Meaning of Economic Concepts II – SS1 Economics Lesson Note (First Term)

Basic economic concepts are human wants, scarcity, choice, scale of preference and opportunity cost, which explain why people must make economic decisions.

Behavioural objectives

By the end of the lesson, students should be able to:

1. explain the meaning of human wants, scarcity and choice;
2. state why scarcity makes choice necessary;
3. describe a scale of preference and state its importance;
4. define opportunity cost and give an example;
5. state the importance of opportunity cost to individuals, firms and the government.

What are human wants?

Human wants are the many goods and services that people desire for consumption.

• Meaning in economics: things we would like to have but may lack the money, or the willingness to part with money, to get.
• Tangible goods: physical items such as houses and television sets.
• Services: work done for others, such as the work of a driver, cobbler, actor, lawyer or doctor.
• Other names: wants are also called ends, desires, aims or objectives.

What are the features of human wants?

• Unlimited: when one want is met, new ones appear, so wants are insatiable.
• Different in importance: some wants, such as food, are more urgent than others, such as a new phone.
• Recurring: some wants return again and again, such as hunger.
• Limited by resources: the means of satisfying wants are scarce, so not every want can be met.

What is scarcity?

Scarcity is the condition in which a good or service is limited in supply in relation to the demand for it.

• How to judge it: compare the available quantity with the present level of demand, given the available resources.
• Plentiful goods can be scarce: goods may fill the market, but they are still scarce if people lack the money to satisfy all their wants.
• Not the same as absence: a good does not have to be missing from the market to be scarce.
• Central to economics: without scarcity, there would be no need to study economics.

What is the difference between scarcity and shortage?

Scarcity means resources are limited compared with the wants for them. Shortage means supply is less than demand at the current price, usually for a short time, as in petrol queues.

What is choice?

Choice is the selection of one alternative from among several.

• Meaning: the decision to have one thing instead of another implies choice.
• Who makes choices: individuals, firms and the government all make economic decisions, so every economic decision is a choice.

What are the aspects of choice?

• What to use: deciding the resources to be produced and used.
• How to get: deciding how to get the resources.
• When to use: deciding when to use the resources.

Why does scarcity make choice necessary?

1. Human wants are unlimited.
2. The resources to satisfy them are limited.
3. All the wants cannot be satisfied at the same time.
4. People must therefore choose which wants to satisfy first.
5. Every choice means giving up another alternative.

What is a scale of preference?

A scale of preference is a list of a consumer’s wants arranged in order of importance.

• Ranking: wants at the top are satisfied before the others.
• Limit: a person satisfies wants down the list until the available money or resources run out.

What is an example of a scale of preference?

A student with a small amount of money may rank wants as shown below. The ranking is only an illustration.

What is the importance of a scale of preference?

1. It is a tool for arranging human wants.
2. It helps in making choices.
3. It ensures the optimum allocation of resources.
4. It shows human wants at a glance.
5. It helps consumers to use their resources well.

What is opportunity cost?

Opportunity cost is the next best alternative given up when a choice is made.

• Other names: it is also called the real cost or true cost.
• Example 1: Mr. Audu buys a television set instead of a radio set, so the radio set forgone is the opportunity cost of the television set.
• Example 2: a farmer plants maize on a plot instead of yam, so the yam forgone is the opportunity cost of the maize.
• Use: the concept helps in daily decisions and applies to individuals, firms and governments.

How is opportunity cost used by individuals, firms and the government?

• Individuals: it helps a person to choose among many needs by allocating services and resources in the best way.
• Firms: it helps them to allocate more resources to goods and services that give the highest profit.
• Government: it helps the government to choose which projects to spend limited revenue on. For example, a state government may fund free education and medical care and so give up other projects.

What is the importance of opportunity cost to the individual?

1. It helps individuals to make decisions.
2. It helps individuals to allocate scarce resources.
3. It encourages judicious use of resources.
4. It helps in prioritising our wants.
5. It helps an individual to make wise choices.

What is the importance of opportunity cost to firms?

1. It helps in decision making.
2. It helps to decide the method of production.
3. It helps in project execution.
4. It guides policy formulation and implementation.

What is the importance of opportunity cost to the government?

1. It helps in resource allocation.
2. It helps in decision making.
3. It helps in the preparation of the budget.
4. It helps in project execution.

How are scarcity, choice and opportunity cost related?

Scarcity forces people to choose, and every choice has an opportunity cost.

Evaluation

1. Define human wants and give two examples of services.
2. Explain why a good can be scarce even when it is plentiful in the market.
3. What is a scale of preference? State two of its importances.
4. Mr. Audu buys a television set instead of a radio set. What is his opportunity cost?
5. Give two differences between scarcity and shortage.

Assignment

Explain the relationship between scarcity, choice and opportunity cost, and state four ways in which opportunity cost is important to the government.