What is scarcity in economics?
In economics, scarcity refers to limited resources or the perception of limited resources when there are insufficient resources to meet human needs and desires. It may also pertain to how corporations choose what and how to produce with limited resources, as well as how they determine the selling price of an item based on demand.
Scarcity occurs when the demand for a natural resource, commodity, or service exceeds the available supply. It often implies that the current level of exploitation of a natural resource is unsustainable over the long term, most often for the following two types:
- Nonrenewable resources are natural resources that cannot be replaced once depleted, such as oil and rare metals.
- Examples of renewable resources are water, fish, and trees
In his essay “The Nature and Significance of Economic Science” published in 1932, the British economist Lionel Robbins defined the field in terms of scarcity.
Economics is the study of human behavior in terms of the interrelationship between competing goals and limited resources with multiple applications.
In a hypothetical world where all resources are plentiful — water, hand soap, expert interpretations of Hittite inscriptions, enriched uranium, organic bok choy, and bourbon — economists would have nothing to study.
No resource allocation decisions would need to be made, and no trade-offs would require investigation and evaluation. In contrast, in the real world, everything costs something; that is, every resource is limited to some degree.
Money and time are the most valuable of limited assets. The majority of individuals lack one or both. A jobless individual may have an abundance of free time, but struggles to pay rent due to a lack of funds. A powerful executive, on the other hand, may be financially able to retire on a whim, but may be forced to eat 10-minute lunches and sleep 4-hour nights due to a lack of time. This individual has abundant wealth but little time.
A third group possesses limited time and assets. Rarely do one encounter wealthy, leisurely individuals in the wilderness.
When resources are limited, we must decide how to utilize them most effectively. However, this also depends on the resources we obtain. The scarcity of a resource, for instance, increases its value. Diamonds are an extremely rare and valuable resource with limited availability.
Concurrently, it is a scarce resource that is in high demand worldwide, indicating that it is in high demand but has a limited supply. This contributes to its high value throughout the world.
This value can be separated into consumer scarcity — the lack of our specific resources — and market scarcity. Then there is producer scarcity, which refers to the scarcity of the goods or services that we purchase.
Two factors determine scarcity: the scarcity of our own resources and the scarcity of the resources we wish to acquire.
If a consumer desires a bottle of water, for example, and cannot obtain one for kilometers, the bottle’s value increases significantly. For example, a person stranded in the middle of the desert places a much higher value on water than a person living in a comfortable home. In conclusion, the scarcity of a product can increase its value to customers.
A resource’s scarcity alone increases the value of an item. As a result, we as consumers place a higher value on it.
Adam Smith allegedly introduced the diamond-water contradiction in his book The Wealth of Nations. Smith questioned the price disparity between water and diamonds. Why, he questioned, are diamonds so highly valued while water, a human necessity, is regarded so poorly?
As a result of their subjective value to individuals, diamonds are valuable. Alternatively, the price at which consumers are willing to pay.
People are willing to pay more for diamonds, thereby increasing their value. This does not explain, however, why they are valued more than water. Ultimately, water is necessary for human survival.
This is influenced by several variables, but scarcity and marginal utility are the most significant. Due to the rarity of diamonds, their value is high. In contrast, nearly everywhere in the developed world has access to water.
Water is readily available, to clarify. We have more than enough resources to meet our current needs. Everything beyond our most basic necessities begins to lose value. For instance, after consuming a large meal, one’s perception of the value of another decreases significantly. The same concept applies to water.
Since our most basic needs are met, we may place a greater value on luxuries such as diamonds.
What Are the Causes of Scarcity?
There are four primary shortage causes. Possible causes of scarcity include inadequate resource distribution, an individual’s perspective on resources, a sudden increase in demand, and a sudden decrease in supply. The objective is to determine the underlying causes of the issue so that it can be resolved. In some instances, a scarcity of a particular item may have multiple causes.
Ineffective distribution of resources is one of the leading causes of scarcity. Frequently, the resources necessary to meet the needs of a community are available, but they cannot be distributed to the population. This may be the result of war, political paybacks, or other turmoil created on purpose by other humans, typically in an effort to exert control.
Sometimes, humanitarian actions can help alleviate these conditions, but this is not always the case. Even if humanitarian efforts are successful, it is possible that not everyone in need will be reached.
Another common cause of scarcity is a sudden increase in demand that exceeds the available supply. When some regions prepare for a storm and there is a shortage of plywood and generators, this is a common occurrence.
This demonstrates how a sudden increase in demand can result in a predicament. This problem is exacerbated by the distribution-related inability to provide goods to affected regions.
Similarly to an increase in demand, a decline in supply may be observed. However, supply decreases can occur without a corresponding increase in demand. Natural calamities such as droughts and fires may result in rapid supply depletion. In many cases, the condition may only last for a season or a year, but it can still cause a significant amount of stress for those in need of the resources.
In some instances, human perspectives may be identified as the sole cause of scarcity. In other words, there may not be a dearth of goods and services.
Rather, the problem could be that someone believes there is a shortage and, as a result, either conserves more or does not attempt to locate the resource. This may not be a common occurrence, but those with a mindset of scarcity may view it as equally significant.
How does scarcity work?
In a free market, scarcity is determined by supply and demand, which can cause the price of a product or service to fluctuate over time based on its availability.
Consider oil as an example. This scarce resource’s value fluctuates frequently. When oil reserves are depleted, fewer resources are available. When an item becomes scarce, its price often increases dramatically. Extremely high prices may result in a decline in demand, prompting some companies to consider alternatives, such as:
Other oil sources, like in the Antarctic
Other power sources, like solar panels, battery-power or electricity
Reducing the use of goods and services, like equipment, cars and airplanes
Consumers may be compelled to purchase more expensive goods, such as gasoline, or they may seek alternatives, such as a hybrid or electric vehicle, bicycle, or battery-powered lawnmower.
What are examples of scarcity?
In economics, scarcity may affect businesses, nations, and resources. Here are 12 examples:
Land scarcity occurs when there is insufficient space for communities to cultivate food, raise animals, construct homes and infrastructure, or construct buildings.
The desertification of the world’s land masses, for instance, is causing a loss of arable land, and the depletion of forests is causing a shortage of wood and construction materials in certain nations, necessitating the reuse of components from demolished structures.
Some individuals, regions, or nations may experience a housing shortage. In New York City, for instance, development land is scarce and expensive. The greater the influx of people into a city, the fewer apartments and housing options may become available, which frequently results in higher rents and costs. In the aftermath of natural disasters such as fires, hurricanes, and tornadoes, housing shortages may occur.
Overexploitation of land, water, and wildlife can result in a scarcity of resources. For example, overhunting, overfishing, and overfarming can lead to shortages. Sometimes, property rights and environmental regulations restrict the use of a body of water, parcel of land, forest, or animal to prevent its overexploitation.
Included among the naturally scarce natural resources are gold, oil, silver, and fossil fuels. When demand exceeds supply, these resources become scarce, and as a result, their prices may increase. Other products, such as diamonds, command high prices because of their limited availability and market regulation.
As a result of environmental issues such as global warming and changing weather patterns, certain regions of the world are now drier than in the past, with fewer rivers and less access to water for humans and animals.
Inadequate maintenance of infrastructure, such as a city’s water supply pipes, can also contribute to water shortages. Home chores such as showering, washing dishes, and watering plants sparingly can help conserve this natural resource.
A labor shortage can occur when there are insufficient people with a particular set of skills, such as physicians, nurses, teachers, pilots, or engineers. There have historically been labor shortages during and after wars due to the loss of life and means of subsistence. Moreover, undereducated populations and labor strikes can exacerbate a labor shortage.
When there is a healthcare emergency or a waiting list for specific surgeries and treatments, the healthcare industry faces shortages due to the limited number of hospital beds and healthcare professionals. In addition, medical supplies, prescriptions, and treatments, including the annual flu vaccine, are susceptible to shortages.
World health issues
Epidemics and pandemics such as avian influenza, swine flu, and mad cow disease can cause a shortage of animal products, food, imports, and exports. In extreme circumstances, they may also lead to a shortage of medical personnel to care for patients.
Seasonal industries, such as construction, operate only during a portion of the year, which may influence the scarcity of particular goods, commodities, and services. Demand from consumers, such as the purchase of holiday gifts, also contributes to seasonal scarcity. There may be temporary shortages of popular consumer goods as a result.
In addition to border conflicts, inflation rates, and government or international organization regulations, an embargo or tax on imports from another country can cause a dearth of goods or resources. In addition, national laws or proposed legislation can result in a shift in consumer purchasing patterns and the scarcity of a product, such as ammunition for firearms.
Weather and natural disasters
Bad weather can reduce farmers’ yields, resulting in a human and animal food shortage. Natural disasters like hurricanes, tornadoes, flooding, and tsunamis can have an effect on natural resources, imports and exports, food, shelter, and supplies.
In addition, extreme climates can delay the delivery of goods and services, resulting in temporary shortages in communities.
Congestion on highways can cause supply delays, and a lack of suitable land to construct new roadways or railways in certain locations may result in recurrent shortages in certain regions or cities.
Absolute and relative scarcity are the two forms of scarcity. Let’s start by defining relative scarcity.
When a product’s natural supply is limited, it is characterized by relative scarcity. Consequently, only a limited supply is available. However, relative scarcity is defined as being inherently limited and scarce relative to demand.
In other words, relative scarcity exists when supply and demand are out of balance. This is not due to a company’s inability to produce, but rather a lack of available resources.
This should be compared to the shortcoming. A shortage may be the result of ineffective management or distribution, for instance. In 2018, there was a shortage of PS4 Pros to illustrate the point. We would not say that this item is rare; rather, Sony was unable to meet demand due to insufficient supply. In contrast, nature limits relative scarcity.
Absolute scarcity exists when the supply of a good is intrinsically limited. In other words, we cannot increase the supply in any way. However, absolute scarcity exists when the amount of a resource cannot decrease. Every day, for example, there is a severe shortage of 24 hours. There is no possible increase or decrease.
Comparable to relative scarcity, demand cannot be met. Extreme scarcity, however, has little effect on demand.
What Is the Difference Between Relative Scarcity and Absolute Scarcity?
When the availability of a resource is naturally constrained, relative scarcity exists. This has nothing to do with a company’s inability to produce enough, but rather with the limited quantity of a particular resource on Earth. However, relative scarcity also relates to the ratio of supply to demand.
For example, oil. Even if there is currently an abundance of oil, the supply is limited and will eventually be insufficient to meet demand. The deficit is relative. Absolute scarcity also refers to a limited resource that is unrelated to demand.
How Can a Society Deal With Scarcity?
To combat scarcity, societies could potentially increase their supply. The greater everyone’s access to goods and services, the less scarcity there will be. There are inherent limitations to increasing the supply, such as production capacity, land availability, and time.
Another strategy for addressing scarcity is to reduce wants. Less demand for non-essential products and services, such as clothing and entertainment, will reduce the strain on scarce resources.
Natural Resource Scarcity
There are two reasons why natural resources may not be considered scarce. Anything that is practically infinitely accessible and can be obtained for free or in exchange for other items is not rare.
Alternatively, a resource is not scarce if consumers are indifferent to it and have no desire to use it, or if they are unaware of the resource or its potential uses. However, even resources are presumed to be inexhaustible, and because they are free in monetary terms, they may in a sense be limited.
Consider air as an illustration. From the perspective of a person, breathing is completely unrestricted. However, there are costs associated with the endeavor. Since the Industrial Revolution, it has become increasingly difficult to take the air we breathe for granted.
Poor air quality has been linked to high illness and mortality rates in a number of cities today. Governments or utilities must invest in power generation techniques that do not produce hazardous emissions to prevent these costly occurrences and ensure that residents can breathe freely.
Even if they are not more expensive than dirtier alternatives, they require considerable capital expenditures. The populace ultimately bears these costs. In other words, free breathing is not truly free.
If a government decides to spend money to make the air safe to breathe, numerous concerns arise. What methods exist to improve air quality? Which strategies are the most effective in the short-, medium-, and long-term? What about cost-effectiveness?
What relationship should exist between quality and price? What trade-offs are involved in alternative courses of action? Where should the money come from? How and for whom should the government increase taxes, if at all?
Will the government borrow money? Will it generate revenue? How will the government keep track of the project’s expenditures, obligations, and profits from a financial perspective?
Soon, the scarcity of clean air (the fact that clean air has a price) will give rise to a plethora of concerns regarding the efficient distribution of resources. Scarcity is the fundamental problem that spawned economics.
In economics, scarcity refers to the quantity of something that exists at a specific time and location. When resources are scarce, we must exert greater effort to obtain the desired resources or products.
When the supply of a resource is lower than its demand, scarcity exists. As a result, prices go up.
Physical scarcity, human scarcity, and financial scarcity are the three types of scarcity.