LECTURE ONE: INTRODUCTION
1.1 ECONOMICS OF EDUCATION
OBJECTIVES
By the end of this lecture you should be able to:
- Define the terms used in economics of education.
- Explain why economists are interested in education.
DEFINITION
1. It is the application of economic tools of analysis to determine how best scarce
resources allocated to education can be utilized to achieve educational goals. Examples of
tools of analysis are, cost – benefit analysis, cost effectiveness, social demand approach
and manpower demand approach.
The CBA entails the comparison between the costs of investing in education in relation to
the benefits, to assess its profitability. Social Demand approach refers to aggregate / total
demand for school places in a nation. This approach aims at predicting the number of
school places likely to be demanded by individuals and their families and to provide these
places so that social demand is satisfied.
Manpower demand approach focuses on analysing the market needs of a country in terms
of human resources to design an educational system that will meet the needs of trained
human resources.
Cost effectiveness means running educational programmes in the most cost-effective ways
possible economically. (these will be covered in detail in a topic to be covered later)
Educational resources are never enough. The tools enable economists to evaluate
investment choices and thus make rational guidelines on how best to allocate resources.
2. Economics of education is also the study of how best we choose to produce, to distribute
and utilize the scarce resources to meet educational goals. i.e. we produce graduates (do
they have the skills needed for job markets? Do they have the positive attitudes, etc?
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1.2 ECONOMICS OF EDUCATION AND OTHER RELATED
TERMS Demand
It is the quantity or amount of goods and services that an individual is able and willing to
buy at any given price over a particular period of time (Hanson, 1986).
Demand
P2
PI
D
O Q2 QI
Fig1.1 Demand- Price Relationship
Supply
It is the quantity of a good or service a seller is willing or able to sell at a given price over
a particular period of time (Samuelson and Mordhause, 1985).
S
P2
P1
O QI Q2
Fig .2 Supply - Price relationship
Consumption
It‟s the utilization of goods and services to provide the consumers immediate
satisfaction. Capital
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This is the property or wealth that may be used to produce more wealth. It may consider
finance and manpower that can be accumulated for future returns. E.g. fixed assets, human
beings, etc. used for further production.
Economics
It is the study of how to allocate scarce resources to many wants. A choice has to be made
as to how much shall be produced or needed. It is also a science which studies human
behaviour as a relationship between ends and scarce means which have alternative uses.
It is social science that studies how society chooses to allocate scarce resource among
unlimited wants and desires (Clark and Verselt, 1987). It is a social science that studies
the production, distribution and consumption of goods and services.
Goods are anything that satisfies human wants. Services are intangible goods for they help
us to get something that we [Link] shall be produced or needed. It is also a science
which studies human behaviour as a relationship between ends and scarce means which
have alternative uses. It is social science that studies how society chooses to allocate scarce
resource among unlimited wants and desires (Clark and Verselt, 1987). It is a social
science that studies the production, distribution and consumption of goods and services.
Others definitions include;
According to Adam Smith;
It is an inquiry into the nature and causes of the wealth of nations.
J.S. Mills
Economics is the practical science of the production and distribution of wealth.
Alfred Marshall
It is the study of mankind in the ordinary business of life. Economics examines that part of
individual and social action connected with the attainment of the material requisite of well
being.
Investment
This is an expenditure of goods and services that satisfy the consumers‟ future wants and
may be used for the production of future benefits or savings. It‟s sacrificing the present
for the future. I.e. what one is likely to get in future?
Human Capital
This is the stock of competencies knowledge and personality attributes embodied in an
individual through education and experience. It is that value of human skill consisting of
acquired ability and stature rather than the individual himself i.e. skilled and semi skilled
workers.
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Education
It is the process of acquiring knowledge, skills, right attitudes and ability to be able to
perform various jobs.
Opportunity Cost
It refers to foregoing a particular chance for the sake of pursuing education or another
chance. I.e. foregoing purchase of particular piece of land to pay school fees.
1.3 DEVELOPMENT OF ECONOMICS OF EDUCATION
The development of economics of education can be traced back to the ancient times
especially after the Second World War (1939 – 1945). After the Second World War, there
was an unprecedented and enormous expansion of educational systems all over the
world.
This expansion has only been exceeded by the increase in popular demand for education.
A demand which has not been satisfied (Briggs, 1992).
The expansion of educational systems was attributed to by several factors namely: i.
Need for equality in opportunity. i.e. equality of educational opportunities. ii. Governments
wished to rebuild their economies after the war and called for a review and expansion of
their educational systems and so need for planning.
iii. The declaration of human rights (1948 charter) emphasized right to individual
education. iv. UNESCO conference in Addis Ababa 1961 African countries agreed to aim
at attaining universal primary education by 1980 and at the same time, expanded
education at all levels. v. Personal advancement - Education during 1960‟s was seen as a
means of social mobility. i.e. People had been promised education by their politicians and
leaders before independence.
vi. Need to replace expatriate workers after independence of the most colonized
countries, including Kenya. An expatriate is a person who has left his own country to live
abroad. vii. Realization that education is not an end in itself - Once people graduate from
primary schools they increasingly wish to enter secondary schools. Also, should the
employment prospects for primary schools dry up, then demand for higher qualification
increases and more secondary places are demanded and so on up the educational ladder.
The education system of third world nations strongly influence and are influenced by the
whole natural magnitude and character of their development process. Prior to this,
education was considered as a social welfare aspect of the society for social – political
goals. Periods of technological progress saw the development of capital accumulation.
Several schemers came up
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with schools of thought that emphasized various economic ideas concerning human capital
and development.
Proponents of various schools of economic thoughts include:
PLATO (427 – 347 B.C.)
His ideas on economics advocated the importance of division of labour. He considered
human beings as having natural differences hence specialization. He divided the society
into two, the higher class not to work for profit or accumulation of property and the lower
class to get profit. He saw specialization as the root of all economic progress. He
considered slavery as a permanent and necessary institution in the history of mankind.
ADAM SMITH
He came up with the theory of value – such as the demand and supply theory, cost of
production theory. He brought about a distinction of value – in – use and value in
exchange. He considered that utility cannot be the basis of exchange of value i.e. the
amount of labour that a particular commodity can command or get in exchange for its
market. Labour here is seen as the measure of value. He considered that capital is stored
up in labour and can be converted into labour embodied. One can receive education or
skills hence the development of the human capital that commands a value.
Smith distinguished that wages are determined by the productivity of labour i.e. human
capital. He saw that wages cannot go below a minimum level sufficient to maintain the
human capital.
DAVID RICARDO (1772 – 1823)
He developed a systems of analysis based on abstracts and their solutions. He saw
political economy as an inquiry into the laws that determine the divisions of the product
amongst the classes who are responsible for its production. He was interested in finding
out laws that govern the distributive shares. He was concerned with micro and macro-
analysis and attempted to see the progress of a static state.
VON THUNEM (1783 – 1873)
He came up with concepts on locations, and trade and analyzed that the location of a
particular good e.g. human capital will determine its value. This includes land, transport,
wage etc. Von Thunen saw the need to protect economic goods from free trade to avoid
exploitation.
JOHN STUART MILL (1809 – 1873)
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He made a distinction between the laws of production and laws of distribution, and saw
that human evolution cannot change them. He wanted completion in the spheres of
production as affected by the mental and physical labour. He saw aspects of wage as
depended on the demand and supply of labour, and the value of labour in terms of skills
embodied in it.
KARL MARX (1818 – 1883)
He brought up new concepts in the economic thought. He looked at the mode of
production, and forces of production that are dynamic and frequently changing. Marx‟s
came up with ways increasing productivity. He saw the value of the product must equate
the value of labour e.g. a teacher should be highly paid depending on the products of his
labour.
Max saw labour power as a commodity with value as determined by the labour necessary
for the production of an article – and inclusive of the costs of subsistence and
maintenance. He brought up the idea of surplus value. If a laborer requires 4 hours to earn
his subsistence wage – and works for 12 hours – the eight are surplus value i.e. labour over
the above subsistence requirements. He checked the distribution of this value of surplus
labour.
Marx‟s saw accumulation as a necessary evil in a capitalistic economy. Accumulation is
the Moses and prophets in capitalism – without which capitalists cannot stay in business.
It is determined by many forces both economic and social.
The theory of economic development blended other home economic factors as education
to improve labour productivity. The assumptions of Marx still remain an appealing
political challenging the future of the rich and poor countries alike.
1.4 THE CONCEPT OF HUMAN CAPITAL
According to Adam Smith, (1952, pp 119 – 120); the human capital consists of acquired
and useful abilities of members through education, study or on -the -job training. He
considered the costs incurred in obtaining the skills – the capital. In turn education was to
develop the human to facilitate more production to repay the expenses incurred earlier
with a profit. He stressed education as an investment choice that would yield a stream of
benefits in form of higher lifetime earnings.
Von Thunem 1965 pp 393, also accepted the notion of human capital. He looked at the
factors of production i.e. land, labour and capital and concluded that highly schooled
nation equated with similar material and goods from an uneducated nation, will create a
larger income. Hence the manpower was regarded as human that could be invested in.
Alfred Marshal 1961 pp 204 – 205 confirmed the importance of human capital. He defined
it as those faculties, energies and habits that make the person industrially efficient .The
past war periods (1945) saw a renewed upsurge in economics of education. The education
sector was seen as an industry.
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In 1960 T.W. Schultz formulated the concept of human capital, which had been previously
restricted to the physical capital. For long, labour as a factor of production was considered
as a fixed value that ignored the level of the workers skills and the knowledge. He argued
that growth in production could only be explained by the investment in human capital that
take place through formal schooling and on the job training.
Rates of return for education are often argued to be above the opportunity costs and the
rates of return for many other types of investments such as agriculture, industry and
infrastructure (World Bank, 2005). Effective schooling offers access to abstract reasoning
and the kind of flexible thinking skills associated with growth oriented- production and
new jobs.
The human capital theory justifies the individuals and society active investment in
education. The theory puts forward the concept that returns on investment in education are
a useful indicator of the productivity of a population. In short, the human capital theorists
argue that an educated population is a productive population.
The theory emphasizes how education increases the productivity and efficiency of workers
by increasing the level of stock of economically productive human capability. The theory
considers education relevant in so far as it creates skills and helps to acquire knowledge
that serve as an investment in the productivity of the human beings. Thus, education is
important because it allows workers to be more productive, thereby being able to earn
higher wages.
1.5 THE CONCEPT OF EDUCATION AS A CONSUMPTION OR
INVESTMENT 1. AS A CONSUMPTION
Education is said to be consumption in cases where we use it for immediate needs.
“Consumption spending” refers to consumers‟ daily purchases. I.e. food, household
appliances and services like banking, etc. Consumer items are non economic goods since
they are not used to generate wealth.
2. AS AN INVESTMENT
To invest means to sacrifice the present for the future. It is a derived demand where
education is not demanded for its own sake but what it‟s likely to give in the future.
Investment spending refers to the purchase of economic goods such as, land, machinery,
etc. where these items are used to increase future outputs or sales (Clark and Veselt,
1987). Therefore, it‟s correct to conclude that, education is both a consumption and
investment item. Education yields non economic benefits to the individual and economy
e.g. improved social status and psychological satisfaction for acquiring a valid certificate.
Economic benefits include; increased capacity to earn I.e. higher wages and salaries to
employees.
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Education is an economic good because it is not easily obtainable and thus needs to be
apportioned. Economists regard education as both consumer and capital good because it
offers utility to a consumer and also serves as an input into the production of other goods
and services. As a capital good, education can be used to develop the human resources
necessary for economic and social transformation. It is widely accepted that education
creates improved citizens and helps to upgrade the general standard of living in a society.
Education plays a great and significant role in the economy of a nation, thus educational
expenditures are found to constitute a form of investment. This augments individual‟s
human capital and leads to greater output for society and enhanced earnings for the
individual worker. It increases their chances of employment in the labour market, and
allows them to reap higher returns and gives them opportunities for job mobility.
1.6 FACTORS WHICH INFLUENCE PRIVATE AND SOCIAL
DEMAND FOR EDUCATION
DETERMINANTS OF THE DEMAND FOR EDUCATION
Definition of Demand
It is the amount of goods and services that an individual is willing and able to purchase at
a particular price at a given period of time. Demand for education refers to the amount of
education that an individual or a society is willing and able to purchase at a particular
price at a given time. i.e. to what level of education.
Private factors
Private cost for education
These costs include both the tangible (direct) and intangible (indirect) which the individual
in his or her family have to meet in the process of purchasing education at particular time.
In this regard where private costs are high, chances of children from poor families seeking
education will be minimized i.e. the higher the cost the lower the demand for education
and vice versa.
Family disposable income
The amount of financial resources within the family that can be set aside for meeting the
cost of education will greatly influence the private demand for education. If the family
doesn‟t have sufficient financial resources, to meet other basic necessities or needs, the
demand for education in such a family will be low. i.e. the higher the disposable income,
the higher the demand and vice versa other factors held consent. If there is no money for
basic necessities education is not considered because there is no money to dispose.
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Expected earnings on completion
Individuals and parents are likely to invest in education if the future expected benefits
would be higher than the present. The higher the expected benefits the higher the demand
for education and vice versa. i.e. expected prestige, wider employment prospects, self
esteem, job promotions, etc.
Cultural inhibitions
The cultural factors may provide either discouraging or enabling environment for
education. E.g. some cultural norms, practices and attitudes tend to be detrimental to the
girl child. E.g. Samburu, Maasai and Pokot, women education is not valued. They are told
to marry off or repeat. Thus there is low demand for education.
Social factors
Demographic influence
The rate of population growth and demographic characteristics to a greater extent
determine the level of demand to education. In this regard, the lower the population the
lower the demand for education and vice versa other factors held constant. Demographic
characteristics include age patterns, working age, old and dependence, school going
population, age distribution of boys and girls i.e. more working people are able to take
care of the young.
It also includes social economic status i.e. affluent population, poor, etc. since to the
affluent population there is high demand for education and vice versa for the poor.
Economic development
To equip individuals with knowledge, skills and attitude that will promote and forester
economic growth and development i.e. to establish a more efficient and productive labour
force to enhance economic advancement. Individuals gain specialized skills and attitude to
make them more productive.
Strategy to improve the standards of life
This is done to better and increase income levels, more job opportunities, exploitation and
utilization of scarce available resources in order to increase food provision in terms of
quality and quantity, reduction of poverty, improved social justice and security, equitable
allocation and distribution of scarce resources to enhance development e.g. free primary
education.
Government policy
This may include both established legal and policy structures to guide the provision of
education e.g. The introduction of free primary education in 2003 increased the demand
for that level of education i.e. 1.3 million children went back to school, establishment of
HELB to provide loans, bursaries, scholarship to needy and deserving students has also
increased the demand for higher education and make secondary students to work harder.
That is high demand for education.
Others determinants include
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Family aspirations
Educated parents encourage their children to do better and are ready to educate them.
There is also the need to go to certain political class, improved social status etc.
Level of unemployment among educated people
The tendency of individuals demanding to pursue particular education programmes or
courses is likely to be influenced by the rate at which graduates of the same course get to
be absorbed in to the labour market thus the demand for a course which has many
employed educated people will be low and vice versa. E.g. medicine law will have high
demand. The higher the chances of employment the higher the enrollment levels and vice
versa.
To precipitate political information educated people will have issues of democracy
participate in elections improve issues of transparency, human rights, etc.
Innovation research technological issues, cultural interactions are promoted. Research
generates more advancement.
1.7 DETERMINANTS OF SUPPLY OF EDUCATION
Definition of supply
It refers to quantity of goods and services that an individual is willing and able to supply at
a particular price at a given period of time.
Supply of education may refer to the amount of education that an individual in the society
is willing to sell or provide at a particular price and time. E.g. provision of education and
training institutions that an individual‟s, public, religious communities are willing to
provide at a particular cost and time.
The price/cost of education
An increase in the cost of education leads to an increase in the supply of that education.
Supplier looks for profits that motivates them but at a social level the lower the cost of
education the higher the supply. E.g. free primary education.
The benefits the government and society gets from investing in education. E.g. social
economics benefits, political benefits, etc, motivates society to provide learning
institutions to get benefits accrued to education.
Disposable income of the government
The amount of resources to be set aside for providing education and training opportunities.
So the higher the disposable income the higher the supply of education and vice versa
Level of technology
Modern technologies and innovations may precipitate the government to open up
educational centres that can offer knowledge and skills demanded by these technologies.
E.g. Kenya
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Agricultural Research Institute which is expanded thus the higher levels of technology the
higher the demand for education in the respective areas.
Government policy
It includes levels of structures on the establishment of learning institution e.g. some
requirements to open schools or universities to be registered to award degree or diploma.
When the government is positive, increases the supply of the division and when they
hinder they reduce the levels of supply. Demographic characteristics and pattern
Mobile communities like Maasai, the supply of education opportunities in such areas are
low. i.e. nomadic characteristics. It is so hard to establish learning institutions compared to
those fixed people. Where people are economically stable the government is likely to
establish schools because parents are able to meet the cost. If the demand is high the
supply is also higher unlike poor economic ground areas.
High population density areas are likely to have more schools which are needed as
compared to sparsely populated areas which have low. Culturally some communities
don‟t need schools for example where female children do not go to school
Political influence
Particular political systems may be interested in providing a lot of educational
opportunities, e.g. NARC – National Alliance of Rainbow Coalition. Some particular
geographical zones may have more educational opportunities e.g. more schools were
established during Kenyatta era. Due to Harambee spirit more schools were established.
President Moi also started Schools and Universities e.g. Moi University.
Other factors include:
Prices of related goods and services and other investments
Private level and individual consider the cost benefit analysis e.g. schooling or buying a
matatu. Purchasing education is expensive and that‟s why private individuals start
schools. The level of private and social demand for education
This precipitates individuals and publics to provide more learning institutions for education
and training. E.g. there is high social demand for education in Kampala where other
universities are affiliated to Kenyan universities, more academies, etc.
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How do we ensure that supply and demand for education are at
equilibrium? price D S
P e
SD
Q quantity
E
What you have learnt
Private and social costs of education
Private and social benefits /returns to education
Factors influencing the demand for education
Factors influencing the supply of education
Measures to returns of education
ACTIVITY
1. Looking at the growth of education in Kenya since independence, give a possible
economic explanation for the growth of harambee schools, Institutes and Colleges of
technology in the country.
2. Why do economists see spending in education as a form of investment?
3. What is economics of education and what are the economic justifications for economists
to take interest in education.
4. Why do you think the government gets involved, in financing education instead
ofleaving education entirely to individuals to do so? How do we ensure that supply and
demand for education are at equilibrium?
5. Identify policies that will ensure 100% enrolment of girls in schools.
6. Give possible reasons why government is concerned with investing in heavily in
primary level education as compared to university education;
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