Definition and Examples of Scarcity
Scarcity is the idea that there are limited resources or goods available. Anything people desire or can’t obtain easily is considered to be scarce. When facing scarcity, you have to make trade-offs, which is one of the underlying principles of economics.
Natural resources such as lumber, oil, diamonds, and gold are often thought of as scarce. These resources cannot be easily obtained and are not found in limitless quantities. To obtain oil, diamonds, or gold, it takes a lot of time, money, or other efforts.
Every good or service is scarce to some degree due to consumers and suppliers having to make tradeoffs in their time, budget, etc. in order to obtain them.
What makes something scarce could be circumstances outside of someone’s ability to pay for the good. For example, cars may be scarce due to a shortage in semiconductors, which are needed to make many of the high-tech electronic components work. As a result, manufacturers can’t make as many cars as consumers want to buy, so the prices of vehicles may rise. In this example, cars could be considered to be scarce, even if it is temporary.
How Does Scarcity Work?
When demand for a good increases due to a change in people’s tastes, income, or prices of related goods, it may take suppliers time to increase the quantity of goods supplied. As a result, there may be a temporary shortage in the market, creating a gap between how much people want of a product and how much is available to buy, creating more scarcity. When people face scarcity, they have to make tradeoffs.
A tradeoff is what you are giving up in order to do something else. These trade-offs occur for both consumers (demanders of goods) and suppliers (producers of goods).
For suppliers, if a good is scarce, consumers may line up at the door waiting for a limited amount of product the store has or frequently call in to check to see if it is available. If the suppliers do not want this to occur, they could raise the price. As price rises, consumers will want to buy less quantity at a higher price, which can help mitigate the issue of people waiting for the product. This is one of the trade-offs suppliers may consider when facing scarcity.
For consumers, they may have to allocate their budget differently if prices rise on goods. Consumers could also switch to a substitute good or choose to wait and purchase the good in the future when the scarce environment subsides. All of these possibilities represent the trade-offs a consumer faces when facing a scarce good or service.
The increase in demand for toilet paper during the early stages of the COVID-19 pandemic is a good example of how scarcity works. Suppliers could not increase manufacturing capacity fast enough to meet the sudden increase in demand for toilet paper. As a result, suppliers diverted labor and other resources toward manufacturing toilet paper, while consumers had to drive to multiple stores in order to find it.
Another way scarcity can occur is if there is a change to supply, rather than demand. A decrease in supply could occur if a major supplier of a good shuts down production or the costs of input increase. In this situation, a temporary shortage may also occur, especially if the product is essential or has an inelastic demand.
A recent example of this is the infant formula shortage in early 2022. A major production plant was shut down after a recall, hurting the domestic supply of formula. Families had to make trade-offs, such as buying alternative formula or shipping it in from Canada, even at a higher price, in order to feed their children.
When Does Scarcity Occur?
Since there are always trade-offs one has to make with their money, time, or resources, everything is scarce to some degree.
How is time scarce? Each time you sit on the couch to watch television, you could have alternatively been doing something else, like exercising, reading a book, or studying for a certification. You have a limited amount of time per day, yet many things to do. You have to make trade-offs.
Similar to time, you likely are not a billionaire who has an almost unlimited amount of money to buy things. Money is scarce, so you have to make decisions on what things you can afford to buy. Scarcity is the central principle in microeconomics since trade-offs, or opportunity costs, are involved in every decision you make.
- Scarcity is the idea that people have unlimited wants and needs but a limited means to achieve them.
- Goods, services, time, and ability are examples of things that can create scarcity.
- A core principle of economics is studying the tradeoffs people make when facing scarcity.
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