Scarcity in Economics
Introduction
Economics is the study of human behaviour when people face limited resources to satisfy their unlimited wants. Since human wants are unlimited while resources are limited, people cannot satisfy all of their wants. This problem is called the problem of scarcity and is considered a key concept in economics. In this article, we will explain scarcity in detail.
What is Scarcity?
The limited availability of resources in contrast to unlimited wants is known as scarcity in economics. Scarcity leads to economic problem, which means that due to the limited availability of resources, it is impossible to satisfy all of our unlimited wants. Due to scarcity, individuals, firms, and governments are forced to make choices.
Historical Background
The following points explain the historical background of scarcity:
Classical Economics and Thomas Malthus
An economist named Thomas Malthus first recognised the problem of scarcity in the late 18th and early 19th centuries. He argued that a rapid increase in population can create a limited availability of resources, which causes scarcity. Then he wrote an essay explaining the relationship between population, scarcity, and resources, named “Principle of Population.”
Marginalism and Carl Menger
Marginalism refers to a theory that explains the value of goods and resources. An economist named Carl Menger explained scarcity in the late 19th century. He explained how consumers make choices on the basis of marginal utility in order to satisfy their needs and wants, given that there is a limited availability (scarcity) of resources.
Modern Economics and Friedrich Hayek
An economist named Friedrich Hayek further explained the role of scarcity in modern economics in the 20th century. He explained the relationship between prices and economic activities and how this process can contribute to the efficient allocation of resources.
Examples of Scarcity
The following are some examples of scarcity in economics:
Land Scarcity
Limited amount of fertile land is available for agricultural uses such as growing crops like wheat, rice, cotton, etc. This is called the scarcity of land.
Scarcity of Natural Resources
There are limited quantities of available natural resources, and many will deplete over time. For example, natural gas is limited and may deplete over time. Similarly, coal and oil are also limited and are decreasing in quantity as people are greedy to make money by extracting unlimited coal and oil from land. Similarly, other non-renewable resources are limited. Even some renewable resources are at risk of depletion because they are being depleted at a higher rate than the rate at which they are replenished. This is the scarcity of natural resources.
Labour Shortage
Labour is one of the factors of production which has limited availability in the world. Particularly, there is a shortage of skilled labor in different occupations. For example, there is a shortage of doctors and nurses in different countries.
Time and Capacity
There is also limited time and human capacity to do something, such as produce goods or provide services, in the given time.
Seasonal Scarcity
People are hired in specific seasons, such as the planting and harvesting seasons. This is the seasonal scarcity that occurs due to the limited number of people available during the peak seasons.
Water Scarcity
Factories are contaminating water bodies by throwing their waste directly into the water. That’s why there is limited quantity of fresh or clean water to drink and to use for hygiene purposes.
Health Care
Health care scarcity happens when there is limited availability of health care facilities for individuals. We witnessed this health scarcity during the COVID-19 pandemic, when hospitals and health care systems collapsed in many countries due to their excess demand.
Electricity Shortage
Electricity is a form of energy that is scarce due to its limited production. In many developing countries, people can enjoy only a few hours of electricity per day.
Global Scarcity
The global scarcity includes water, natural resources, and food. Some countries face food scarcity due to natural disasters such as famine and earthquakes. Water scarcity is also global due to the limited quantity of clean water for drinking.
Causes of Scarcity
The following are some causes of scarcity:
Rise in Demand
When the demand for a product exceeds its available supply, demand-induced scarcity is created. This means that buyers are willing and able to buy a higher quantity of the product while its supply is the same. This is illustrated by the following diagram.
In the above diagram, at price P0, the quantity demanded is higher than the quantity supplied due to a rise in demand, leading to scarcity. The rise in demand can be due to an increase in population, an increase in consumer income, or changes in the taste of customers. For example, the current increasing demand for electric vehicles may create a scarcity of electric vehicle components.
Fall in Supply
When there is a fall in the supply of a product, supply-induced scarcity is created. This means that the supply of a product has fallen while its demand has remained the same. This is illustrated by the following diagram.
In the above diagram, at price P0, the quantity demanded is higher than the quantity supplied due to a fall in supply, leading to scarcity. The fall in supply can be due to bad weather, a decrease in the number of firms, or the shortage of resources needed to produce that product.
Structural Scarcity
This happens due to a mismatch between supply and demand for a product. Due to this mismatch, scarcity is created for some people, but not for all. For example, there is an extreme scarcity of water in some countries while other countries have abundant water. In this case, all the countries do not have equal access to water, leading to structural scarcity for some countries.
Types of Scarcity
The following are some types of scarcity:
Natural Scarcity
Natural scarcity occurs due to the limited availability of natural resources. Natural resources such as fresh water for drinking, fossil fuels, and minerals are being depleted and becoming extinct with the passage of time, leading to their scarcity.
Artificial Scarcity
This scarcity occurs due to the industry's greed to make profit. Business firms limit the supply of specific goods or services in the market, which creates an artificial scarcity. This will help them make more money by increasing the prices of those products to get benefit of the excess demand.
Economic Scarcity
Economic scarcity occurs due to an imbalance between demand and supply of products or services. When demand is high while supply is low due to the limited availability of resources, economic scarcity is created.
Market Response to Scarcity
A free market responds to the scarcity through an increase in the price. This is illustrated by the following diagram.
In the above diagram, at price P1, there is a scarcity of product due to excess demand. The market mechanism will respond in the following ways to overcome scarcity.
- The price will increase from P0 to P1.
- Due to an increase in price, the quantity supplied will increase from Q1 to Q0, while the quantity demanded will increase from Q2 to Q0.
- The scarcity will be removed, and the equilibrium will be at E0, P0 and Q0.
Ways to Overcome Scarcity
The following are some ways to overcome scarcity:
Resource Management
A way to overcome the scarcity is through resource management. There should be strategies through which we can recycle or reuse the resources and limit their rate of depletion.
Innovation and Technology
With the use of technology, we can find new alternatives to the resources being depleted. For example, instead of relying heavily on fuel as a source of energy, through innovation, we can use renewable sources of energy like solar power or wind power.
Economic Policies
Economic policies can also overcome scarcity by implementing new policies that promote a fair distribution of resources among all users. Countries can open borders, and governments can use economic policies that ensure equal access for everyone to help overcome structural scarcity.
Rationing Systems
Some people have access to huge quantity of resources while other lack this access. The government can use a non-price rationing system to overcome the issue of scarcity. This means that the government controls the distribution of a limited amount of resources so that everyone has their limited access.
Resource Discovery
Scarcity is caused by the fact that the resources are limited. However, new discoveries of natural resources can increase their availability and, hence, limit the problem of scarcity. For example, the discovery of a new oil reserve can increase its availability and, hence, overcome its scarcity. Similarly, the discoveries of other resources can increase their availability and reduce their scarcity.
Conclusion
We conclude that scarcity occurs when resources are limited in relation to the unlimited human wants. Scarcity is a fundamental concept in economics and is the reason we are forced to make choices for resource allocation. The phenomenon of scarcity forces us to make better choices in decision-making while allocating resources. Scarcity can be caused by a rise in demand, a fall in supply, or their combination. Free markets respond to the problem of scarcity through an increase in the price of product. Governments can overcome scarcity through the use of technological innovation and effective economic policies for better allocation of scarce resources. It must be noted that the problem of scarcity can never be fully solved. This is due to the fact that resources will always be limited and human wants will always be unlimited and increasing.