific
population or society.
 It represents the willingness and ability of
individuals or groups to seek out and
engage in educational activities to acquire
knowledge, skills, and expertise. This
demand is driven by various factors
including economic conditions, social
expectations, personal aspirations, career
goals, and the perceived value of education.
Cont.,,
 Understanding the demand for education is
essential for policymakers, educational
institutions, and stakeholders to design and
implement effective educational programs,
allocate resources efficiently, and address the
educational needs of the population.
 By analyzing and responding to the demand for
education, it is possible to enhance access to
education, improve educational outcomes, foster
individual and societal growth, and promote
lifelong learning.
cont.,,
 Individual demand:
This refers to the desire of individuals to acquire
education to improve their skills, knowledge,
and future prospects.
 Derived demand: Education is also demanded
as a means to meet other goals, such as higher
income, better job prospects, and social status.
 Shifts in demand: Factors like population
growth, changes in income levels, technological
advancements, and cultural attitudes can
influence the demand for education.
 Factors Affecting Demand
 Population demographics: The size and age
distribution of the population can influence the demand
for different levels of education.
 Income levels: Higher incomes often lead to increased
demand for education as people can afford to invest in
their education.
 Employment trends: Job market requirements can drive
demand for specific skills and educational qualifications.
 Cultural factors: Societal attitudes towards education,
such as the importance placed on education, can impact
demand.
 Government policies: Subsidies, grants, and other
educational policies can affect the demand for education.
Demand curve
 In economics, a demand curve is a
graphical representation of the
relationship between the price of a
good or service and the quantity
demanded by consumers.
 When it comes to education, a demand
curve can be used to illustrate the
relationship between the price of
education (tuition fees or other
costs) and the quantity of education
services that students are willing to pay
for or enroll in.
Cont.,,

In the context of education, the

demand curve for educational
services can follow the law of
demand, which states that, all
else being equal, as the price of a
good or service increases, the
quantity demanded for that good
or service decreases, and vice
versa
Cont.,,
Here is a simple explanation of how
a demand curve in education might
look:
Price (p)

Demand(D)

Quantity (Q)
 Cont.,
 Vertical Axis: The quantity of education services
demanded.
 Horizontal Axis: The price of education (tuition
fees or cost of education).
 Shape of the Curve: The demand curve typically
slopes downward from left to right, indicating that
as the price of education decreases, the quantity of
education services demanded increases.
 Shifts in the Curve: Factors such as changes in
income, student preferences, the perceived value of
education, government policies (such as subsidies
or financial aid), or the overall economic conditions
can shift the entire demand curve
 Supply of Education:
 The supply of education can be defined as the
availability of educational services,
resources, and institutions within a given
region or country.
 It represents the capacity of educational
providers, such as schools, colleges,
universities, training centers, and online
platforms, to offer learning opportunities and
programs to learners.
 The supply of education encompasses physical
infrastructure, teaching staff, curriculum
development, educational materials,
technology, and other resources necessary for
the delivery of quality education.
Cont.,,,:
 Educational institutions:
 Schools, colleges, universities, and
other training centers are the primary
suppliers of education.
 Educators: Teachers, professors, trainers,
and other educational professionals
contribute to the supply of education.
 Educational resources: These include
textbooks, technology, infrastructure, and
funding that support the delivery of
education.
 Factors Affecting Supply
 Availability of resources: Adequate funding,
qualified teachers, infrastructure, and educational
materials are necessary for the supply of education.
 Government regulations: Regulations related to
accreditation, curriculum guidelines, and licensing
can influence the supply of education.
 Technological advancements: Technologies like
online learning platforms can enhance the supply of
education and reach a broader audience.
 Educational institutions' capacity : The number
of educational institutions and their capacity to
accommodate students affect the supply of
education.
 Equilibrium:

 In the context of education, market equilibrium

refers to the point where the quantity of
education services demanded by students
is equal to the quantity of education
services supplied by educational
institutions.
 At this equilibrium point, both demand and
supply are balanced, leading to a stable
price and quantity in the education market
 Factors that can disrupt this equilibrium include
government interventions, changes in
economic conditions, technological
Market equilibrium graph
Cont.,,,
Demand Curve (D):
 Represents the relationship
between the price of education
and the quantity of education
services demanded by students.
 The demand curve slopes
downward to the right,
indicating that as the price of
education decreases, the
quantity demanded increases.
Cont.,,,
Supply Curve (S):
 Represents the relationship
between the price of education
and the quantity of education
services supplied by educational
institutions.
 The supply curve slopes
upward to the right, indicating
that as the price of education
increases, the quantity
 Cont.,,
 Market Equilibrium: This is the point where
the demand curve (D) intersects the supply
curve (S).
 At this intersection point, the quantity of
education services demanded is equal to the
quantity of education services supplied. This is
the point where the market is in equilibrium.
 Equilibrium Price (P): The price at which
the quantity of education services demanded
is equal to the quantity supplied. This is the
price at which buyers are willing to pay for
education services and sellers are willing to
offer them.
Cont.,,,,
 Equilibrium Quantity (Q): The
quantity of education services
transacted at the equilibrium price.
At this quantity, the market is in
balance, with no surpluses or
shortages of education services.
 Changes in either demand or
supply can shift the equilibrium
point, leading to changes in the
price and quantity of education
services exchanged in the market.
The Purpose of demand &
supply analysis in education
 Demand and supply analysis in education
serves several important purposes:
 Resource allocation: By analyzing demand
and supply in education, policymakers can
make decisions about how to allocate resources
such as funding, teachers, and facilities
efficiently to meet the needs of students.
 Planning and policy-making: Understanding
the demand for and supply of education helps
in long-term planning and policymaking. It can
inform decisions about building new schools,
introducing new programs, or adjusting
admission criteria.
 Cont.,,
 Quality of education: By analyzing
demand and supply, educators can identify
areas where there is a shortage of
qualified teachers or where additional
resources are needed to maintain or
improve the quality of education.
 Equity and access: Demand and supply
analysis helps in identifying disparities
in access to education. By understanding
where demand is not being met,
policymakers can work to ensure that all
students have access to quality education.
 Cont.,,
 Labor market relevance: Analyzing
demand and supply in education can help
in aligning educational programs with
the needs of the labor market. This
can help ensure that students are
acquiring the skills and knowledge needed
to be successful in the workforce.
 Forecasting future needs: By studying
trends in demand and supply,
policymakers can anticipate future needs
for educational services and plan
accordingly.
 Cont.,,,
 Economic development: Education is
critical for economic development, and
demand and supply analysis can help
ensure that a well-educated workforce is
available to meet the demands of a
growing economy.
 In summary, demand and supply analysis
in education plays a crucial role in
ensuring that educational services are
provided efficiently and effectively,
meeting the needs of students,
educators, policymakers, and society
as a whole.
 UNIT THREE

Education and Human

Capital
Education and human capital
The economists included human capital
in their definition of capital, generally
referred to the value of human skill
and other acquired abilities rather
than to the individual himself.
John Stuart Mill says the human being
himself I do not class as wealth. He is
the purpose for which wealth exists. his
acquired capacities by labor, fall
rightly, as it seems the human capital
designation.
Cont.,,,
 In 1776, Adam Smith considered the skills of the
labor force to be the predominant force for
economic progress. In his definition of fixed
capital, human capital is also included.
 Human capital represents the investment people
make in themselves that enhance their economic
productivity. It rests on the assumption that formal
education is highly instrumental and even necessary
to improve the production capacity of a population.
 Cont.,,
 The provision of formal education is seen as a
productive investment in human capital, which
the proponents of the theory have considered
as equally or even more equally worthwhile
than that of physical capital.
 Education increases the productivity and
efficiency of workers by increasing the level of
cognitive stock of economically productive
human.
 Basic justification for human capital formation is
that investment in education leads to higher
productivity; this in turn leads to high earning.
The Concept of Human Capital
Theory
 The Concept of Human Capital Theory
 Human capital theory is an economic concept
that suggests that individuals and society as
a whole can benefit from investing in people,
particularly through education and training.
 The theory posits that when individuals acquire
new skills and knowledge, they become more
productive and valuable to employers, which
in turn can lead to higher wages and economic
growth.
 Human capital theory emphasizes the
importance of investing in people through
education and training to enhance their
productivity and value in the labor market.
 The meaning and scope of
human capital
Human capital refers to the
knowledge, skills, abilities,
and other attributes that
individuals possess, which enable
them to contribute to the
production of goods and services.
It encompasses the economic
value that individuals bring to an
organization or society through
their labor and expertise.
Human capital formation
 Human capital formation refers to the
process of increasing the knowledge,
skills, abilities, and other attributes of
individuals that contribute to their
productivity and potential economic value.
 This concept recognizes that individuals,
through education, training, and
experience, can enhance their
capabilities, thus improving their own
economic well-being and contributing to
the overall growth and development of a
society or economy.
Cont.,,,
 The scope of human capital includes various
aspects such as education, training,
health, and experience, all of which
contribute to an individual’s productivity and
efficiency.
 Human capital refers to the knowledge,
skills, abilities, and other attributes
that individuals possess, which enable
them to contribute to the production of
goods and services.
 It encompasses the economic value that
individuals bring to an organization or
society through their labor and expertise.
 Here are a few key points about
human capital formation:
 Education and Training: Access to quality
education and training is essential for human
capital formation. Formal education,
vocational training, and continuous learning
opportunities help individuals acquire the
skills and knowledge necessary to participate
in the workforce and adapt to changing
economic demands.
 Health and Nutrition: Physical well-being
also plays a crucial role in human capital
formation. Good health and proper nutrition
contribute to higher productivity, cognitive
function, and overall well-being, which are
essential for economic success.
Cont.,,,
 Experience and On-the-Job Training:
Practical experience and on-the-job training
are crucial for developing specific skills and
expertise. By gaining hands-on experience in a
particular field or industry, individuals can
enhance their productivity and contribute
more effectively to the economy.
 Innovation and Creativity: Human capital
formation is not just about acquiring existing
skills but also about fostering innovation and
creativity. Encouraging critical thinking,
problem-solving skills, and creativity can lead
to new ideas, technologies, and approaches
that drive economic growth.
Cont…
 Governments play a significant role in
promoting human capital formation through
policies and investments in education,
healthcare, job training programs, and other
initiatives that support skill development and
knowledge enhancement.
 Social and Cultural Factors: Social and
cultural factors also influence human capital
formation. Socioeconomic background,
access to opportunities, gender equality, and
cultural norms all play a role in determining
individuals' ability to develop their human
capital.
Cont…
 Benefits for Society: A well-educated and
skilled workforce can lead to higher
productivity, innovation, and economic
growth.
 Human capital formation not only benefits
individuals by improving their earning potential
and quality of life but also contributes to the
overall development and prosperity of a society.
 In summary, human capital formation is a
fundamental driver of economic
development, emphasizing the importance
of investing in people's knowledge, skills,
and well-being to build a more productive
and prosperous society.
Measuring human capital
formation
 There are several ways to measure
human capital formation, each
focusing on different aspects of
human capital development. Some
common methods include:
 Education attainment levels:
Monitoring the population's
educational achievements, such as
literacy rates, enrollment in
schools, completion rates, and the
number of individuals with post-
secondary education degrees.
Cont.,,,
 Skill assessment: Evaluating the
skills possessed by the workforce
through standardized tests, surveys,
or assessments tailored to specific
industries or job roles.
Labor force participation rates:
Calculating the proportion of the
working-age population that is
economically active, including both
employed and unemployed
individuals actively seeking work.
Cont.,,,,
Productivity metrics: Measuring the
output per worker or per hour worked
to assess the efficiency and
effectiveness of human capital in
contributing to economic growth.
Investment in education and
training: Tracking public and private
expenditure on education, vocational
training, research and development,
and other programs aimed at
enhancing human capital.
Cont.,,,,
 Health indicators: Considering factors
like life expectancy, access to
healthcare, and overall health
outcomes, as good health is essential
for individuals to fully contribute to
economic activities.
 Income and wage levels: Analyzing
wage differentials and income
disparities based on education levels,
experience, and skills to understand
how human capital affects earning
potential.
Cont,,,,,,

Investme
Higher
nt in Higher
productiv
educatio earning
ity
n
 Rationales behind investment in
human capital are

1. the new generation must be given the

appropriate parts of the knowledge which has
already been accumulated by previous
generations;
2. That new generation should be taught how
existing knowledge should be used to develop
new products, to introduce new processes and
production methods and social services; and
3. That people must be encouraged to develop
entirely new ideas, products, processes and
methods through creative approaches.
 Factors Contributing to
Human Capital Formation
levelof skills, knowledge and
competence held at any one time
represent the stock of human
capital.
Some of the factors
contributing to human capital
formation are:
 Education (formal schooling)
 On-the-job training
 Job search (choice of individuals)
 Health service
.Classifying Types of Human
Capital
 There are various types of human capital, including
technical skills, soft skills, intellectual capital,
institutional knowledge, and organizational
capital.
A. Technical Skills: This type of human capital
includes specific abilities or knowledge related
to a particular job or industry. For example, a
software engineer’s technical skills might include
programming languages, software development
tools, and database management.
B. Soft Skills: Soft skills are interpersonal abilities
that enable individuals to communicate effectively
and work collaboratively. Examples of soft skills
include leadership, communication, problem-
solving, and teamwork.
 Cont.,,,
4. Intellectual Capital: This includes the knowledge,
expertise, and experience an individual brings to a job
or industry. It encompasses both formal education and
practical experience.
5. Institutional Knowledge: This type of human capital
refers to the specific knowledge an individual has of a
particular organization, including its culture, history,
policies, and procedures. This knowledge is often gained
through years of experience working within the
organization
6. Organizational Capital: This type of human capital
includes the systems, processes, and structures that
enable an organization to function effectively. Examples
of organizational capital include the company’s
technology infrastructure, management systems, and
communication protocols