Economics of Education Part 1.pptx

Introduction to Economics of Education

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

2. 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

3. Meaning of Economics of Education 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

4. 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,

5. Meaning of Economics of Education 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

6. Meaning of Economics of Education 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

7. 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

8. Scope of Economics of 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

9. Scope of Economics of Education 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

10. 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 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

11. Late Introduction of Economics of Education 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 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

12. 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?

13. Justification of Studying Economics of Education We justify the study of economics of education on the following grounds: 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

14. Justification of Studying Economics of Education 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 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

15. Justification of Studying Economics of Education 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

16. Justification of Studying Economics of Education 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

17. 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

18. Education a Consumption vs Education an Investment 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

19. Education a Consumption vs Education an Investment Investment is the act of increasing the stock of productive capacity It is also known as capital formation

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

21. Education as Consumption 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

22. Education as Consumption 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

23. Education as Consumption We would wish that Tanzanians aspire education as consumption This is because the nation would acquire these advantages: Enhancement of quality of life Realisation of one’s potentialities 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

24. 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

25. Education as an Investment 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

26. Education as an Investment To conclude, Education is seen as an investment in these ways; To an individual because his/her earning capacity and income are enhanced To a nation because the increase of productivity and the supply of qualified manpower contribute to national development 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

27. 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

28. 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

29. Supply and Demand for Education A competitive market is one in which the following assumptions are fulfilled Output is homogeneous: there are no quality differences in the output provided by different producers All consumers can purchase all of the commodity they want at the given market prices, but no consumer can individually influence the market price 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

30. Supply and Demand for Education 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

31. Supply and Demand for Education 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

32. 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

33. 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

34. Determinants of Demand Determinants of Demand for Education Price of other goods and services 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 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

35. Determinants of Demand Determinants of Demand for Education 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 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

36. Determinants of Demand Determinants of Demand for Education Income distribution among families in the country, usually summarized by the average income The higher the average income, the higher the demand for education

37. Demand Curve

38. Demand Curve It is conventional to graph the market quantity demanded (Q i D ) as a function of its own price (P i ) The demand curve illustrates the relationship between Q i D and P i 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

39. 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

40. 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

41. 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

42. Upward Shift in Demand

43. 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

44. 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

45. 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

46. 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

47. 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

48. Equilibrium Price and Quantity The equilibrium price P e is the price at which the market demand Q D is equal to market supply Q S 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

49. Equilibrium Price and Quantity At any price below P e , for example P 1 , there is excess demand (shortage) Q D >Q S This creates the pressure for price to increase Sometimes the adjustment process is very fast, but most of the time it is slow

50. Equilibrium Price and Quantity 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

51. 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.

52. 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

53. 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

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

55. Cost in Education

56. 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

57. 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

58. 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

59. Why consider costs in Education The following reasons justify cost analysis in education 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 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?

60. 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 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

61. 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

62. Factors Influencing the cost of education 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

63. Factors Influencing the Cost of Education 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 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

64. Factors Influencing Cost of Education 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

65. Factors Influencing Cost of Education 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

66. 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

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

68. Benefits of Education Education promotes good values such as social cohesion, peace, stability and democratic values 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 When more people are educated, fewer people experience alienation and general distrust of others and the government Education improves individual decision making abilities and make the educated stay out of trouble, thus live better, healthier and longer

69. Benefits of Education 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