(a) Why is the scale of preference important (b) Explain the concept, opportunity cost. (c) State the opportunity cost in each of the following actions: (i)...

Answer Details

(a) Importance of the scale of preference. A scale of preference is a list of a person's wants arranged in order of their importance or urgency, from the most pressing to the least. It is important because human wants are unlimited while the means (income and resources) to satisfy them are limited. By ranking wants, the individual can satisfy the most urgent needs first with the scarce resources available, make rational choices, avoid waste, and know clearly what is being given up. It is therefore the basis of choice and of measuring opportunity cost.

(b) Opportunity cost. Opportunity cost (or real cost) is the value of the next best alternative that is forgone when a choice is made. Because resources are scarce, choosing one thing means sacrificing another; the alternative given up is the true cost of the decision. For example, if a farmer uses land to grow yam, the opportunity cost is the cassava he could have grown on that same land instead.

(c) Stating the opportunity cost:

• (i) A shirt bought for N500 instead of a pair of shoes: the opportunity cost is the pair of shoes that had to be given up.
• (ii) Onions grown realising N20,000 instead of maize that could have realised N25,000: the opportunity cost is the maize (worth N25,000) that was forgone.