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Group One

1. What is economics of Education?

Why Economics of Education?
Is it important to for developing countries like Ethiopia?
2. Describe and Explain the theoretical and historical development of
economics of education
3. Describe and Explain the scope of economics of education by relating to
the context of Ethiopia
4. To what extent economics of education help to enhance policies,
planning, and strategies?
Relate the context of Ethiopia.
Try to address all the major problems that are indicated on the current
education and training policy of the nation (TGE, 1994)

- 1. Before treating the definition of economics of education, it is better to give

some insights about economics. Many scholars define the term economics in
different ways. For instance, Thomas (1989, p.1) defines economics is the
study of people’s behavior and how it affects resource allocation. Others like
(Albrecht 1986, p.5) defined as the social science which studies the problem
of using scarce resource to satisfy society’s unlimited wants. Economics by
(Hol, 2009) also defined as the study of choice under the study of scarcity.
And lastly (Yang, 2006), described as economics is a discipline that studies
the allocation of scarce resources between alternative uses to meet
individual needs. Generally in all definitions of economics the concept of
scarcity and choice are central to the discipline.

- It concerned with the general question of resource allocation and the

determination of prices and level of production in the economy (Kaufman &
Hotchkiss, 2006:p.1).
- The study of how people choose among alternative of their scarce resources.
- Is the study of how individuals and societies choose to utilize scarce
resources to satisfy virtually unlimited wants
- of economics and defined as (Yang 2006, p. 6).

Education: the process of training and developing knowledge, skill, mind and
character etc especially by formal education (Websters, 1992, p. 461).

1.2. What is Economics of Education?

The economics of education is the study of how men and society choose with or
without the use of money to employee scarce productive resources to produce
various types of training the development of knowledge, skill, mind, character etc
(Cohn, 1979: p.2).
1.3. Why Economics of Education
In order to train and develop the knowledge, skill mind and character of individual
and society the importance of resources is significant. Resources are scarce.
Therefore to avoid the competition of getting these scarce resources the concept of
economics is vital. Thus economics of education is indispensable to study…

1.4. Is It Important in Ethiopia?

Yes, definitely. Because since Ethiopia is a poor country to escape from vicious
circle of poverty it is mandatory to educate its citizen with available resources to
produce a desired service/outcome
It has fundamental importance for the well-being of society.
4. PPF- represents the point at which an economy is most efficiently producing its
goods and services and therefore allocating its resources best way possible.

Opportunity cost is the value of what is forgone in order to have something else.
PPF- describes the various combination of final good and services that could be
produced in a given time period with available resources and technology (Schiller,
1994: p. 11).
PPC- illustrates essential principles
1. scarce resources
2. opportunity costs
1. Scarce resource- there is a limit to the amount we can produce in a given
time period with available resources and technology.
2. Opportunity cost: we obtain additional quantities of any desired good only by
reducing the potential production of another good.
5. Yes, we agreed
Education is both an investment and consumption. Consumption while schooling is
patly the consumption good for many people (i.e., individuals pursue an education
for the satisfaction and pleasure of the experience, it is also treated as most
individual as a clear investment in their feature ( Kaufman & Hotchkiss, 2006, p.

It can be considered as private consumption because people value, in itself and

spend their money on it.
Public consumption: to the extent that the same decided to spend a portion of its
income on education rather than on any other programmed with a view to driving
certain immediately visible benefits.

Investment – since people invest in themselves or in their children or the state do it

for their subjects in planned way to drive benefits in the future ( ).

A good investment is to calculate the internal rate of return and compare it with the
market rate of interest. If the internal rate of return is greater than or equal to the
market rate of interest, the investment is profitable (Kaufman & Hotchkiss, 2006; p.

There are two alternative decision rules by which to determine weather or not
education is a good investment. An objection sometimes made is that people do not
really make decision this way. Two arguments, can be marshalized against this
objection. The first is that prospective college students do seem to be quite
cognizant of monitory benefits and costs of attending college.

The second way to judge the validity of human capital theory is to compare the
prediction of theory with actual behavior (Kaufman & Hotchkiss, 1006 p. 335).
6. Education and Productivity
Education raises the productivity of workers, the earning of educated reflect the
value of the product.
The economic case for educational investment hinges on the assumption that
education contribute to increased workers productivity. Earning differences as a
proxy for such productivity increases and have shown that more education does,
indeed, appear to be directly related to such earning differences. Thus entry
focuses directly on the education productivity relationship. The interpretation of
schooling is contribute to increased productivity assumed that the person with
additional education is in a position to make better decision. Productivity increases
due to education would be greater when those who get education enter occupations
where they can make decisions (Carnoy,1995)

Education and trainability

Education provides opportunity for individual and societies for training of their skills
and their mind.
Education is a filter,but even it is a filter,success in school may confer a sennce of
probable success on the job.peoplewho are successful in school are those who have
shown that they can learn new things and carry them through (Carnoy,1995).

Education and segmentation

Education creates earning differentials as the result segmentation of population
may creates (K/Marks).
The labor segmentation refers to a differentiation of economic opportunities and
rewards among objectively comparable groups of workers. It suggest the process of
division and isolation of different social groups.
The types of education offered to students from different class background and the
labor sector in which they are expected to be ultimately employed. youths from low
homes are more likely to be channeled in to school that stress attitude and
behavioral traits appropriate to secondary sector and quit dissimilar from those
emphasized to upper income students in their school. Premarket segmentation in
education there by circumscribes their post school opportunities and reproduces
and justify the prevailing economic hierarchy (Carnoy,1995).

Education and competition

7. Yes, earning differential is as part of human capital theory of the age earning
profile can be used to drive the difference between the earnings of the higher
education group and the earnings of the lower education group (Kaufman &
Hotchikis, 2006 p. 37).

People with more education will be expected to earn more money than people who
have less education (Cohn, 1979: p.40).

The assumption that, existing earnings differential in favor of educated people

reflect their superior productivity, is not based on sound empirical evidence (DHESI,
1979. p. 144).

How opportunity cost increases as we move along with PPC. It reflects the difficulty
of moving resources from one production to another.

- Maximum output of a good from resources used in production.
- Means getting the most from what you have got i.e., using factors of
production in most productive way.
- As we move from point to point along the PPC we are seeing the most output
we can get from various labor (resource allocations). P. 13 Ibid.

8. Economics of Scale
- Reduction in minimum average costs that sum about through increases in the
size (scale) of plant and equipment (Schiller) 1994: 470
- In the long run, increase in input may result in proportionality greater
increases in output (Alburt, 1986, p. 410).
- A firm that experiences economics of scale notices that in the long run as the
quantity of output increases, the firm’s average cost (cost per unit of output)
falls. The long run average cost of production is declining when economics of
scale exist. Diseconomies of scale arise when, in the long run, the firm
realizes that the average cost per unit is rising as output expands.
- When we come to an education for instance, schools of a large size can
operate at lower per pupil costs other thing being equal (Cohn, 1979: p. 202).
Examples: a. textbook production
b. chairs production
c. reasonable increment of class size
(20è 25, 60 è 70)

9. Educational expenditure of educational cost

Educational cost refers to the total opportunity cost of education i.e., all resources
that are used by the educational process which is used for either for present
consumption or some other form of investment (http __________________).
Educational expenditure refers to a simple calculation of money expend on

Difference between Educational Expenditure and Educational Cost

Educational cost Educational expenditure

- broad concept, i.e., - specific concept

quantitative + qualitative - money expend on education
- money + OC (opportunity cost) - can get by referring accounting
- cannot easily identified in journals
accounting journals information on expenditure on
- can be private + social education is more easily accessible
and available from the budget or
- the amount of money spent to
accounts the central or regional
acquire or impart education governments (Alpha)

10. Major Types of Educational Costs (behavior)

The major types of educational costs are
1. Total cost (TC)
2. fixed Cost (FC)
3. Variable cost (VC)
4. Average Cost (AC)
5. Marginal Cost (MC)
6. Private Cost (PC)
7. Social Cost (SC)
10.1. Total cost
- The market value of all resources used to produce goods/services
- The sum of all costs inputs used to produce the total output in
education system (Schiller, 1994; p..)
10.2. Fixed cost
Cost of production that does not change when the rate of output is altered.
Ex. The cost of basic plant and equipment in education.
Are those costs that do not vary or do not increase or decrease as the firm changes
its output level (Beardshaw, 1984 p. 23).

10.3. Variable Cost

- Costs of production that changes when the rate of output is altered.
Ex. Labor and material cost (Schiller. P. 459)
Are costs of produces that changes directly with the output level of the firm. That is
the firm rises its output level the VC also rise i.e., VC are dependent on the output
level of the firm (Beardshaw), 1984: p. 220.

10.4. Average Cost (AC)

That cost divided by the quantity produced in a given time period (Schiller)
Unit cost obtained by dividing the total cost of a given level of activity or production
by the total number of unit of output. (Beardshaw, 1984: p.223).

10.5. Marginal Cost

- the increase in the total cost associated with a one unit increased in production
(Schiller, 1994: p. 457).
Additional cost incurred to get one more unit of the output. (it also defined as the
cost of producing one more or less unit of commodity (Beardshaw, 1984: p. 226).

Unit cost
- The type of cost that incurred per individual or per item or per school
and the like (Alpha p. 134).

11. Essence of Opportunity Cost

Definition: the most desired goods or services that are forgone in order to obtain
something else.
- the opportunity cost of an activity is the most desired goods and
services forgone in order to make resource available for that activity.
- Opportunity cost are the flip sides of scarcity. They are as relevant to
individual (micro) decision making as to social (macro) decision about
resource use, indeed because our wants desires generally exceed our
resources, everything we do involves an opportunity cost (Schiller,
1994: p.8-9).

Essences of opportunity cost

1. The increase in opportunity cost reflects the difficulty of moving resources
from one industry to another.
2. the law of increasing opportunity cost is not based solely on the limited
versatility of individual workers
3. Increasing opportunity cost are not a sign of inefficiency.

Opportunity Cost in Education

We can treat this concept into two basic categories.
1. The wealth of the nation – the share of educational budget at national level
depends on the share of other sectors that give up due to the allocation of
budget to educational.
The allotted budget of educational implies allocating of budget at the expense of
2. within the education system
due to priority for instance due attention given to primary education implies
taking the cost of other educational level like secondary and higher education.
3. within society
the society sending their children to school implies giving up their benefit getting
from their child labor ex. Fetching water, wood, plough farms, raring child,
looking after cattle’s.

12. Education may create equality or inequality

Equality: the generalized increase in access to education has reduced the
disparities not only between countries but also within countries (Checchi, 2005: p.5)
Differences in schooling explain differences in income per capital.

Inequality: the main explanatory factor of income inequality is family background or

called social class. Education is viewed as a vehicle by which the wealth of the
upper classes is transmitted from generation to generation (Cohn, 1979: p. 31-32).

13. Education and labor market have dual relationship

Human capital in the form of education has economic value. Economists infer the
return to human capital due to education from data on people’s wages. Higher
levels of education earn higher wages evidence that he is valued by the labor

The labor market at the different level of schooling may value individual
characteristics differently. The skills that are useful in jobs typically filled with
colleagues may differ greatly from skills that are rewarded in jobs that are typically
filled with high school colleagues. Therefore skill prices may vary across educational
categories (Uusitalo, 1999 p. 34).

The most important feature of LM that distinguishes is from other markets is that
the item being exchanged is embodied in human being.

The ownership and possession of a commodity such as wheat is completely

transferable between buyer and seller and, thus, neither party has any interest in
the personal characteristics of others (for instance, age, gender, color or
personality); the only interest of each part is to secure the most advantageous price
possible. Likewise, the wheat, since it is an inert commodity, does not have any
preference as to where and to whom it is sold.

The same conditions are not true in the labor market. Labor as a service is
inseparable from the person providing it and, thus the worker supplying labor and
the firm buying it must have direct, personal relations with each other. This, and the
fact that human beings have definite preferences with respect to the conditions
they work under, cause the exchange in the labor market to be determined not only
by the prices of labor but also by the cost of non-economic factors. That are largely
absent in commodity markets. This economic factors are partly physical in nature,
such as the risk of injury on the job or the pleasantness of the work environment,
and partly social in nature, such as the percentage of the job, the race or gender of
work mater, and the attitude of the management (Hotchkiss, 2006: p. 4-5).

14. Approaches to Educational Planning

Educational planning is primarily concerned with two problems, first the
determination of size and structure of output of the educational system appropriate
for the given socio-economic goals, second the efficiency in the production of these
output. In addition, an adequate educational plan will also take into account the
qualitative aspects of the various input-output relationships (Dhesi, 1979: p. 137).

Planning is the process of preparing a set of decisions for further action, approaches
to preparation usually differ according to circumstances, disciplines, problems and
individual country’s policies. And as planning generally consists of the three steps
mentioned above, the differences in approach can occur in any of these steps.

Accordingly the following approaches to educational objectives can be

1. Social demand approach
2. manpower requirements
3. social cost-benefit
4. Optional allocation of resources
(Panitchapakdi, 1974: p. 3-6).

Approaches Characteristics
Social demand Educational demand oriented,
emphasis on educational input
Manpower requirement Labor demand oriented, emphasis on
educational output
Social cost benefit Cost & earning oriented, emphasis on
the labor market
Optimal allocation of resource Diversified objective, combined into a
social welfare function, emphasis on
limited resources.

In context of Ethiopia
1. Social demand approach in context of Ethiopia.
Assumption “Education is an affordable right.”
It seeks the involvement of political decisions
Expansion of primary, secondary, tertiary (higher education)
This entails Ethiopia to exercise the social demand approach

2. manpower approach in context of Ethiopia

- the policy decision of 70:30 in higher education
- the expansion of TVETs
- revision of curriculum etc
3. Rate of return (cost-benefit approach) in context of Ethiopia
- Education becomes market commodity
- the privatization of education

15. Review the concept of cost-benefit analysis

- The term cost-benefit analysis implies a systematic comparison of the magnitude
of costs and benefits of a form of investment in order to assess its economic
- This approach currently practiced throughout the world, however, it has been
frequently criticized. Because this approach basically focus of the monetary value of
This branch of economics is the result of the practical, application of modern
welfare economic to public sector in decision making. Put simply, it attempt to
evaluate the social costs and benefits of proposed investment projects as a guide
when deciding up on desirability of the projects. Cost-benefit analysis differ from
ordinary investment appraisal in that the later considers only private costs and
benefits. In short it is intended to enable the decision maker to choice between
alternative projects on the basis of their potential contribution to social welfare
(Beardshaw, 1984: p. 396).

Cost benefit analysis is used to address only those types of alternatives when the
outcomes can be measured in terms of their monetary values. For example:
educational alternatives that are designed to raise productivity and income, such as
vocational education, have out comes that can be assessed in monetary terms, and
can be evaluated according to cost benefit analysis. However, most educational
alternatives are dedicated to improving achievement or some other educational out
comes that cannot be easily converted in to monetary terms. Many important
decisions in education are concerned with the costs of education. Cost analysis can
reveal the cost implications of any educational policy, assess the financial feasibility
of an educational reform, provide diagnosis of past and current resource utilization
in education (Carnoy,1995).

16. human capital…..

The concept of human capital refers to the facts that human beings invest by
themselves by means of education, training and other activity which raises their
future income by increasing their life time earnings. Traditionally economic analysis
of investment and capital tended to concentrate on physical capital namely
mationary, equipment or buildings which would generate income in the future by
creating productive capacity. Since the time the concept of human capital
dominated economics of education and has had a powerful influence on the analysis
of labor market such us the analysis of economic growth, as well as expenditure on
health care and the study of migration. (Carnoy,1995)

The theoretical framework most responsible for the wholesome adoption of

education and
development policies has come to be known as human capital theory. Based upon
the work of Schultz (1971), Sakamota and Powers (1995), Psacharopoulos and
Woodhall (1997), human capital theory rests on the assumption that formal
education is highly instrumental and even necessary to improve the production
capacity of a population. In short, the human capital theorists argue that an
educated population is a productive population.
Human capital theory emphasizes how education increases the productivity and
efficiency of workers by increasing the level of cognitive stock of economically
productive human capability which is a product of innate abilities and investment in
human beings. 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.
According to Babalola (2003), the rationality behind investment in human capital is
based on three arguments:
i. that the new generation must be given the appropriate parts of the knowledge
which has already been accumulated by previous generations;
ii. 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
iii. That people must be encouraged to develop entirely new ideas, products,
processes and methods through creative approaches.
According to Fagerlind and Saha, (1997) human capital theory provides a basic
justification for large public expenditure on education both in developing and
developed nations. The theory was consistent with the ideologies of democracy and
liberal progression found in most Western societies.
Its appeal was based upon the presumed economic return of investment in
education both at the macro and micro levels. Efforts to promote investment in
human capital were seen to result in rapid economic growth for society. For
individuals, such investment was seen to provide returns in the form of individual
economic success and achievement.
Most economists agree that it is human resources of nation, not its capital nor its
material resources, that ultimately determine the character and pace of its
economic and social development.
Psacharopoulos and Woodhall (1997) asserts that:
Human resources constitute the ultimate basis of wealth of nations. Capital and
natural resources are passive factors of production, human beings are the active
agencies who accumulate capital, exploit natural resources, build social, economic
and political organization, and carry forward national development. P.102. (Human
Capital Theory: Implications for Educational Development
Olaniyan. D.A
Department of Educational Management
University of Ibadan, Ibadan
Okemakinde. T
Department of Educational Management
University of Ibadan, Ibadan)

Human capital refers to the studies of investments, of a individuals, organizations,

or nations that accumulate stocks of productive skills and cognitive or technical
knowledge (Becker, 1964).

Human development is the expansion of people’s freedom to live long, healthy and
creative lives; to advance other goals they have reason to value; and to engage
actively in shaping development equitably and sustainable on measured planet.
People are both beneficiaries and the drivers of human development, as individuals
and in groups (UNDP,2010: P.2)
Human development is not only about health, education and income – it is also
about people’s active engagement in shaping development, equity and
sustainability, intrinsic aspects of the freedom people has to lead lives they have
reason to value.

17. Economic growth and economic development

Economic growth is an increase an output (read GDP), an expansion of production
possibility (Schitller, 2006: p. 15)
Economic growth: we mean an increase in GDP of a nation. However, we must 1 st
distinguish between 1961 and 1982 the GDP of the UK increased from $ 24.4 bi to $
232.4b an increase of 853.
We must also consider population growth.

Generally, an increase in the real GDP per capita of a nation (Beardshaw, 1984: p.

Economic growth: refers to an increase in the volume of total real output produced
in an economy. This results from an increase is the source base of a country and/or
gain in production efficiency (Getachew, 1999: p. 40).

Economic growth: is usually viewed either as a process of accomplishing of physical

capital and technological and organizational progresses or as a transformation of
countries resources especially in the size, intensity of utilization, level of
development and the occupational profile of the labor force (Dhesi, 1979: p. 11).
18 Demands is the rate at which consumers want to buy a product. Economic
theory holds that demand consists of two factors: taste and ability to buy. Taste,
which is the desire for a good, determines the willingness to buy the good at a
specific price. Ability to buy means that to buy good at specific price, an individual
must possess sufficient wealth or income. Both factors of demand depend on the
market price.
The demand theory and analysis concentrate on formulating laws on relationships
between the amount o f various goods demanded and some easily quantifiable
phenomenon such as price of those goods, the price of other competitive or
complementary goods and the income of consumers.
Most theoretical and empirical analysis of the demand for education has centered
on the investment or rate of return aspect. The consumption aspects has generally
been treated by analyzing the amount spent per head of population, or per
students, as income per head changes, this aspects to demand for education is
known as the social demand approach (Gara Latchanna and Jeilu Umer Husen,2007)
According to Blaug (1966) suggest a theory that is concerned with the aggregate
demand for education. The basic premises is people demand education as long as
the rate of return from education is greater than some market rate of interest, in
this case the average yield of equities and debentures. Rate of return is on bonds,
which measures the opportunity cost of education. The greater RB, the lesser the
demand for education and the greater RB, the lesser the demand for education,
other thing being equal.
The demand for education service tends to increase
1. with an increase of the population, in so far as
every human person has a right to be given a
chance to develop his mind and skills, and society
has the responsibility to make the best use of
available human resources.
2. It also tends to increase with economic
development, which is essentially an increase in
the real (total and per capita) income. The
elasticity of the demand for education services
grow as the social and technical environment
becomes more complex, and the time available
for free activities also grow.
3. With the influence which the supply of education
exerts on the demand for them. For instance the
development of the arts often causes an
expansion of related activities, which inturn
tends to generate more demand for education
The supply of education
There are three important determinants of the supply of education services. These
1. Time precedence, in the sense that the supply must be available many years
before it is needed.
2. Unity , in the sense that all types of schools must expand at the same time
3. Complementarily, in the sense that due proportions must be observed in the
supply of the component part of the services : teachers, accommodation,
equipment and administration

19. Educational benefits must start with two basic observations. The first is that
people with more education usually differ from those with less education. The
secondary observation is that individual changes as they obtain more schooling. For
all levels of education the discussion of educational benefits must begin by asking a
question, who will benefits? The first and the most obvious are the students (private
benefit).the second are the society (social benefits) who may or may not invest in
education of students either directly or indirectly. The third beneficiaries’
educations at each of its level institution who teach, administrate, and provide other
service. This is important because in many case decisions are made with in school
not for the benefit of students or society but for the benefits of those employed
there (Carnoy, 1995).
24. efficiency in educational production is
concerned with a comparison of the costs of
education to the output of education. Educational
production is said to be efficient when the
maximum amount of educational output is produced
for a given educational cost or alternatively the
least amount of educational cost is required to
achieve a given level of educational output.



300 -----------------------------------------

0 50 125 200 250

Production possibility curve
Graphical representation of the alternative combinations of the amounts of
two goods or services that an economy can produce by transferring resources from
one good or service to the other. This curve helps in determining what quantity of a
non-essential good or a service an economy can afford to produce without jeopardizing
the required production of an essential good or service. Also called transformation
curve. http://www.businessdictionary.com/definition/production-possibility-curve.html
( VOL-47 , 2004)