What Is Scarcity?
Scarcity is an economic concept where individuals must allocate limited resources to satisfy their needs. Scarcity occurs when demand for a good or service is greater than availability.Scarcity affects the monetary value individuals place on goods and services.
Key Takeaways
- Scarcity is an economic concept where individuals must allocate limited resources to satisfy their needs.
- Scarcity limits the choices available to consumersin an economy.
- Some natural resources that are easily and widely accessible eventually prove scarce as they are depleted from overuse.
- Scarcity affects the monetary value individuals place on goods and services.
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Production and Demand
If goods and services are abundant and unlimited, there is no need to make decisions about allocating resources. However, scarcity limits the choices available to consumersin an economy.Scarcity makes goods more valuable and sellers can set higher prices.
Scarcity also describes the relative availability of factors or production or economic inputs.Suppose producing a widget requires two labor inputs: workers and managers, with one manager required per 20 workers. The available labor pool consists of 20,000 workers and 5,000 managers. There are more available workers than managers. Yet, workers are a relatively scarce resource, since they're needed for a ratio of 20 per manager for production, but outnumber managers by a ratio of only 4 to 1 in the labor pool.
Societies face limitations when trying to increase supply. Production capacity, land available for use, time, and labor are all considerations. Another way to deal with scarcity is by reducing demand through quotas, rationing, or price caps.
Scarcity forces consumers to make choices that come with associated opportunity costs. Opportunity cost is the cost of what is given up, compared to the value of the alternative.
Natural ResourceScarcity
Abundant common resources over-consumed at zero cost at first often prove limited. Climate isn't a tangible asset and its value is hard to calculate, but the costs of climate change affect companies and societies. Air is free, but clean air has a cost in terms of the economic activity discouraged to prevent pollution for health and quality of life.
Some natural resources that may appear free because they are easily and widely accessible eventually prove scarce as they are depleted from overuse in a tragedy of the commons. Economists increasingly view a climate compatible with human welfare as scarce goods because of the cost of protecting them and place a price on them for a cost-benefit analysis.
Governments may require manufacturers and utilities to invest in pollution control equipment, or to adopt cleaner power sources. Governments and the regulated industries eventually pass costs to taxpayers and consumers.
Scarcity and the Market
Scarcity may denote a change in a market equilibrium raising the price based on the law of supply and demand. In those instances, scarcity denotes a decrease over time in the supply of the product or commodity relative to demand. The growing scarcity reflected in the higher price required to attain a market equilibrium could be attributable to one or more of the following:
- Demand-induced scarcity reflects rising demand
- Supply-induced scarcity caused by diminished supply
- Structural scarcity attributable to mismanagement or inequality
Does Scarcity Mean Something Is Hard to Obtain?
Scarcity can explain a market shift to a higher price, compare the availability of economic inputs, or convey the opportunity cost in allocating limited resources. The definition of a market price is one at which supply equals demand, meaning all those willing to obtain the resource at a market price can do so. Scarcity can explain a market shift to a higher price, compare the availability of economic inputs, or convey the opportunity cost in allocating limited resources.
When Is Scarcity Intentionally Created?
A prominent example of intentional scarcity can be seen in the drug market. Inventors of new drugs and devices secure patents to prevent competitors from manufacturing the same products for a limited amount of time. This intentionally creates scarcity, allowing inventors to benefit commercially from their work for a window.
How Does Monetary Policy Affect Scarcity?
In the U.S., the Federal Reserve controls the money supply. When governments print too much money, the value of the money decreases. Supply is high and money is less scarce. However, too much money in aneconomy can lead toinflation.Governments tend to keep the money supply relatively scarce through contractionary policy. The main contractionary policies employed by the United States include raising interest rates, increasing bank reserve requirements, and selling government securities.
The Bottom Line
When individuals must allocate limited resources to satisfy their needs, scarcity occurs. Scarcity limits the choices of consumersin an economy. Scarcity can affect a country's money supply, natural resources, available labor, and means of production.
