The basic concept or elements of economics are: wants, scarcity, scale of preference, choice and opportunity cost.
Wants simply means the desire or wish to own goods or services that give satisfaction. Goods include things such as cars, radios, food, houses, books, etc., (that is tangible commodities), while services includes hair dressing, the services of an actor, etc(that is intangible commodities). Want s are also called ENDS.
As these basic needs are satisfied, other needs will arise. That is why we say that human wants are insatiable. This is because human wants are unlimited while resources used in satisfying them are limited.
Scarcity refers to the limited available resources used in satisfying the unlimited human wants.
These resources are scarce relative to their demand. It is as a result of scarcity of resources that needs the study of economics very essential in order to find alternative uses of these scarce resources. The available resources cannot satisfy all human wants. Since human wants are unlimited or insatiable relative to the available resources, we have choose the most pressing ones and leave others that are less important because resources are scare.
As a student you will need to buy school materials, e.g exercise books worth #100.00 but you have only #50.00. it can be seen that the money you have (#50.00), which is your resources, will not be sufficient to buy all you need. The available resources within the environment can never at any time be in abundance to satisfy all human wants.
SCALE OF PREFERENCE
Scale of preference refers to a list of unsatisfied wants arranged in order of their relative importance.
A scale of preference refers to a list of unsatisfied wants arranged in order of priority or importance. This aids decision-making. The most pressing needs are ranked first followed by the less pressing ones.
In other words, it is a list showing the order in which we want to satisfy our wants arrange in order of priority.
The drawing of scale of preference will make it easier for choice to be made. In order to achieve maximum satisfaction with limited resources at their disposal, an individual, firm and unsatisfied wants in order of priority.
Each individual is assumed to have a scale of preference. This is because economics theory assumes that people always behave rationally and would satisfy their most pressing want first.
For example, a student might rank his wants in following order according to their level of importance:
- Pair of school uniform
- Exercise books
- Wrist watch
- Scientific calculator
- An arm chair
If he is to choose between items 1 and 4, he chooses the first. Scale of preference of individuals, firms and the government differ from time to time.
A scale of preference may not necessarily be a written list. It could be a mental list. For example, Mr John a trader who has only #10000 want to buy a pair of shoes, shirt, cap, fan, stove and pressing iron as shown in table.
JOHN’S SCALE OF PREFERENCE
The table above represents Mr John’s scale of preference, he has carefully arranged all his numerous wants in order of priority.
Since Mr John has # 10, 000.00, he can only purchase a pair of shoes, shirt, cap and fan. Because his resources (# 10,000.00) is limited , he has to choose the first four item which he can afford based on his resources.
IMPORTANCE OF SCALE OF PREFERENCE
- Ranking of needs
- Financial prudence
- Identification of highest priority
- Rational choice
- Efficient utilisation of limited resources
- Optimum allocation of resources
- Maximisation of satisfaction
The importance of scale of preference can be paraphrased this way also:
- It helps individuals to rank their needs in order of importance.
- It helps us to manage our resources properly.
- It helps both individuals and government to identify the most important needs.
- It enhances optimum allocation of resources.
- It helps individuals, firms and government in the efficient utilization of resources.
- It helps economic agents to maximize their satisfaction.
- It helps individuals to make rational decision.
Choice can be defined as a system of selecting or choosing one out of a number of alternatives. Human wants are many and we cannot satisfy all of them because of our limited resources.
We therefore, decide which of the wants we can satisfy first. Choice arises as a result of numerous human wants and the scarcity of the resources used in satisfying these wants.
Opportunity cost is also known as a real cost or time cost.
The concept of opportunity cost is used in economics to express cost in terms of foregone or sacrificed alternatives. Opportunity cost means the alternative foregone or sacrifice made in order to satisfy another want. It is the satisfaction of one’s want at the expense of another want.