BASIC CONCEPTS OF ECONOMICS Lesson Note
This SS1 Economics lesson note covers BASIC CONCEPTS OF ECONOMICS for First Term, Week 3.
Learning Objectives
- Define and explain the basic concepts of economics.
- Differentiate between scarcity, choice, scale of preference and opportunity cost.
- Explain how the concepts are related to one another.
- Relate the concepts to individuals, firms and government.
- Apply the concepts to simple real-life economic situatitions
Lesson Note
A. INTRODUCTION
The basic concept or elements of economics are wants, scarcity, scale of preference, choice, and opportunity cost
1. WANT
Want may be defined as insatiable desires or need by human to own goods or services that gives satisfaction the basic needs of man includes food shelter clothing human wants or needs are many and are usually described as insatiable because the. Means of satisfying them are limited or scarce
2. SCARCITY
Scarcity is defined as the limited supply of resources which are used for the satisfaction of unlimited wants in other words it is the inability of human beings to provide themselves with all the things the y desire or wants
3. CHOICE
Choice is the act of selecting one want or use of resources from several competing alternatives. Choice becomes necessary because resources are scarce.
4. SCALE OF PREFEENCE
A scale of preference is a list of wants arranged in order of importance, from the most important to the least important. It helps a decision-maker decide which wants should be satisfied first.
For example, Mr. Babatunde a trader who has only #10,000 wants to buy a pair of shoes ,shirt cap ,fan ,stove and pressing iron
MR BABATUNDE’S SCALE OF PREFERENCE
Items needed. Price
1. shoe. 3500
2. shirt 1000
3. Cap. 500
4. fan. 5000
5. stove. 3500
6. Pressing iron 4000
Mr. Babatunde has carefully arranged all his numerous wants in order of priorities so he can only purchase a pair of shoes, shirt, cap because his resources are limited
Importance of scale of preference
1. ranking of needs in order of relative importance
2. identification of highest priority
3. Efficient utilisation of limited resources
4 optimum allocation of resources
5 maximization of resources
5. Opportunity Cost
Opportunity cost is defined as an expression of cost in terms of forgone alternative ,it is the satisfaction of one's wants at the expense of another wants
For example, a farmer who has #200 and wants to buy a Cutlass and a hoe may discover that he cannot get both materials if he decides 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 sacrificed is the forgone alternative and this is what is referred to as opportunity cost or real or true cost
Importance of Opportunity Cost
1. Importance to Individuals
i. Helps in making better choices: It enables individuals to compare alternatives before spending their limited income or time.
ii. Encourages proper planning: People can decide which needs should receive priority.
iii. Promotes efficient use of resources: It helps prevent waste of money, time and other scarce resources.
iv Helps in budgeting: Individuals can consider what they must give up before spending money.
v. Improves decision-making: It makes people aware of the consequences of their choice
2. Importance to Firms
i. Helps firms allocate resources efficiently.
ii. Assists investment decisions: A firm can compare different investment opportunities.
iii. Helps maximise profit: Firms can select the alternative that gives the greatest expected benefit.
iv. Reduces waste: Scarce capital, labour and materials can be directed to their best uses.
3. Importance to Government
i. Helps government set priorities when public funds are limited.
ii. Assists in budget allocation among education, healthcare, roads, security and other sectors.
iii. Promotes efficient use of public resources.
iv. Helps government compare alternative projects before committing public funds
Differences Among the Basic Concepts
| Concept | Meaning | Main Point |
|---|---|---|
| Scarcity | Resources are limited compared with wants. | Creates the need to make decisions. |
| Choice | Selecting one alternative from competing wants. | Shows the decision made. |
| Scale of Preference | Ranking wants in order of importance. | Helps determine priorities. |
| Opportunity Cost | The next best alternative forgone. | Shows what is sacrificed because of a choice. |
Evaluation
OBJECTIVES QUESTIONS
1. What is scarcity?
A. Availability of unlimited resources
B. Limited resources in relation to unlimited wants
C. Lack of money only
D. Absence of human wants
2. Choice becomes necessary because resources are:
A. Unlimited
B. Free
C. Scarce
D. Useless
3. A scale of preference is a list of wants arranged in order of:
A. Cost
B. Importance
C. Availability
D. Production
4. Opportunity cost is the:
A. Money spent on a commodity
B. Total cost of production
C. Value of the next best alternative forgone
D. Price of a commodity
5. Which of the following is an example of a scarce resource?
A. Human wants
B. Time
C. Desire
D. Imagination
6. When a student chooses to buy a textbook instead of a pair of shoes, the shoes represent the student's:
A. Scale of preference
B. Choice
C. Opportunity cost
D. Scarcity
7. Which of the following is a basic economic problem?
A. Scarcity
B. Friendship
C. Entertainment
D. Recreation
8. The act of selecting one want from several alternatives is known as:
A. Scarcity
B. Choice
C. Production
D. Consumption
9. A government deciding whether to build a hospital or a road is an example of:
A. Choice
B. Inflation
C. Hoarding
D. Specialization
10. Which of the following best explains why individuals, firms and governments must make choices?
A. Wants are limited
B. Resources are unlimited
C. Resources are scarce while wants are unlimited
D. Goods are always free
Theory Questions
1a. What is i. scarcity ii. Scale of preference iii. Opportunity cost
1b. Explain the meaning of choice in economics.
2a. State two differences between scarcity and choice.
2b. How does a scale of preference help an individual?
2c. Give one example of opportunity cost for a firm