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Scale of Preference in Economics & opportunity Cost

scale of preference in business

What Is Scale of Preference in Business Studies

Scale of Preference is an economic term which means ranking our needs and wants on the basis of their importance. Needs and wants are insatiable. By insatiable, we mean the needs are limitless, and the resources to satisfy them are limited.  

Therefore, ranking our needs and wants based on what we need most is important for effective management of resources. The need for a scale of preference arises because human needs are vast and the resources to satisfy those needs are limited.

Scale of preference enables us to make better decisions not only for our personal expenditure but also for our business and for the purpose of economic planning.

Examples of Scale of Preference Scenarios

The easiest way to explain the concept of scale of preference is to use real life scenarios. Let’s say for example you have 1000USD that you want to use to meet some needs and wants, and you place payment of water bills as the most important and utility bills as second. Once you have satisfied your most important needs you will now move on to other needs in that order.

From the scenario above, what you did is what scale of preference is all about. We all use scale of preference either directly or indirectly in ranking our needs and wants.

For example, let’s make a tabular depiction of what a scale of preference would look like.

Tabular example of a scale of preference

Needs /Wants Amount(N100,00)
Food 25,000
School fees 30,000
Bills payment 15,000
Transport 10,000
Savings 10,000
Entertainment 5000
Laptop 5000
Charity 5000
Party 150,000

The above table has shown us exactly what a scale of preference looks like. Food which is a necessity was ranked first on the list, school fees payment came second, all in the order of importance. Scale of preference enables prudent spending our of our resources.

What Is the Difference Between Scale of Preference and Opportunity Cost

Many times, opportunity cost and scale of preference are often confused to be one. Although scale of preference and opportunity cost are relative, they are not entirely the same.

From the table above, we can see that we were satisfying our needs in a descending order- that’s what scale of preference is all about. But the problem is that we only have 100 thousand naira as our total cash inflow for that period. The next question that comes is what of the other needs? That’s where opportunity cost comes in handy!

Opportunity cost is that item you would have purchased after buying your best or most important item.

From the table above, charity, party and laptop will all be classified under opportunity cost. That is because after purchasing the most important items, you can no longer afford them.

Opportunity cost in a nutshell are the needs or wants you have forgone to satisfy other needs or wants.

Related questions to scale of preference

What is scale of preference in economics with example?

Scale of preference can simply be defined as your needs and wants arranged in their order of importance. For example, you have only N5000, you will likely spend it on what is most important first before the next less important item.

What is the difference between opportunity cost and scale of preference?

Opportunity cost is what you forgone in order to satisfy your most important needs. After spending all you fund on your important needs or wants that next most important item will be the opportunity cost. Scale of preference however, is ranking your needs and wants on the basis of their importance.

Why is scale of preference considered important?

Scale of preference is important because mans needs and wants are insatiable, and the resources to satisfy them are limited.

Who introduced the concept of scale of preferences?

The scale of preference was introduced by

What are examples of preferences?

Let’s say as a student you need both laptop and a watch. Although both needs are important, the laptop will be more important because you can use your phone to check time, the laptop however, can be used for school work and even to earn money. The bias you have for the laptop is what is referred to as preference.

What causes preference?

Preference arises due to the value that some items hold either for us or for the society. It may also be as a result or culture, taste, level of education and exposure and personal dispositions.

What does your preference indicate?

Preference indicates your taste or the bias you have towards certain items, actions or people.

Is preference a choice?

Choice and preference are closely interrelated. While preference is the bias we have towards an item, choice enables us to make decisions from an array of options available.

How do you measure preference?

Preference can be measured by the satisfaction that we derive by using a particular item, service or a product.

Author Profile

Fishon Amos
Fishon Amos writes on Education, Rankings, Wealth, Technology, Politics and others with Explain.com.ng. He has published several articles online and hopes to keep educating people through his writings. When he is not writing, he plays chess and listen to crime Podcasts on Spotify.

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