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Economic Theories of College Access

Economic Theories of College Access. ELPA 9408. Economics Defined. Economics is comprised of highly generalizable frameworks that are designed to analyze how incentives affect behaviors of decision makers who are in pursuit of goals. (Paulsen & Toutkoushian , 2008, p. 2)

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Economic Theories of College Access

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  1. Economic Theories of College Access ELPA 9408

  2. Economics Defined • Economics is comprised of highly generalizable frameworks that are designed to analyze how incentives affect behaviors of decision makers who are in pursuit of goals. (Paulsen & Toutkoushian, 2008, p. 2) • Economics is The study of the allocation of scarce resources in the presence of unlimited wants.

  3. Economic Approach to Examining a Decision-Making Process 3 Important Questions to Ask: • Who are the decision makers? • What goals are the decision makers trying to achieve? • What constraints do the decision makers face?

  4. Individual Choice 3 Components to an Individual Choice Model: • Consumer preferences • Constraints • Consumer choice Utility – A measure of the satisfaction from some type of economic activity. • Higher utility is better • Actual values don’t have meaning, just the comparison with regards to size

  5. Individual Choice 1. Consumer Preferences: Assumption: Consumers have rational preferences • Preferences are complete • Either the utility of A is > B, B is > A, or the consumer is indifferent between A and B • Preferences are transitive • If the utility of A > B and B > C, then A must be > C • More of one good is better than less of the same good • You can redefine a “bad” as a “good”, i.e. the lack of a “bad” is good

  6. Individual Choice 1. Consumer Preferences: Indifference curve - A curve representing all bundles of goods that provide the consumer with the same utility • The consumer is indifferent to all bundles on a particular indifference curve • Downward sloping • Bowed inward Indifference map- A set of indifference curves • Utility increases as you move towards curves above and to the right

  7. Individual Choice 1. Indifference Map:

  8. Individual Choice 2. Constraints Budget Constraint- All combinations of goods for which the total amount of money spent is equal to their income Income changes lead to parallel shifts of the budget constraint Price changes lead to rotations of the budget constraint • Around the intercept on the axis of the good whose price does not change

  9. Individual Choice 2. Budget Constraint

  10. Individual Choice 3. Consumer Choice Consumer chooses bundles of goods to maximize their utility given their limited budget Maximized bundle must satisfy: • On the budget line • more is better • It must give the consumer the most preferred bundle • Furthest indifference curve

  11. Individual Choice 3. Consumer Choice (optimal choice)

  12. Individual Choice Model Generalizations to explain differences in educational choices: • Students have different preferences • Some students are more willing to invest in education • Students have different resources • Some students may have more money, wealth, or time • Students different relative prices • Some students face a lower price of education

  13. Individual Choice • Students have different preferences

  14. Individual Choice • Students have different resources

  15. Individual Choice • Students different relative prices

  16. Individual Choice • Pell Grant - $5,000 in money that can be spent on education

  17. Discussion Questions • In the individual choice model, one of the factors that leads to differential education choices is different preferences. • Based upon the human capital framework, how can preferences for education be altered? • What other ways can preferences for education be changed that would be outside of the scope of the human capital framework?

  18. Heller (1997) • What are the most important points to take away from this article? • Identify a trend in Baum, Ma, and Payea (2010) which you believe that Heller would be most worried about negatively affecting college access for low-income youth. • Identify a trend in Baum, Ma, and Payea (2010) which you believe that Heller would argue is helping college access for low-income youth.

  19. Human Capital Theory • Human Capital: A unique set of innate abilities and acquired skills. • Question: Why do some people acquire more education than others? • Assumption: People choose the level and type of human capital that maximizes the present value of lifetime utility (happiness). • Sometimes this is abstracted to lifetime income

  20. Human Capital Theory • Important features of the human capital model: • Education leads to increased skill • Higher wages • Lower unemployment • Education is costly to the person and is generally paid up front • People value present income and utility at a higher rate than future income and utility • Discount rate

  21. Age-Earnings Profile College $ Average median income (Bachelor) ~ $55,700 Average lifetime net-income ~ $1,150,000 $30,000 HS Average median income ~ $33,800 Average lifetime net-income ~ $800,000 $20,000 Indirect Cost Time 18 22 65 Direct Cost Public 2-year undergraduate budget = $14,637 Public 4-year undergraduate budget = $20,339 Private 4-year undergraduate budget = $40,476 $20,000

  22. Model Generalizations • The longer the length of the income stream the larger the benefits that an education investment • Why people generally go to college as youth • As tuition falls, more will go to college • Why governmental policy focuses on financial aid • As earnings differential increase, more will go to college

  23. Undergraduate Budgets Source: Baum, S., & Ma, J. (2013). Trends in college pricing, 2013. Washington, DC: The College Board

  24. Trends in Pricing Source: Baum, S., & Ma, J. (2013). Trends in college pricing, 2013. Washington, DC: The College Board

  25. Sources of Financial Aid Baum, S., & Payea, K. (2013). Trends in Student Aid, 2013. New York, NY: The College Board.

  26. Annual Earnings by Education Source: Baum, S., Ma, J., & Payea, K. (2013).Education pays 2013: The benefits of higher education for individuals and society. Washington, DC: The College Board

  27. Lifetime Earnings Source: Baum, S., Ma, J., & Payea, K. (2013).Education pays 2013: The benefits of higher education for individuals and society. Washington, DC: The College Board

  28. Lifetime Earnings Ratios Source: Baum, S., Ma, J., & Payea, K. (2013).Education pays 2013: The benefits of higher education for individuals and society. Washington, DC: The College Board

  29. Activity Construct an age-earnings profile for: • A 30 year old person that is contemplating returning to schools to pursue a law degree (3 years) full time (unable to work). • A 38 year old person that is contemplating pursuing a M.Ed. Degree in student affairs part time (3 years) while continuing to work full time. • A 22 year old college graduate who is contemplating pursuing a Ph.D. in economics (5 years) full time with a graduate assistantship (no tuition, small stipend). • An 18 year old student who is contemplating attending a 2-year college (live at home, work full time) and then completing at a 4-year college (live away and not work).

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