The basic concept or element of Economics are: wants, scarcity, scale of preference, choice and opportunity cost. Below are the basic concepts of economics:
Table Of Contents
- Definition of wants.
- Definition of scarcity
- Scale of preference
- Choice
- Opportunity cost
WANTS
Definition: Want is one of the basic concepts of economics and may be defined as insatiable desire or need by human being to own goods and or services that give satisfaction. The basic need of man include: food, housing and clothing. Human needs are many. They include tangible goods like houses, cars, chairs, television set and radio, while The others are in form of services, e.g, tailoring, carpentry and medical. Human wants or needs are many, and are usually described as insatiable because the means of satisfying them are limited or scarce.
SCARCITY
DEFINITION: Scarcity is another basic Concepts of Economics and is defined as the limited supply of resources which are used for the satisfaction of unlimited wants. In other words, scarcity is the inability of human being to provide themselves with all the things they desire or want. This resources are scarce relative to their demand. As a student, you will need to buy school materials, e.g, exercise books Worth N100 but you have N50. It can be seen that the money you have 50 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. Since wants are numerous and insertable relative to the available resources, human beings have to choose the most important ones and leave others that are less important. There would be no economic problem if resources were not scarce, hence economics is sometimes define as the study of scarcity.
Why is scarcity a fundamental problem in economics?
Economics seeks to study the relationship between ends and means. Ends are unlimited while the means are limited. Scarcity simply means resources are Limited in relation to the ends. Economics is therefore concern with allocating limited resources among the competing and unlimited wants.
How do governments solve the problem of scarcity?
Government are faced with problem of allocating scarce resources among competing unlimited wants. In doing this, government draws a scale of preference which help them to choose or select the most important wants to be satisfied. In making choices, you forgo some other wants. The foregone wants are the opportunity cost or real cost of the selected alternative.
SCALE OF PREFERENCE
Definition: Scale of preference is another basic Concepts of Economics and is defined as a list of unsatisfied wants arranged in the order of their relative importance. In other words, it is a list showing the order in which we want to satisfy our wants arrange in order of priority. In the scale of preference, the most pressing ones come last. It is after the first in the list have been satisfied that there will be room for the satisfaction of the next. Choice therefore arises because human wants are unlimited or numerous, while the resources for satisfying them are limited or scarce. For example Mr Paul who has only 10,000 wants to buy a pair of shoes, shirt, cap, fan, stove and pressing iron.
Importance of Scale of Preference
- Ranking of needs: Scale of preference helps us to rank our needs or wants in order of their relative importance.
- Financial Prudence: Scale of preference does assist in managing our finances properly.
- Identification of highest priority: Scale of preference assist individuals to identify quickly the most important needs among others.
- Rational choice: Scale of preference assist individuals, firms and government to make rational choices in the list of wants.
- Efficient utilization of limited resources: Scale of preference also help individuals to make efficient utilization of available resources.
- Optimum allocation of resources: Scale of preference facilitate optimum allocation of resources.
- Maximisation of satisfaction: Scale of preference enables economic agents to maximize their satisfaction.
CHOICE:
Definition: Choice is another basic Concepts of Economics and can be define as a system of selecting or choosing one out of a number of alternatives.
Human wants are very 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. Since it is extremely difficult to produce everything one wants, choice has to be made by accepting or taking up the most pressing wants for satisfaction based on the available resources.
OPPORTUNITY COST
Definition: Opportunity cost is another basic Concepts of Economics and is defined as an expression of cost in terms of foregone alternatives. It is the satisfaction of one wants at the expense of another want. It refers to the wants that are left unsatisfied in order to satisfy another more pressing needs. Human wants are many, while the means of satisfying them are scarce or limited. We are, therefore, faced with a problem where we have to choose one from a whole set of human wants. To choose one means to forgo the other.
A farmer who has only N200 and wants to buy a cutlass and a hoe may discover that he cannot get both materials or items for 200. He would therefore have to choose which one to buy with the money he has. If he decide to buy a cutlass, it means he has decided to forgo the hoe. The hoe is thus what he has sacrificed in order to own a cutlass. The hoe he has sacrifice is the foregone alternative and this is what is referred to as opportunity cost or real or true cost. Opportunity cost should not be confused with money cost. Money cost refers to the total amount of money that is spent in order to acquire is set of goods and services. For example, a customer who spend 6,200 for by a pair of trousers has dispensed with cash. The 6,200 spent is the money cost.
Importance of Opportunity Cost
Opportunity cost is very important to individuals, firms and governments.
To individual
- Wise choice: opportunity cost enable individuals to make wise choice between competing wants.
- efficient use of scarce resources: it also assist individuals to make maximum use of scarce resources relative to their unlimited wants.
To The Firm
- Rational decision: It assist the firm to make rational decisions about Production process.
- Techniques of Production: It also helps manufacturing industries in deciding the techniques of production, i.e, wether to adopt capital or labour intensive method of production.
To the Government
- Preparation of budgets: Opportunity cost helps government in the preparation of budget, since it assist in efficient allocation of scarce resources to certain sector of the economy.
- Decision-making process: It helps the government in making setting decisions, e.g, the priority areas that may require immediate attention, such as medical and education.
Revision Questions
- Define the the following; wants, scarcity, scale of preference, opportunity cost.
- Explain how government solve scarcity problem.
- What are the importance of scale of preference.
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