Education

Scale of Preference And Opportunity Cost Explained

Scale of preference is one of the most common economic terms. It is defined as a list of wants arranged in an order of importance i.e. needs are arranged in descending order (meaning the most demanding need is always in the first place, and the least important one is the last). People have many desires, while resources are limited.

Example of Scale of Preference

A student puts his or her most pressing needs or wants at the top of the list and then the less important needs go to the bottom of the list.

Items neededPrice ($)
Textbook
Shirt
Shoes
Trouser
Notebook
School fees
Mattress
50.00
20.00
30.00
30.00
10.00
70.00
100.00

From the above table, the student’s most important needs have been placed at the top of the table with the less important ones at the bottom. According to this person, his most important need is a textbook followed by a shirt and like that. The mattress is his least pressing want so he puts it at the bottom of the table.

Let us assume that the student had only $70.00 to spend, he would be able to purchase a textbook and a shirt only; the rest of the items that he cannot purchase will therefore be called the opportunity cost.

In summary, the amount the student has and how important the needs are will determine how he will spend his/her money. There is no way the person would purchase anything in the list above before purchasing the textbook.

Read: Importance of technology in education

Importance of Scale of Preference

  • It helps an individual, a firm, or a government to make rational use of available resources to satisfy the most important want.
  • It allows every person to organize all his or her priorities appropriately.
  • It helps to make the only right decision when it comes to the distribution of narrow resources.
  • People have a scale of preference and economist believes that people will always satisfy their wants first. So, it allows businesses much more moneymaking since vendors and producers get a perfect opportunity to understand the purchasers’ needs much better.

Opportunity Cost

Opportunity cost is the alternative want foregone as a particular item is chosen, or as a particular want is satisfied. As explained in the table above, the student alternative forgone are shoes, trousers, notebooks, School fees, and mattresses. The wants have been arranged according to their level of importance but the money with him can buy all. So, the ones he was unable to buy because of the limited resources is the opportunity cost.

Bolarinwa Olajire

A tutor with a demonstrated history of working in the education industry. Skilled in analytical skills. Strong education professional with a M. SC focused in condensed matter. You can follow me on Twitter by clicking on the icon below to ask questions.
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