Basic Concepts of Economics Explained

The various basic concepts of Economics include:

Wants

Wants simply means the desire or need to own goods or services that give satisfaction. Human beings want or need many things at a particular time. The basic needs or wants of man are food, shelter and clothing. As these basic needs are satisfied, other needs will arise. This 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

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 made the study of Economics very essential in order to find alternative uses of these scarce resources. The available resources in human society can never in any time be in abundance to satisfy all human wants. Since human wants are unlimited and insatiable relative to the available resources, human beings have to choose the most pressing ones and leave others that are less important relative to scarce resources.

Scale of Preference

Scale of preference refers to a list of individual wants in order of their relative importance. The drawing of scale of preference will make it easier for choice to be made. Since human wants are unlimited and the available resources used in meeting these needs are limited and cannot satisfy all human wants, human beings have no choice than to rank these needs in order of their relative importance.

Why Scale of Preference Is Necessary & Important

1. Scale of preference helps us to rank our needs in order of their relative importance.
2. It helps or aids In individual to make rational choice.
3. It leads to efficient utilization of limited available resources.
4. The drawing of scalenof preference shows our needs at a glance and reminds us of such needs and compels us to plan for the satisfaction of such needs.
5. Scale of preference encourages us to be prudent in our spending since our needs have been hierarchicised.
6. Since human wants are numerous and the resources to satisfy them are scarce, scale of preference is therefore necessary to aid us to make choice .
7. A scale of preference enables a consumer to make a choice that will give him maximum satisfaction.
8. The scale of preference aids an individual to forget those wants he cannot satisfy as a result of his limited available resources.

Choice

Choice arises as a result of numerous human wants and the scarcity of the resources used in satisfying these wants. Choice therefore, arises as a result of scarcity. Choice in this case means the act of choosing some needs for satisfaction out of many other needs based on the available resources within the limit of the person making the choice.

Man is always faced with the problem of choice because, as soon as some needs are satisfied, other needs will arise. Since it is impossible for any human being to satisfy all his needs at a particular time, human being must choose the most pressing wants for satisfaction based on the resources within his limits. For instance, every human being will like to eat good food, own a nice house with all the necessary equipment like television and video sets, radio set, refrigerator, air conditioner, etc.

But not everybody can “afford all these luxuries at a time, as a result, the person will have to choose the most pressing needs among the above itemised needs. In this case ‘the choosing of one want in place of another will be done based on the above drawn scale of preference if the choice is to be rational.

Opportunity Cost

Opportunity cost means the satisfaction of one want at the expense of another want. It refers to the want that is left unsatisfied in order to satisfy another mere pressing need. The left unsatisfied wants are known as alternative forgone or sacrIfIced alternative. This alternative forgone or sacrificed is known in Economics as opportunity cost or real or true cost.

IMPORTANCE OF OPPORTUNITY COST TO AN INDIVIDUAL, A FIRM AND A GOVERNMENT

Opportunity cost like the other basic concepts of Economics: scarcity, scale of preference and choice is important to an individual who represents the consumer or house hold, the firm or productive unit and the government that form the three decision makers In an economy. The concept of opportunity cost emphasizes the basic problem of choice which is the main core of the subject matter of economics as a result of the limited available resources vis-a-vis unlimited human wants.

Since every economic problem involves choice and every choice involves opportunity cost, therefore, opportunity cost is very important.

Also, Opportunity cost is important because it involves allocation of scarce resources to pressing areas of needs. It also shows that every activity involves a sacrifice whether on the side of an individual, a firm or a government. To an individual who aims at maximising his utility from his limited available scarce resources will have to allocate these limited resources to those wants that are more import tant.

Opportunity cost helps the individual to make judicious use of his scarce resources. For instance, an individual farmer who has a piece of land and two different types of crops like yam and cassava will plant either one of them since he may not plant the two on the same land at the same time. if he grows cassava because of the present economic position of garri, the opportunity cost of cassava is the yam he has sacrificed or foregone to plant.

To a firm, opportunity cost is also important to it because the firm has to loose to allocate its limited available raw materials in the production of a particular product with high demand at the expense of other products with low demand in order to enable it to maximise profit.

To a government, opportunity cost helps it in the preparation of its budget. The government will therefore, decide the sector it will allocate more resources. Government may therefore, allocate more resources to education at the expense of other sectors. Opportunity cost also aids a government in policy making. Finally, all said and done, there is an element of opportunity cost in the activities of an individual, a firm and a government.