Economics

Scale of Preference and Opportunity Cost

len Alfred Ajibola - Wed, 23rd January, 2019 @ 03:07:00 AM

Topics in Economics

Scheme of work for Economics, SS1, First Term Scheme of work for Economics, SS1, Second Term Scheme of Work for Economics, SS1, Third Term Functions of the Wholesaler Advantages and Disadvantages of the Wholesaler Wholesale Market: Who is a Wholesaler? Characteristics of the Wholesaler Retail Market: Who is a Retailer and Examples of Retailers Market: Types of Market Market - What is a Market in Economics? Elasticity of Supply: Types of Supply Elasticity Supply Elasticity: Elasticity of Supply explained Demand Schedule - Types of Demand Schedule Demand: What is Demand? Law of Demand Concept and Types of Cost Supply, Supply Curve and Law of Supply What is a Black Market, Its advantages and disadvantages Supply Curve, Graphical representation of Supply Curve Scale of Preference and Opportunity Cost


Academic Questions in Economics

Please check out our Test Your Knowledge page to see all Questions and Answers

The following statements are true concerning explicit opportunity cost except _____.

  • A. They are recorded in the accounts book

  • B. It is a type of cost

  • C. They may also be referred to as 'out of pocket' cost

  • D. They are utilized as factors of production

  • E. Money spent on wages, salaries and raw materials are examples of explicit opportunity cost

  • F. Explicit opportunity cost are always utilized for investment

Needs / Wants

Cost (Naira)

 Phone

 50,000

 Console Game

 120,000

 Laptop

 80,000

 Ipad

 100,000

 Smart watch

 85,000

 Ipod

 40,000

 

Which of the following statement is incorrect concerning the table?

  • A. Ipod is the least important need of the individual

  • B. If the individual has 200,000 Naira at hand, then the laptop, iPad, smart watch and iPod will all be considered as opportunity cost

  • C. If the individual has 480,000 Naira, he or she will purchase all the items in the table

  • D. Console game is the most important need of the individual

  • E. The table shows a scale of preference

  • F. The individual needs an ipod

Which of the following statement is false concerning scale of preference?

  • A. It is brought about by the insatiability of human wants

  • B. It is brought about by the limitation of cash at hand

  • C. It is a list of a person's needs or wants written in an order of importance

  • D. Scale of preference cost is the value of the best alternative a person could have achieved but did not achieve it after the best choice had been made

  • E. Opportunity cost is a term associated with scale of preference

  • F. None of the above

Eonomies of scale in economics means _____.

  • A. The prices of goods will remain the same because producers manufacture similar goods

  • B. The prices of goods will fall because producers manufacture more goods

  • C. The prices of goods will rise because producers manufacture less goods

  • D. The prices of goods will rise and producers will manufacture more goods

  • E. The prices of goods will fall and producers will manufacture less goods

  • F. Equilibrium is achieved in the economy

Budget deficit refers to the amount by which _____.

  1. total expenditure exceeds revenue
  2. capital expenditure exceeds revenue
  3. recurrent expenditure exceeds revenue
  4. recurrent expenditure exceeds capital expenditure
  5. capital expenditure exceeds recurrent expenditure
  6. total expenditure exceeds capital and recurrent expenditure

What are infant industries in Economics?

  1. They are industries that are allowed enough time to mature for recognition
  2. They are industries that produce baby foods in addition to mother care products
  3. They are industries that are too young to compete in a thriving society
  4. They are industries that are constantly introducing new products
  5. They are industries that are under a parent company
  6. They are industries located in rural areas

Which of the theory did Malthus became popular for?

  • A. Population may outgrow the means of subsistence
  • B. The people will eventually decide not to have children
  • C. The death rate may become so high that people may not be able to produce
  • D. Migration of people from one place to another may leave the world barren
  • E. All of the above

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Scale of Preference:

You may have probably made a scale of preference in one way or another.

Scale of Preference is often considered to be brought about by the insatiability of human wants and limitation of cash at hand.

Note: By insatiability, we mean that human wants can never be satisfied; and just like Oliver Twist, we keep asking for more.

Please read on Values here.

Take for instance, when you take a young girl (of about 10 years old) to the supermarket; the girl will likely request for so many beautiful things from that supermarket. This is entirely normal for her to do but the question is: what if you don't have enough money to buy them?

You can read on the Disadvantages of Money here.

A scale of preference can be defined as the list of a person's needs or wants written in an order of importance.

From the above question, you can quickly map out a scale of preference and buy her what you think is important or best for her. You can probably explain your actions to her later and hopefully she will understand and appreciate you for it.

Please read on Demand and Law of Demand here.

Consider the table below:

Needs / Wants

Cost (Naira)

 Phone

 50,000

 Console Game

 120,000

 Laptop

 80,000

 Ipad

 100,000

 Smart watch

 85,000

 Ipod

 40,000

The above table shows us what a scale of preference would look like.

You will observe that the person puts his most important needs or wants at the top of the list. Further down the list are his less important needs.

Now, let's imagine that this individual has 170,000 Naira to spend. According to the above scale of preference, the followings can be deduced;

  • A phone will be considered to be the most important; and it costs 50,000. He buys the phone.
  • A console game according to this person is next in importance; and it costs 120,000. He buys the console game.

Another question worth asking is:

  • What happens to his other needs?

This is where the term "Opportinity Cost" comes in.

Opportunity cost is value of the best alternative that a person could have achieved or bought but did not achieve it after the best choice had been achieved.

Please read on the Concept and Types of Cost here.

Now, you can guess that the Laptop, Ipad, Smart Watch and Ipod will all be classified under the opportunity cost. This is because the individual could not buy them after he bought his best choices.

Note: Laptop, Ipad, Smart Watch and Ipod refers to opportunity cost in the above instance.

Opportunity cost may be put into 2. These are:

 

Explicit Opportunity Cost

Opportunity cost is considered to be explicit when a person's financial resources is used for business. (The resources used for business will always be in the form of cash). Consider the instance below:

  • Let's assume you have 2 million Naira, and decided to buy 2 cars. After the purchase of both cars, you gave out both to be managed by Mr. Tony and Mr. Bony; and they deliver you some money weekly from the car.

We can conclude that your explicit opportunity cost is the money (2 million Naira) spent on both cars; and that's because the cars were used as factors of production.

Please read more on production here.

Note: In the above instance, if you had not utilized your 2 million Naira in the way of explicit opportunity cost, then you may as well have donated it to a motherless baby home; but doing this nullifies it as an explicit opportunity cost. (That is, the 2 million naira no longer becomes an explicit opportunity cost).

Explicit opportunity cost involve the outflow of cash or other resources of yours to be used as factors of production.

Note: Explicit Opportunity Cost is sometimes referred to as out of pocket costs. and it may be recorded in the accounts book.

Please read on Journals here.

Other examples of explicit opportunity cost are money spent on wages, salaries and raw materials.

 

Implicit Opportunity Cost

Opportunity cost is considered to be implicit when there isn't any outflow of cash. Think of it this way:

Let's assume you own 2 cars and you directly use it yourself for your comfort and pleasure.

The truth is; you may have invested on both cars but you chose not to; and that's your implicit opportunity cost.

Please read on how to start a Home Based Fish Farming here.

We can thus say that an implicit opportunity cost does not require an outflow of cash and there isn't any returns of profit. It's what you already own and is being used by you.

An implicit opportunity cost is one where there isn't any form of cash outlay.

Implicit opportunity cost are not recognized by the accounting system since they belong to the owner.

Please read on the Differences between Bookkeeping and Accounting here.

Note: Implicit opportunity cost are sometimes referred to as imputed costs.

With regards to business, the implicit opportunity cost is the cost of the capital which the entrepreneur may have earned if he had invested somewhere else. The point is:

The entrepreneur did not invest somewhere else and that make's it an implicit opportunity cost.

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Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.


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Amazing facts in Economics


NOTABLE POINTS IN Economics

Scale of Preference can be defined as the list of a person's needs or wants written in an order of importance. 📜✍️

When you have a limited amount of money and could only buy some of the items on your list (the top items on the list); then the remaining items that you didn't buy will be generally considered as your opportunity cost.

Opportunity cost can be defined as the value of the best alternative that a person could have achieved or bought but couldn't achieve after the best choice had been achieved.

Opportunity cost are of two types. They are:

  1. Explicit Opportunity Cost
  2. Implicit Opportunity Cost

Please read on scale of Preference, Opportunity cost and the types of Opportunity cost here

Economics isn't just about money. It isn't just about economizing or efficiency or prudence at management.

In simple terms, Economics is a science that deals with the study of scarcity and choice.

Economics have 2 main branches. They are:

  • Microeconomics
  • Macroeconomics