What Is Scale of Preference in Economics?
"Scale of preference" is a common economic term that refers to the importance that an individual places on certain needs and wants. While there are many economic concepts, scale of preference is a concept that can easily be put into action as a tool. Read on to learn more about what scale of preference means, how to use it in daily life, and other important, basic economic concepts.
What Is Scale of Preference, Explained?
Sometimes, the easiest way to explain economic concepts is to provide concrete examples. Let's say Joe has a specific amount of money, such as $5,000. Joe has certain needs and wants that he needs to pay for. Joe would put the thing he needs or wants most at the top of the list, followed by other needs and wants in descending order by importance. For example, Joe may place rent and utility bills above all else. He may also have other bills to pay. Once the needs are taken care of, Joe can add more to his list, such as a new computer or car. Next to each line item will be a numerical amount. For instance, if Joe's rent is $1,000, this will appear next to "rent" on his list. Joe will add up the numbers as he goes along to see if he has enough money left over for wants.
How Is Scale of Preference Used?
The concept of scale of preference goes well beyond just making a personal budget. It is also used for businesses and in world economics. If you own a business and there is a demand ― need and want ― for your goods, you can use a scale of preference to compare the scarcity of resources ― lack of resources ― against the demand for your goods. This allows for efficient distribution when owning and operating a business.
How Does Scale of Preference Benefit Businesses?
There are five ways that using the scale of preference concept can directly benefit businesses:
- If you have little resources, using the concept correctly can help you best utilize what's available.
- You can produce the correct amount of goods for the consumer, meaning not too much or too little.
- Even if you have little resources, when the concept is used correctly, you can satisfy the needs of the consumer.
- You have a better chance of making correct decisions after you acquire resources.
- The priorities of people, such as the business owner and consumer, are more in line with the amount of available resources.
Smart business owners often make scale of preferences lists when they are considering supply and demand and satisfying the consumer.
What Is Opportunity Cost?
Opportunity cost is another common yet important, term and concept in economics. It is a term often confused with scale of preference because both concepts deal with the weighing of outcomes. Opportunity cost essentially evaluates "the path not taken." For example, if you go to a concert and spend money, you cannot now spend that money on a new stereo nor can you get the time you spent back and do something else with it. Therefore, the opportunity cost is time and money "lost" by going to the concert. However, if you're content with your decision, and you've made the right decision, nothing is lost. You cannot do both.
What Is the Difference Between Opportunity Cost and Scale of Preference?
Opportunity cost and scale of preference are both very similar — and subjective. Essentially, you are subjectively evaluating possible outcomes. However, scale of preference is more precise. In using this concept, you are evaluating line items in terms of importance. When it comes to opportunity cost, you are weighing one thing vs. the other, and importance is not necessarily a factor. Opportunity cost deals more with wants, not needs.
What Are Preferences in Economics?
It is important to discern between preferences and scale of preference, as preferences refer to something slightly different in economics. Essentially, preferences are a large part of consumer demand. When you're designing a marketing strategy, being well in touch with consumer preferences is important to market your product correctly.