The scarcity principle is an economic theory in which a limited supply of a good—coupled with a high demand for that good—results in a mismatch between the desired supply and demand equilibrium. Show
The scarcity principle is related to pricing theory. According to the scarcity principle, the price for a scarce good should rise until an equilibrium is reached between supply and demand. However, this would result in the restricted exclusion of the good only to those who can afford it. And if the resource that is scarce happens to be grain, for instance, individuals will not be able to attain their basic needs. In economics, market equilibrium is achieved when supply equals demand. However, the markets are not always in equilibrium due to mismatched levels of supply and demand in the economy. This phenomenon is referred to as disequilibrium. When the supply of a good is greater than the demand for that good, a surplus ensues. This drives down the price of the good. Disequilibrium also occurs when demand for a commodity is higher than the supply of that commodity, leading to scarcity and, thus, higher prices for that product. For example, if the market price for wheat goes down, farmers will be less inclined to maintain the equilibrium supply of wheat to the market (since the price may be too low to cover their marginal costs of production). In this case, farmers will supply less wheat to consumers, causing the quantity supplied to fall below the quantity demanded. In a free market, it can be expected that the price will increase to the equilibrium price, as the scarcity of the good forces the price to go up. When a product is scarce, consumers are faced with conducting their own cost-benefit analysis; a product in high demand but low supply will likely be expensive. The consumer knows that the product is more likely to be expensive but, at the same time, is also aware of the satisfaction or benefit it offers. This means that a consumer should only purchase the product if they see a greater benefit from having the product than the cost associated with obtaining it. Consumers place a higher value on goods that are scarce than on goods that are abundant. Psychologists note that when a good or service is perceived to be scarce, people want it more. Consider how many times you’ve seen an advertisement stating something like this: limited time offer, limited quantities, while supplies last, liquidation sale, only a few items left in stock, etc. The feigned scarcity causes a surge in the demand for the commodity. The thought that people want something they cannot have drives them to desire the object even more. In other words, if something is not scarce, then it is not desired or valued that much. Marketers use the scarcity principle as a sales tactic to drive up demand and sales. The psychology behind the scarcity principle lies on social proof and commitment. Social proof is consistent with the belief that people judge a product as high quality if it is scarce—or if people appear to be buying it. On the principle of commitment, someone who has committed themselves to acquiring something will want it more if they find out they cannot have it. Most luxury products, such as watches and jewelry, use the scarcity principle to drive sales. Technology companies have also adopted the tactic in order to generate interest in a new product. For example, Snap Inc., unveiled its new spectacles through a blitz of publicity in 2016. But the new product was available only through select popups that appeared in some cities. Tech companies may also restrict access to a new product through invites. For example, Google launched its social media service, Google Plus, in this manner. Robinhood, a stock trading app, also adopted a similar tactic to attract new users to its app. The ridesharing app Uber was initially available only through invites. The idea behind this strategy is to place a social value on the product or service and leverage the idea of exclusivity.
In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation. Scarcity is one of the key concepts of economics. It means that the demand for a good or service is greater than the availability of the good or service. Therefore, scarcity can limit the choices available to the consumers who ultimately make up the economy. Scarcity is important for understanding how goods and services are valued. Things that are scarce, like gold, diamonds, or certain kinds of knowledge, are more valuable for being scarce because sellers of these goods and services can set higher prices. These sellers know that because more people want their good or service than there are goods and services available, they can find buyers at a higher cost. Scarcity of goods and services is an important variable for economic models because it can affect the decisions made by consumers. For some people, the scarcity of a good or service means they cannot afford it. The economy of any place is made up of these choices by individuals and companies about what they can produce and afford. The goods and services of any country are limited, which can lead to scarcity. Countries have different resources available to produce goods and services. These resources can be workers, government and private company investment, or raw materials (like trees or coal). Certain limits of scarcity can be balanced by taking resources from one area and using them somewhere else. Sellers like private companies or governments decide how the available resources are spread out. This is done by trying to strike a balance between what consumers need or want, what the government needs, and what will be an efficient use of resources to maximize profits. Countries also import resources from other countries, and export resources from their own. Scarcity can be created on purpose. For example, governments control the printing of money, a valuable good. But, paper, cotton, and labor are all widely available across the world, so the things required to make money are not themselves scarce. If governments print too much money, the value of their money decreases, because it has become less scarce. When the supply of money in an economy is too high, it can lead to inflation. Inflation means the amount of money needed to buy a good or service increases—therefore money becomes less valuable, and the same amount of money can buy less over time than it could in the past. It is therefore in a country’s best interest to keep its paper money supply relatively scarce. However, sometimes inflation can help an economy. When money is less scarce, people can spend more, which triggers a rise in production. Low inflation can help an economy grow.
Learning Objectives
 Figure 1. Food, like the wheat shown here, is a scarce good because it exists in limited supply. The resources that we value—time, money, labor, tools, land, and raw materials—exist in limited supply. There are simply never enough resources to meet all our needs and desires. This condition is known as scarcity. At any moment in time, there is a finite amount of resources available. Even when the number of resources is very large, it’s limited. For example, according to the U.S. Bureau of Labor Statistics, in 2016, the labor force in the United States contained more than 158 million workers—that’s a lot, but it’s not infinite. Similarly, the total area of the United States is 3,794,101 square miles—an impressive amount of acreage, but not endless. Because these resources are limited, so are the numbers of goods and services we can produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.
Throughout the course, you will find these “Try It” boxes with questions to help you check your understanding and apply the concepts from the reading. Choose an answer, then select “check answer” to get feedback about how you did. EconomicsWhen faced with limited resources, we have to make choices. Again, economics is the study of how humans make choices under conditions of scarcity. These decisions can be made by individuals, families, businesses, or societies. Let’s consider a few decisions that we make based on limited resources. Take the following: 1. What classes are you taking this term? Are you the lucky student who is taking every class you wanted with your first-choice professor during the perfect time and at the ideal location? The odds are that you have probably had to make trade-offs on account of scarcity. There is a limited number of time slots each day for classes and only so many faculty available to teach them. Every faculty member can’t be assigned to every time slot. Only one class can be assigned to each classroom at a given time. This means that each student has to make trade-offs between the time slot, the instructor, and the class location. 2. Where do you live? Think for a moment, if you had all the money in the world, where would you live? It’s probably not where you’re living today. You have probably made a housing decision based on scarcity. What location did you pick? Given limited time, you may have chosen to live close to work or school. Given the demand for housing, some locations are more expensive than others, though, and you may have chosen to spend more money for a convenient location or to spend less money for a place that leaves you spending more time on transportation. There is a limited amount of housing in any location, so you are forced to choose from what’s available at any time. Housing decisions always have to take into account what someone can afford. Individuals making decisions about where to live must deal with limitations of financial resources, available housing options, time, and often other restrictions created by builders, landlords, city planners, and government regulations.
Throughout this course you’ll encounter a series of short videos that explain complex economic concepts in very simple terms. Take the time to watch them! They’ll help you master the basics and understand the readings (which tend to cover the same information in more depth). As you watch the video, consider the following key points:
Problems of ScarcityEvery society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. Economics helps us understand the decisions that individuals, families, businesses, or societies make, given the fact that there are never enough resources to address all needs and desires. Economic Goods and Free GoodsMost goods (and services) are economic goods, i.e. they are scarce. Scarce goods are those for which the demand would be greater than the supply if their price were zero. Because of this shortage, economic goods have a positive price in the market. That is, consumers have to pay to get them. What is an example of a good which is not scarce? Water in the ocean? Sand in the desert? Any good whose supply is greater than the demand if their price were zero is called a free good, since consumers can obtain all they want at no charge. We used to consider air a free good, but increasingly clean air is scarce. Productive ResourcesHaving established that resources are limited, let’s take a closer look at what we mean when we talk about resources. There are four productive resources (resources have to be able to produce something), also called factors of production:
Productive resources and factors of production are explained again in more detail in the following video:
economic goods: goods or services a consumer must pay to obtain; also called scarce goods free goods: goods or services that a consumer can obtain for free because they are abundant relative to the demand productive resources: the inputs used in the production of goods and services to make a profit: land, economic capital, labor, and entrepreneurship; also called “factors of production” Contribute!Did you have an idea for improving this content? We’d love your input. Improve this pageLearn More |
Why is it that scarcity forces us to make choices in regards to what and how much we produce?
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