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Basic Concepts in Economics

Basic Concepts in Economics

1. Wants:

Want may be defined as an insatiable desire or need by human beings to own goods or services that give satisfaction. In economics, wants are unlimited while the means of acquiring them (resources) are limited.

2. Scarcity:

Scarcity is defined as a limited supply of resources which are used for the satisfaction of unlimited wants. This means that people do not have as much as they desire. The problem of scarcity arises as a result of the fact that, at any point in time, the productive resources available in any society are limited, whereas human wants are unlimited. Scarcity is the central problem of every society.

3. Choice:

This is defined as a system of selecting one out of a number of alternatives. Choices become necessary as a result of scarcity. Making a choice implies giving up something in order to get something else. The concept of choice relates to all the three main economic agents.

  • An individual consumer must choose among types of goods and services because of his limited income.
  • The firm must choose what to produce and how to produce within the constraint imposed by its limited resources.
  • The government must decide what public goods and services to provide for the people given its limited revenue as projected in the budget documents.

4. Scale of Preference:

It is described as a list of all wants to be satisfied in order of priority or importance. The concept of ‘Scale of Preference’ underscores the basic assumption in economics that every economic agent exhibits rational behaviour in the process of making a choice.

5. Opportunity Cost:

Economists use the term ‘opportunity cost’ to mean the next best alternative forgone in the process of making a choice. To an individual consumer, the opportunity cost of a commodity bought is the next most desirable commodity he could have bought instead. For example, Alex has ₦50 and wants to buy Gala and Cake but discovers that he cannot get both with the amount has because each item costs ₦50. If he chooses to buy the cake, the gala he sacrifices, because of limited resources, is the forgone alternative and this is what is referred to as opportunity cost. Opportunity cost is alternatively referred to as alternative forgone, real cost, true cost, or economic cost.

6. Rationality:

In economics, rationality simply means that individuals will always pick the best option when making choices. This means an individual exercises sensible choice making in which he gains optimum benefit.

7. Production:

Production is a process of combining various material and immaterial inputs in order to make something for consumption (output). In ordinary sense, it means creation of a commodity. But, in economics, that is a wrong view. The carpenter who gives shape to wood makes it more useful to us than it used to be. This means he creates additional utility. So, production in economics is not just the creation of a commodity but also the creation of new utility.

8. Distribution:

In simple words, distribution implies the act of giving everyone a share of their labour. Therefore, the concept of distribution in economics is concerned with the allocation of total production among the various factors of production as a reward in form of rent, wages, interest or profit. 9. Consumption: Consumption, in economics, is the use of goods and services by individuals. It is best described as the final purchase of goods and services by individuals. The purchase of new clothes, ice-cream at Coldstone Creamery, a car, etc. are all examples of consumption.

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