An effort is made to: identify and determine the effect of the economic and demographic rn factors that influence the rapid growthrnof the educational system in Ethiopia. In doing this, the paperrnreviews the theoretical and empirical arguments for the rapidrninvestment on education in the world. The analytical modelrnconstructed by schultz (1985) to address the same problem isrnused. The model enables us to determine the effect of the factorsrnidentified to influence the growth of the system, in production demandrnframework as constraints and conditions affecting therncosts of, and demands for educational services.rnIn the empirical estimation per capita income per adult , relativernprice of teachers, relative size of school age population andrnproportion of urban population are identified as the majorrnfactors governing the growth of the system. It is found out thatrnthe moderately growing income per adult, the decreasing relativernprice of teachers and the constantly growing urbanizationrnsignificantly contributed to the growth of public expenditure onrneducation. The rapidly growing school-age population squeezed andrnconstrained the growth of public expenditure .rnOn the other hand, from the components rnexpenditure per school child, it is seenrnunderlying thisrnthat the rapidlyrnincreasing enrolment with decreasing expenditure per student wasrnmade possible by; the relative substitution of physical resourcesrnby human resources and the absoluternresource intensity per student .rndepreciation of physicalrnIn addition to these, the effect o f economic and demographicrnfactors on expenditure per school child by school levels and onrnthe enrolment rates of males and females are also discussed .rnFinally, the implications of these findings on the existingrneducation system of the country are also analyzed.