Scale of Preference And Opportunity Cost Explained

Scale of Preference And Opportunity Cost Explained  One of the most popular economic terms is "scale of preference." It is a list ...

Scale of Preference And Opportunity Cost Explained 

One of the most popular economic terms is "scale of preference." It is a list of wants in order of how important they are. This means that the most important need is always at the top of the list and the least important need is at the bottom. People have a lot of wants, but they don't have much.

Example of Scale of Preference

The student puts the most important needs or wants at the top of the list, and the ones that are less important at the bottom.

The student's most important needs are at the top of the table, and his or her less important needs are at the bottom. This guy says that the most important thing he needs is a textbook, then a shirt, and so on. Since he doesn't need a cushion right away, he puts it at the bottom of the table.

Let's say the student only had $70.00 to spend. He could only buy a textbook and a shirt. The cost of all the other things he couldn't buy is called the opportunity cost.

In short, how a student spends his or her money will depend on how much he or she has and how important the wants are. No way in the world would the person buy anything on the list above before buying the course.

Importance of Scale of Preference

1. It helps a person, a business, or a government use their resources wisely to meet their most important needs.

2. It lets each person organize their own goals in the best way.

3. It helps you make the only right choice about how to divide up limited resources.

4. People have different priorities, and economists think that people will always do what they want first. So, it makes business much more profitable because sellers and makers can better understand what customers want.

Opportunity Cost

Opportunity cost is what you give up when you choose one thing over another or when you satisfy one wants instead of another. As the table above shows, the things a student could give up instead are shoes, pants, a notebook, school fees, and a couch. The wants are in order of how important they are, but he has enough money to buy all of them. So the potential cost is the ones he couldn't buy because he didn't have enough money