Scarcity is a fundamental economic word that defines how the availability of supplies, raw materials, or laborers is necessary for creating things and pricing those items. Scarcity can be affected by natural disasters, consumer habits, international relations, and other causes. Understanding scarcity and how it affects business may help you advance your career by enhancing your professional skills. This article explores the concept of scarcity in economics and explains how it operates to help you comprehend its impact on the economy.
List of Contents
- What Exactly Is Scarcity?
- Working Principles of Scarcity
- 3 Types of Scarcity
- Production and Scarcity Factors
- Scarcity and Opportunity Cost
- Causes of Scarcity
- Effects of Scarcity
What Exactly Is Scarcity?
Scarcity is the conception that resources or things are in short supply. What people desire but cannot easily have is called rare. One of the fundamental concepts of economics is that when faced with a shortage, you must make tradeoffs. In addition, it is commonly believed that natural resources such as timber, oil, diamonds, and gold are rare. These materials are not easily accessible and do not exist in infinite amounts. To acquire oil, diamonds, or gold requires a substantial investment of time, money, or other resources.
It is possible that circumstances outside a person’s ability to pay to make a good rare. For example, automobiles may be limited owing to a scarcity of semiconductors, which are required to power numerous high-tech electrical components. As a result, automakers cannot create as many vehicles as consumers want, and car prices may rise. Automobiles may be considered scarce in this case, but only temporarily.
Working Principles of Scarcity
When demand for an item rises due to changes in people’s tastes, income, or the prices of similar commodities, providers may take time to raise the number of goods provided. As a result, a temporary supply shortage may create a gap between demand and supply and increase scarcity. When faced with scarcity, humans must make tradeoffs.
For suppliers, if a thing is rare, customers may queue at the door for a small amount of product the business has or call in regularly to see if it is available. If the suppliers do not want this to happen, they may increase the price. Consumers will buy fewer things at higher costs as prices rise, which will help reduce the waiting time. When faced with a shortage, this is one of the tradeoffs providers may evaluate.
If the price of things rises, customers may have to reallocate their money. Consumers may move to a substitute item or wait until the scarcity environment lessens before purchasing the goods. These options indicate a consumer’s tradeoffs when confronted with a limited commodity or service.
3 Types of Scarcity
1. Structural Scarcity
Structural scarcity differs from demand-driven and supply-driven scarcity in that it often impacts just a fraction of the population or a specific group of individuals. This may be due to geographical or even political factors.
Water scarcity in extremely dry areas such as deserts is a good example of structural scarcity caused by geographical factors. In many regions of the world, there is no local access to water, so it must be transported and properly stored.
2. Supply-Driven Scarcity
Supply-driven scarcity occurs when a resource’s supply is insufficient or decreasing despite constant or rising demand.
Concerning resource time, supply-driven scarcity happens regularly. There are only 24 hours a day, and every hour that passes reduces the remaining time. No matter how long you want, its supply will continue diminishing until the end of the day. This is especially obvious when an economics paper is due the next day.
3. Demand-Driven Scarcity
Demand-driven scarcity is probably the most straightforward since it describes itself. When there is a great demand for a resource or item, you might consider this demand-driven scarcity because of the imbalance between demand and supply.
Popular video game systems have recently demonstrated evidence of demand-driven scarcity. In these instances, there were not enough video game consoles available for purchase because the supply simply could not keep up with the demand, resulting in a shortage and hence a demand-driven scarcity.
Production and Scarcity Factors
Entrepreneurship is the element of production required to take risks, spend money and capital, and organize the necessary resources to generate products and services. Moreover, entrepreneurs are an important factor in production as they design products and services. They also determine the optimal allocation of the other three elements of production to produce those goods and services successfully.
Capital is an element of production used to physically generate commodities and services that must first be produced. Consequently, it might comprise machines, tools, structures, and infrastructure.
Labor is the element of production that corresponds to the individuals who perform the necessary labor to make an item. Therefore, labor can encompass a variety of occupations, including engineers, construction workers, attorneys, metalworkers, etc.
Land is an element of production that encompasses all resources derived from the earth, including timber, water, minerals, oil, and, of course, the land itself.
Scarcity and Opportunity Cost
Opportunity cost is the price of everything a person must pay to make a decision. For example, if you bought a skirt that cost $150, an economist would tell you it cost you a lot more than that. The actual cost of your purchase comprises all you had to sacrifice or do to acquire that skirt. You spent the time it took to get the money, the time it took to go to the store and pick the skirt, any other items you may have bought, and the interest on a $200 savings account. Economists take a more comprehensive approach to the concept of cost. Economists refer to this more comprehensive perspective of expenses as opportunity cost.
Causes of Scarcity
1. Understanding scarcity
In some situations, the causes of scarcity may be attributable only to personal perceptions. In other words, there may be no product and service deficiency. Rather, the issue may be that someone believes there is a deficiency and conserves more or does not bother to hunt for the resource. In other instances, firms intentionally create a sense of scarcity to encourage people to purchase their items. This is a standard marketing strategy for high-end items and technology.
2. Rapid declines in supply
A rapid decline in supply might also contribute to scarcity. Natural disasters, such as droughts and fires, or political factors, such as a government putting sanctions on another nation’s products, can result in rapid supply shortages. In such circumstances, the condition may be transitory, yet it still causes a shortage of resources.
3. Rapid demand grows
Another cause of scarcity is when demand rises faster than supply can meet it. For example, if you reside in a region with moderate summer temperatures, you might anticipate a significant increase in demand for air conditioning systems when an extremely hot summer happens. Even though this form of scarcity does not often continue for an extended time, it demonstrates how a sudden spike in demand can result in a relative shortage.
4. Unequal resource distribution
The uneven distribution of resources is one of the causes of scarcity. Frequently, resources are available to a subset of the population but not to another subset. For instance, what if you lived in a region where lemons were unavailable? In such situations, the issue is that there is no effective way to distribute resources to a given set of individuals. This might result from conflict, political decisions, or a lack of infrastructure.
Effects of Scarcity
1. Opportunity Costs
There will always be limits on the buying power of customers, resulting in scarcity. People can contribute to the demand and availability of products and services by choosing to purchase one thing over another, such as a new computer, versus a replacement for a damaged appliance.
Scarcity may inspire creativity. People will develop new methods to use raw resources more effectively as they become more scarce. Modern refrigeration and transportation are two instances of technical innovation that have improved manufacturing processes.
Economic competition for nonrenewable goods can enable enterprises to provide a product or service cheaper than their competitors. In this situation, scarcity might stimulate enterprise and economic growth. Large-scale economic competition may sometimes have fatal consequences, such as war.
Resource scarcity can cause shortages of essential products and services if severe enough. Food and drinkable water shortages can create widespread misery.
Increasing costs is one of the most visible effects of scarcity. This might occur gradually as a resource gets scarcer over time or rapidly during a natural calamity.
In short, scarcity may seem abstract, but it is a powerful marketing tool. It is the primary reason virtually everyone considers scarce items valuable. In addition, while it might stimulate sales, it is not a remedy for lagging sales. If marketers utilize it excessively, it may have the reverse effect; consumers may be scared away.
Scarcity refers to the limited availability of resources relative to unlimited human wants and needs. It is important because it forces individuals, businesses, and societies to make choices and prioritize their needs and wants.
Scarcity is caused by a variety of factors, including limited natural resources, population growth, technological advancements, and economic policies.
Scarcity can increase demand for certain goods or services, as people compete for limited resources.
Businesses respond to scarcity by adjusting their production and pricing strategies, and by investing in research and development to find alternative resources.
- Frictional Unemployment: All the Things You Need to Know
- Recession: How to Prepare for a Recession
- Economic Depression: A Great Prolonged Period of Economic Decline
- Deadweight Loss: A Big Loss of Economic Efficiency
Read more: Economies
Source: The Balance