One of the most commonly mentioned phrases in economics is the scale of preference. By nature, human beings have insatiable wants and have to arrange them in order of preference. The concept helps entrepreneurs and businesspeople to prioritise their clients' needs.
Every individual makes choices that result in the optimal level of benefit or utility for them. People need to be rational when making choices and decisions. The scale of preference in economics helps people to take care of their most pressing wants first.
Understanding the Scale of Preference in Economics
Every human being has unique preferences based on their financial muscle, education level, and social status, among other factors. Generally, basic needs get prioritised over luxuries. A list of one's needs and wants in order of priority brings about the concept of scale of preference.
Defining the Scale of Preference
The concept of the scale of preference in economics means the importance an individual places on particular needs and wants. Sane human beings normally prioritise basic needs over secondary or luxury ones. This prioritisation helps individuals allocate their scarce resources effectively.
For example, consider a consumer with ₦2 million who wants a brand-new car and a home. The consumer must decide which of the two is more important. The average Nigerian consumer will use a large chunk of the money to build a home because shelter is a basic need. The balance, if any, is not enough to purchase a car. Therefore, they will forego the car.
Relation Between Economics and the Scale of Preference
The scale of preference is a vital tool in economics because it helps economists and other key stakeholders determine the real demand for goods and services. The concept creates a bond between consumers and suppliers for mutual satisfaction. It also benefits sellers and buyers to prioritise what to sell and consume.
It serves as a reminder that resources for scarce and basic needs should be met before luxuries. This balance is crucial for the sustainability of markets and the satisfaction of consumer needs.
Importance of the Scale of Preference
The importance of the scale of preference in economics is observed by consumers and sellers alike. Understanding this concept can lead to better financial decisions and improved resource management.
Benefits to Consumers
Consumers who have a good understanding of the scale of preference can enjoy several benefits. It helps them stay within their financial abilities and limitations, ensuring they do not overspend.
- It teaches individuals to prioritise what is essential, thus improving their satisfaction levels.
- It promotes better resource utilisation because everyone knows the sellers are doing their best to produce enough for the market using limited resources.
Benefits to Sellers
The scale of preference also offers significant advantages to sellers. It helps businesspeople to use available resources efficiently, leading to increased profitability.
- It enables sellers to produce enough items for customers, meaning no excess will go to waste or deficit that will not meet demand.
- It helps sellers maximise profits by producing enough items to meet demand with minimal losses.
Creating a Scale of Preference Table
A scale of preference table is a written list of things you need and want in order of priority. Some people create mental lists; however, a drawn table gives a clearer picture of what to spend on first.
For instance, consider Nkechi, a fresh graduate who has just landed her first job and moved into a new rented apartment. She has ₦720k and needs to create a budget table to manage her expenses effectively.
| Order of Priority | Task | Budget |
|---|---|---|
| 1 | Rent | ₦282,000 |
| 2 | Food | ₦150,000 |
| 3 | Curtains | ₦85,000 |
| 4 | Television Set | ₦130,000 |
| 5 | Going Out with Friends | ₦75,000 |
According to the table above, going out with friends is the last item on her priority list. Nkechi cannot go partying before she meets her rent.
Understanding Opportunity Cost
Opportunity cost is a concept closely related to the scale of preference. In economics, it refers to the value an individual stands to benefit from choosing one decision over another. This concept is crucial for effective decision-making.
To properly evaluate opportunity cost, the costs and benefits of every option available must be considered and weighed against all others. While opportunity cost allows individuals to pursue what they love, the scale of preference ensures that essential needs are met before secondary ones.
Defining the Scale of Preference
The scale of preference refers to a list of unsatisfied wants arranged in order of their relative importance, aiding in decision-making. Understanding this list helps individuals and businesses make informed choices that align with their goals.
Distinguishing Scarcity and the Scale of Preference
Simplistically, scarcity refers to the fundamental economic problems individuals face. In contrast, the scale of preference focuses on arranging unsatisfied wants in order of importance. Recognizing this difference aids in better economic decision-making.
Contrasting the Scale of Preference and Opportunity Cost
The scale of preference is essentially a list of wants arranged by importance, while opportunity cost reflects the value of the alternative foregone. Understanding both concepts is vital for effective decision-making in economics.
By prioritising essential needs and recognizing opportunity costs, individuals and businesses can achieve more sustainable economic outcomes.
Source: Legit.ng
