Economics and Finance

of Education

Qulb e Abbas
Chapter 1
 1.1 Definition of Economics:
• Robbins defined economics
• “As a science which studies human behavior as a
relationship between given ends and scarce
means which have alternative uses”.

• 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.
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 (i) Classical thought in Economics
• Economics grows centering wealth or
resources. So to acquire resources is the main
purpose of people’s economic activities.
 (ii) Neo-classical thought in
Economics
• The basic point of discussion about economics
is the income of human beings and their
expenditure of that money for the purpose of
satisfying their wants.
(iii) Modern thought in Economics
• Economics analyses human behavior related
to the combination of unlimited wants and
alternatively usable scarce resources.
Chapter 2
 2.1 Meaning and Definition
Economics of Education
• “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.
 Need
• 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.
 Scope of Economics of Education:
• Demand and supply of education;
• Educational demography;
• Educational finance: their sources and distribution;
• Taxation for Education;
• Costing;
• Cost-Benefit of investments in education;
• Cost-qualify relation;
• Cost-quality relation;
• Wastage in education;
• Productivity in education;
• Educational manpower development;
• Migration of school leavers and labour market;
• National economic growth and development;
• Rural and urban economics and the consequences of schooling on the economy.
2.3 The Economic Value of Education:
• . Weibrod stated that
“education widens employment possibility to
technological change and thereby the ability
to remain employed”.
 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.
• 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 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:
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).
Giving water (Investments) to Human
 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 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
• situation in an economy in which the
resources or goods
among the people
is considered fair.
Same concept can be
taken for
Education Equity.
 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.
Black box Model
 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.
Thank you