Economics and Financing of Education

Assignment

Submitted By:

Qulb e Abbas

Submitted To:

Dr. Mohammad Iqbal

Assistant Professor

DIVISION OF EDUCATION

UNIVERSITY OF EDUCATION

2018

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Unit 1
Introduction to Economics

1.1 Definition of Economics and its major modes - Macro and Micro Economics
Definition of Economics:
Economics is a science which deals with wealth creation through production of
goods and services, their distributions as well as consumption.
The process plays a huge task in the society because it influences the majority of our
decisions in our day-to-day activities. However, defining economics has pose difficulties
because there is no single acceptable definition. Therefore different economist has given
economics different types of definitions.
Famous among these economists were: Adam Smith, David Ricardo, Thomas Malthus,
J.S. Mill, John Stuart Mill., Karl Marx, Alfred Marshall, J. B. Say, James Henderson,
John Keynes, Irving Fisher, Lionel Robbins and host of others. Each of these famous
economists either gave a definition which others think it is either too narrow or too broad
to describe economics.
Robbins defined economics
“As a science which studies human behavior as a relationship between given
ends and scarce means which have alternative uses”.
This definition touched on major aspect of economics such as human behavior
(rationality), human needs and scarce resources, choices as a result of scarce resources
and alternative uses of resources.
Economics as a subject matter of social science has been treated as a science of
– (a) Wealth, (b) Welfare, (c) Scarcity and Choice (d) Growth and Development and (e)
Sustainable Development.
Macro Economics and Micro Economics
Micro economics deals with the economic decision making by individuals and
institutions.
Macro Economics deals with economic aggregates at the level of the whole economy.
Macro Economics Micro Economics
1. It is the study of economy as a whole 1. It is the study of individual
and its aggregates. economic units of an economy
It deals with aggregates like national 2. It deals with individual income,
income, general price level and national individual prices and individual output,
output, etc. etc.
3. Its central problem is determination of 3. Its Central problem is price
level of income and employment. determination and allocation of resources.
4. Its main tools are aggregate demand and 4. Its main tools are demand and supply of
aggregate supply of economy as a whole. a particular commodity/factor.

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 5. It helps to solve the central problem of 5. It helps to solve the central problem of
full employment of resources in the what, how and for whom to produce in the
economy. economy
6. It is concerned with the determination 6. It discusses how equilibrium of a
of equilibrium level of income and consumer, a producer or an industry is
employment of the economy. attained.
7. Income is the major determinant of 7. Price is the main determinant of
macroeconomic problems. microeconomic problems.
1.2 Need and Importance of studying Economics
Economics assists individuals in the society to understand the decisions of households,
businesses and governments based on beliefs, human behavior, structure, needs and constraints
as a result of scarcity.
Consequently, economics is a study of man and how he thinks, lives, and moves in the
ordinary course of business of life.
It deals with the ever dynamic and delicate forces of human nature.
Economics as a social science gives larger opportunities for precise methods than any
other branch.
1.3 Classical, Neo-Classical and Modern school of thoughts in Economics
Classical thought in Neo-classical thought in Modern thought in
Economics Economics Economics
Definition of Economics Professor Alfred Marshall Professor L. Robins has
Given by Adam Smith: emphasizes human welfare defined economics in such a
“Economics is a science more than resources. He way that has been much
that explores the nature and says, “Economics discusses more acceptable than the
reason of the wealth of the general activities of definitions given by others.
nations.” Economics grows human life.” The basic In his opinion, “Economics
centring wealth or point of discussion about is a science that analyses
resources. So to acquire economics is the income of human behavior related to
resources is the main human beings and their the combination of
purpose of people’s expenditure of that money unlimited wants and
economic activities. The for the purpose of satisfying alternatively usable scarce
weaknesses of Smith’s their wants. That is, the resources.” The
definition lie in: 1) In this main purpose of economics characteristics of this
definition there is no is to accomplish human definition are:
mention of how economics welfare. Marshall has only 1) Htunan wants are
would satisfy people’s discussed the unlimited and the nature
unlimited wants by means accomplishment of human and volume of the wants are
of their limited resources. 2) welfare in real life. Whereas different. 2) The resource
Although national resources at present, the problem of and time to fulfill the wants
have been given more scarcity is the main problem are very limited. 3) One

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emphasis in this definition,
persons and their activities
have been ignored. 3)
Acquiring resources has
been emphasized whereas
how these resources would
be acquired has not been
mentioned. 4) In this
definition, resources stand
for goods, but there is no
mention of services.
of economics, and this basic
issue has not been taken
into consideration.
very important part of the
discussion of economics is
how to adjust unlimited
wants by means of limited
resources. 4) As the supply
of the resources is limited,
we have to try to satisfy our
varied wants with the same
resources. 5) Wants are
limited as per their priority.
For these reasons, this
definition is considered to
be a more acceptable one.

Unit 2
Economics of Education
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.
Economics as a social science subject concerns itself with making choices and finding
alternatives. It studies how society decides what, how and for whom to produce goods and
services. Robbins defined Economics as a social science subject that studies human behaviour as
a relationship between ends and scarce means which have alternative uses.
2.1 Meaning and definition
“Economics of education studies human behaviour (in terms of human decisions),
action(s) and reaction(s)) about schooling (Babalola, 2003)”.
“Education Economics or the Economics of Education is the study of economic issues
relating to education, including the demand for education and the financing and provision of
education”.
2.2 Need, Nature and Scope
Economics of education is one of the branches of ordinary economics, though, it is the
study of how educational managers make official or approved choices from scarce available
resources which is meant for the realisation of the best possible educational outcomes.
Economics of Education employs the use of some elementary concepts commonly used
in labour economics, public sector economics, welfare economics, growth theory and
development economics.
World known classical economists like Adam Smith, Alfred Marshall, John Stuart Mill
had discussed education and development extensively, advocating for public investment in
education. So, by the 1950s, economists gave attention to issues such as the relationship between

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education and economic growth; relationship between education and income distribution and
also the financing of education.
Economists analyse the production of education in this world where resources such as the
capital invested in buildings or technology and the labour of the teacher workforce are
necessarily scarce.
This scarcity of resources means that policymakers must decide:
 How much to spend on each stage of education (i.e. what to produce);
 How to provide educational services in a way that maximises its benefits to society (i.e.
how to produce education); and
 Who should have access to each stage of education (i.e. for whom is education provided).
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.
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.
The study of economics of education includes private and social rates of returns to
education, human capital and signaling theories of education, non-pecuniary benefits of
education, education and economic development, contribution of education to the economy,
measuring educational expenditure, manpower planning, educational planning and human
resource development, educational cost, cost analysis, educational production, educational
effectiveness and efficiency, costs-efficiency and cost-effectiveness, cost-benefit analysis and
economics of teacher supply, educational and equity.
Scope of Economics of Education:
1. Demand and supply of education;
2. Educational demography;
3. Educational finance: their sources and distribution;
4. Taxation for Education;
5. Costing;
6. Cost-Benefit of investments in education;
7. Cost-qualify relation;
8. Cost-quality relation;
9. Wastage in education;
10. Productivity in education;
11. Educational manpower development;
12. Migration of school leavers and labour market;

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 13. National economic growth and development;
14. Rural and urban economics and the consequences of schooling on the economy.
2.3 The Economic Value of Education:
You must be aware of the benefits of education. The public and private sector offered
employment. You live in a decent home and can acquire for yourself some of the good things of
life. Let us at this juncture begin to think about the wider economic benefits of education to the
individual and society. The economic benefits of investing in education are reflected by the
increase in income of educated people. This increase in income is due to improvement in the
skills of the educated which of course increase their productivity at work. Weibrod stated that
“education widens employment possibility to technological change and thereby the ability to
remain employed”. The direct benefit of education to society is the higher productivity of
educated workers and the additional contributions to national income over their entire working
lives. Nwadiani stated that economic benefits lend themselves to easy measurement. According
to him, what is usually done is to use the earnings of workers. Actually, the use of earnings to
measure the direct benefits of education is based on the assumption that the productivity of
workers is reflected in their earnings/incomes. There is also an extended assumption as noted by
Nwadiani that additional earnings, measure in a proxy manner higher output. One needs to point
that earnings are determined not only by educational attainment. The experiences of many people
have shown that there are other important variables that also determine earnings. These include
age, experience, on-the-job training, natural ability, attitudes, motivation, social class, sex, type
and place of work, socio-economic background of workers and family connection.
The easiest way to measure the direct benefits of education according to Nwadiani is to construct
an age-earnings profile. This should be done for educated and uneducated workers of the same
age group. Age-earnings profile is important because it shows the trend in workers earnings
throughout their working life-span.
If one wants to collect data on the earnings of people from the time they enter the labour
force to when they entire, two approaches are usually adopted.
These are the longitudinal and cross-section methods.
The longitudinal method is the one in which data are collected right from the time a person
starts work till when he/she retires. For example, the income of a worker who joins the work-
force at the age of 32 years post graduation from a university till when he retires at the age of 65
are collected. That is, data on his income would be collected for a period of 33 years. The
longitudinal approach has been described as very tedious because it takes a long time to study the
changes income. Researches may not have all the time to embark on such a study. Also, the
researcher may have died before the end of data collection. So, the longitudinal approach has its
own problems.
The cross sectional approach appears to be very favoured. Nwadiani points out that in this
approach, data on earnings are collected from a sample of workers of different age groups. The
collected data, according to him, are used to construct an age-earning profile with the aid of the
calculated age earning streams by plotting a graph taking into consideration their educational

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levels. The value of this cross section data is that the attendant problem of dynamics in the value
of money is avoided.
NON-ECONOMIC BENEFITS OF INVESTMENT IN EDUCATION.
Investment in education also has some non-economic benefits. Actually, they are benefits
that individuals, families, neighbours, communities and society derive from in education. For the
individual; the non-economic internal and external. The individual gets internal psychic
satisfaction for receiving a particular type or level of education. The individual gets widened
employment possibilities, decreased unemployment, improved fringe benefits and working
conditions, improved health and longer life, improved use of leisure time, efficient consumer
behaviour and improved ability to manage personal assets.
Families also benefit from education. For instance, there are improved child care services which
schools provide while mothers are at work. There are improvement of the health of
wives/mothers and their children. There is effective control of family size with planned fertility
behaviour. There is also improvement children are learning as a result of supervision at home by
parents. There is also good neighbourliness to other families and strangers.
Neighbours and communities also benefit from the education of an individual or individuals
children of neighbours acquire information from the educated.
They benefit from counseling services. The educated teach and spread new farming techniques to
their communities. They participate actively in community development efforts. Some of the
educated people who find themselves in good positions use their education to better their
communities.
The non-economic benefits which society derive from education include very high citizen
participation in democratic political process, social cohesion, reduction in crime rate as a result
of the social norms and values inculcated in the educated, appreciation of citizens of the assets
and liabilities of society.
2.4 Brief overview of Investment Mechanism:
All types of education do not fall into the category of consumption. There are certain levels
and types of education that provide the individual with skills and knowledge which enables him
to improve his capacity to produce more goods and services.
For example, knowledge of agricultural science and skills in cultivation would increase the
farmer’s productivity. What we have in mind her is investment.
Investment is what a rational individual does, that is putting money in a business with the aim of
making profits.
In education, investment, according to Eneasator refers to the act of putting money or resources
into education with the aim of making profits or returns. Investment is therefore characterized by
economic motives. This type of education contrasts with the consumption type of education,
where non-economic objectives predominate.
An individual who sees education as an investment embarks on it with the aim of enhancing his
economic status through increased salary or better job prospects. Similarly, a government that
sees education as an investment, commits its resources into it with the aim of improving its

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national economy through educated labour force. In effect, the plan to invest in education by
many governments is to develop human skills, knowledge and expertise so as to increase the rate
of economic development.
In Pakistan, the realization that education is an investment makes the government to take many
bold steps in improving its manpower stock through education. Government investment in both
secondary and tertiary education as a means of improving the national economy.
• It is an investment to an individual because his earning capacity and income are enhance;
• It is an investment from the national point of view, because the increase of productivity and the
supply of qualified manpower contribute to national development;
• Type of education categorized as investment, usually serve as consumption education, too.
Thus, in addition to the economic benefits, the individual enjoys the non-economic benefits of
education, which make it consumption good.
2.5 Brief overview of various concepts and assumptions in Economics of Education:
2.5.1 Economics of Education and Human Capital Theory:
The term, human capital has come to be generally accepted by economists as a
component of the labour force due to the influence of education and training.
Adams Smith (1776) and Alfred Marshall (1890) they said that ‘a man educated at the
expense of much labour and time may be compared to one of those expensive machines and
the work he learns to perform should replace to him the whole expense of his education’.
The latter referred to industrial training as ‘a national investment’.
Much later authors such as Mincer (1958), Schultz (1961) and Backer (1975) gave ‘meat’
to this theory when they affirmed that time and money spent on education builds human capital
hence one should be able to estimate the rate of return (RoR) on such investment, in a way
similar to investment in physical capital.
In short, the a person’s education is an investment (involves costs, in terms of direct
spending on education and the opportunity costs of student time) in her/his human capital (akin
to investment by a firm in physical capital), which makes the individual more productive and
accrue him/her a future stream of benefits (superior productivity, higher wages and other non-
monetary benefits to the individual and the society).
2.5.2 Efficiency, Internal, External, and Financial
Financial efficiency is defined as how well the money invested in each alternative
produce revenues to the agency.
Economic Efficiency is defined as how well the money invested in each alternative
produce benefits to society.
Efficiency can be seen from two perspectives: Internal and External Efficiency.
Internal Efficiency of education is concerned with the provision of more education to produce a
given output by using less input of resources. Internal efficiency of an education system is
concerned with the relationship between the inputs and outputs of an education system.
External Efficiency refers to the attainment of social goals or objectives. It measures, as
mentioned above, not the 'immediate output but the ultimate benefits ' that is gained by passing

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through the system. External efficiency of an educational system is realized through the
relevance of education to socio –economic conditions of a country. The ability of graduates to
enter the labor market following the completion of education can be seen as an indicator of
educational efficiency.
2.5.3 Equity
The situation in an economy in which the resources or goods among the people is
considered fair. Same concept can be taken for Education Equity.
2.5.4 The Macro and Micro Economic Analysis
Microeconomic Analysis is the study of how the actions of individual people and business firms
affect the economy. Individuals, in terms of how they make decisions on consumption depending
on the money they earn and the price of the products they consume, are at the heart of
microeconomic analysis. In addition, the way that individual firms set production levels and then
set prices for the goods that they produce are also analyzed by those interested in
microeconomics.
Macroeconomic Analysis focuses instead on the economy of an entire nation as a whole.
Macroeconomic analysis broadly focuses on three things: national output (measured by gross
domestic product (GDP)), unemployment and inflation.
2.5.5 Education: A black box:
A complex system or device whose internal workings are hidden or not readily understood.
2.5.6 Opportunity Cost:
An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain
action. Put another way, the benefits you could have received by taking an alternative action.
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