Scale of preference in economics: Definition, importance, and other details
Understanding the scale of preference in economics is important because it affects businesses daily. Economics is primarily about the ultimate satisfaction of consumer needs. Hence, the scale of preference is a concept that helps an entrepreneur prioritize their clients' needs and eventually understand goods and services on demand.
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Economics assumes that all humans are rational when facing two essential choices. Therefore, people usually go for items and services with maximum satisfaction.
The scale of preference in economics
Some commodities, especially basic needs, will always be prioritized due to their recurrent nature. Therefore, humans make a list of items and services they would love to purchase in the order of priority. Everyone has different preferences.
What is a scale of preference in economics, with example?
If asked to define the scale of preference in economics, it refers to the importance individuals place on particular needs and wants. Hopefully, the example below will help you understand how the scale of preference determines the demand and supply of goods in the market.
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The scale of preference also helps the consumer to make prudent financial decisions. For instance, a man who has $5000 but wants a house worth $3500 and a car set worth $2000 needs an extra $500 to accomplish his goal.
Since a home is more important than a car, he will buy the house then look for the other $500 later to buy the car later. As a result, a person in business will start a real estate agency instead of a car dealership.
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How do economics and the scale of preference relate?
The scale of preference is a vital only tool in economics for determining the real demand for goods. Moreover, it benefits the seller and buyer because resources are scarce, and demand keeps growing. Hence, they will have to prioritize what to sell and consume.
The supplier will discover goods in demand for efficient production and supply while the consumer will make the right and timely decisions to fulfil the wants. Hence, the preference scale promotes the efficient distribution of goods with a limited supply.
Why is the scale of preference important?
The benefits of this concept cannot be overlooked. The primary importance of scale of preference in economics is creating a bond between consumers and suppliers for mutual satisfaction. Others include:
Benefits to the consumer
- It helps the consumer to stay within their financial limitations.
- It promotes better utilization of resources because everyone knows the sellers are doing their best to produce enough for the market using the limited resources.
- Individuals learn to prioritize what is essential, thus improving their satisfaction levels.
Benefits to the seller
- The knowledge helps the business person efficiently utilize the little available resources.
- It helps the seller to produce enough items for the customers, meaning no excess will go to waste or deficit that will not meet the demand.
- It helps the seller make optimal profits from the market since they produce enough items for the demand with minimal losses.
The scale of preference table
A scale of preference can be a written list or a mental list. However, writing it down makes it easier to remember your decisions. Here is an example of Ella's scale of preference list. She has $1000 and has carefully arranged her sitting room's wants in order of priority:
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Opportunity cost
Another key idea in economics is 'opportunity cost'. It is the value one stands to benefit from choosing one decision over the other. So, for instance, you can buy cakes and bread for your toddler but forgo the value of bread and cakes.
Here, importance is not considered, but what you love is what you get. The concept boosts efficient allocation of resources despite its setbacks. Some of its shortcomings include:
- It is confined to specificity, but some products and services cannot be put to alternative uses. For instance, you cannot forgo rent for something else. You must pay your rent or risk being thrown out of the house.
- It is affected by inertia because alternatives that cannot easily be moved create subsequent payments that exceed the transfer costs.
- It assumes the idea of perfect competition, which is more of a business myth. For instance, some car brands cannot compete with others in residential areas where people are wealthy. The rich will go for high-end brands.
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Distinguishing between the scale of preference and opportunity cost
The trick is in how both ideas work because both include making sacrifices. However, they can both be used to drive businesses to success (for the seller) and live life to the fullest (for the consumer).
The scale of preference is about dealing with critical needs first (something you cannot do without for that period), while opportunity cost is about getting what you love even if it is not an essential need.
These concepts work together because you need a house, school, and other basic needs but choose what you love. In the same case, sellers need to provide consumers with what they demand while considering what people love.
Any business person and consumer should apply the scale of preference and opportunity cost ideas to achieve their financial goals. Do not wait for financial disasters to strike your business or household due to a lack of priorities. Instead, implement these ideas and see how they work out.
READ ALSO: 25 profitable business ideas in Ghana in 2022 listed and explained
Yen.com.gh also listed 25 profitable business ideas in Ghana in 2022. Some people start businesses because the job market is yet to absorb them. However, the best time to start a business is to develop a passion for entrepreneurship.
Therefore, do not get into business with a second thought. Instead, focus on it, and you will prosper even more than you would if you were in the employment sector.
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