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What is Scarcity in Economics?

  • Harina Rastogi
  • Jan 19, 2022
What is Scarcity in Economics? title banner

“The waste of plenty is the resource of scarcity.”- Thomas Love Peacock

 

We live in a world where people have unlimited desires. They want everything they can get and cannot get. But if we look at this desire from an economics perspective we can deduce that having unlimited wants is never an option. 

 

What we want is not always what we need. Needs are for necessities like air, water, food. Wants on the other hand are for non-desirable things. We need food to stay alive. But eating at a five star hotel with 7 courses is what we want. Everyone wants luxury and comfort but not all can afford it. 

 

Market of goods and services work on demand and supply. Sometimes our demands are so much that we cannot fulfill them. What happens then?

 

If you want a bag of wheat but when you go to the market you cannot find any. What will you do? If the market cannot provide you sufficient to fulfill your “needs” then it means that good has become scarce. It may sound easy or not so relevant but in reality scarcity is a major economic issue. All the developing countries have to face it. In this blog you will understand more about scarcity and the reasons why it is present in the economy.

 

(Recommended blog- Economic growth)

 

 

What is scarcity?

 

Scarcity arises when the demand of a particular good is greater than its supply. It can lead to implications like- limiting the options for people when buying a good. Gold, diamond and precious metals are scarce in the economy. 

 

And because they are scarce their prices are shooting up constantly. The basic function of demand and supply is what sets the price and the equilibrium in the market. So, if something is scarce its price will go up. 

 

Sellers have the knowledge about the wants of people. They use this knowledge to inflate the prices of the scarce goods because irrespective of the price people will buy them. People are more driven by their wants. Have you seen any person in India that does not like to buy precious metals even though the prices are high? 

 

The concept of scarcity is a significant variable in a country’s economy. Some people cannot afford to buy the scarce goods but some can. The whole economy is dependent on what companies produce keeping in mind the individuals. Whether they increase the manufacturing of scarce goods to reach an equilibrium and maintain stability? Or they keep on doing the same thing.

 

To manufacture goods we need resources and every country has different resources. They can be people, raw materials, government or even investment. If a country faces scarcity of resources in one part then it can use resources from other parts to relinquish it and vice-versa. The main point is to maintain a balance between the demand and supply of the consumers. 

 

Scarcity can also be created intentionally. Let us take an example- Government is responsible for money printing. And printing requires cotton, paper, ink and labour. These resources are available across the nation. Therefore, there are enough resources to fulfill money printing demand. But it is the decision of the government whether money printing will be done or not. 

 

Government does so for the main reason that if they print too much money then its value in terms of other currencies will depreciate in the market. If the supply of money is high then it will lead to inflation

 

“Neither a state nor a bank ever have had unrestricted power of issuing paper money without abusing that power.”- David Ricardo

 

People will have sufficient money to buy everything, even the scarce resources and it means that their purchasing power will increase. But it also means that the prices of the products will shoot up and everything will be costly too. Only because people can buy it. 

 

(Must read- Factors affecting the Supply of a Product)


 

What are the 3 main Economic problems?

 

The main economic activities involve production, distribution and disposition of goods. While carrying out these activities economies face the challenge of scarcity. This scarcity brings issues of resource allocation across the country. 

 

Resource allocation means how the resources should be distributed across the nation such that the society gets the best utility and advantage out of them. And as we read earlier, wants are unlimited and resources are not therefore, a balance must be maintained in the economy. 


The image depicts the 3 main economic problems of Scarcity which are mainly - what to produce, how to produce and for whom to produce

3 main economic problems


Resource allocation raises three main economic problems that are given below in detail. Basically the economy needs to choose what will be produced, which technique will be adopted to produce and finally who will consume the goods.

 

  1. What to produce

 

The economy needs to decide which type of goods it will produce. There are two choices - Consumer goods like wheat, rice or Capital goods like machinery etc. Which good will be produced and in what quantity is the main focus of this problem. 

 

Production of one good will entail less production of the other good. On the basis of the need and importance of goods, the economy has to decide. Resource allocation is done among different commodities in this problem. The main aim is to ensure that there is maximum aggregate satisfaction.

 

  1. How to produce

 

Another economic problem is how to produce. This is about selecting the most suitable technique of production of the goods decided above. There are two techniques- one is labour intensive and the other one is capital intensive.  

 

Both these techniques are suitable based on the type of product. Like in textile industries, labour is used more. In countries like the US, capital intensive approaches are used more.

 

  • Labour intensive technique - In this more labour is used and less of machines.

 

  • Capital intensive technique- In this more machines are put to use and less labour force is used.

           

 

  1. For whom to produce

 

This is the last of three problems. It is about which segment of consumers will consume the final product. Whether to manufacture for poor people or rich people? 

 

Choice issue arises because the resources are scarce and every person’s need has to be satisfied. Therefore, for whom to produce is as important as deciding what to produce. This issue can be divided into two subheads:

 

  • Personal distribution- It means how the distribution of national income among different people in an economy is done.

 

  • Functional distribution- For whom to produce is about satisfying the needs of every consumer. Functional distribution means how the different factors of production are shared within the national product of an economy.

 

(Suggested Read - What is GDP?)

 

Scarcity is the foundation of allocation problems in an economy. It is said that the free natural resources can also become scarce if there is a charge on their usage. Even the unwanted resources become scarce if people start wanting them more. 

 

Imagine a hypothetical situation wherein there is no shortage of anything. We would have nothing to study about. Wouldn’t that be boring?

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