What Is Scarcity in Economics? Plus Examples and Definitions
Scarcity is a fundamental term in economics and describes how the availability of supplies, raw materials or employees is crucial to producing goods and services and setting their price. Natural disasters, consumer habits, international relations and other factors can influence scarcity. Understanding scarcity and how it affects businesses can help you develop professional capabilities to further your career.
In this article, we explore the definition of scarcity in economics, explain how it works and provide 12 specific examples of scarcity in the free market to help you better understand how it affects the economy.
What is scarcity in economics?
Scarcity in economics is a term describing finite resources, or the perception of limited resources, when there's not enough to fulfill human needs and wants. It can also refer to how companies decide what and how to produce using limited resources and how they determine a retail price for the item based on purchase demand.
Scarcity occurs when the demand for a natural resource, product or service exceeds the supply. It often implies that the current level of use of a natural resource is unsustainable in the long-term, most often for these two kinds:
Nonrenewable resources: Natural elements like oil and precious metals that don't replenish once gone.
Renewable resources: Natural elements that are consumed faster than their ability to replenish, like fresh water, fish and trees.
Read more: Scarcity Definition and Why It's Important in Business
How does scarcity work?
Scarcity works in the free market by supply and demand, which can fluctuate the price of a good or service over time, when there's more or less of it available. For example, oil. This limited resource sees its price consistently change. When oil reserves get used, the supply falls. If it becomes scarce, the price often rises dramatically. Extremely high pricing can create less demand in response and some companies may find alternatives, including:
Other oil sources
Other power sources, like solar panels, battery power or electricity
Reducing the use of goods and services, like equipment, cars and airplanes
Consumers may have no other choice but to buy a higher-priced item, like gas in this example, or they can seek alternatives, like purchasing a hybrid or electric car, bicycle or battery-operated lawn mower.
Related: Supply and Demand: Definition and How it Works
What are the causes of scarcity?
There are three chief causes of scarcity in the economy:
Demand scarcity: When there's a high demand for a resource or product, because of increasing populations or changes in preferences.
Supply scarcity: When the supply or resource is low or out, due to weather, disasters or resource depletion
Structural scarcity: When there's mismanagement or inequality of access to populations, often because of politics or location
Other causes of scarcity include when there's no alternative resource or when irreparable damage to a resource occurs.
Related: Understanding How a Market Economy Works
What are examples of scarcity?
Scarcity in economics can happen across industries, nations and resources. Here are several examples:
You can have a land scarcity when there's a shortage of land area for populations to grow food, raise livestock or develop housing and infrastructure. For example, the desertification of the land masses around the world is causing a decline in useful land for farming and the depletion of forests is leading to a scarcity of wood and building materials in certain countries, causing the reuse of supplies from demolished buildings. The erosion of coastlines is another example of land scarcity occurring.
Related: 18 Top Economics Degree Jobs
Housing can become scarce for certain populations, regions or nations. For example, land in New York City is limited and expensive for development. The more people who move into the city, the fewer apartments or housing options may be available, which can often lead to higher rent and purchase prices. Housing shortages can also happen during times of natural disasters, like fires, hurricanes and tornados.
Related: How Does Supply and Demand Affect Prices?
Overuse of land, water and animals can create a scarcity of the resource. For example, overhunting, excessive farming or overfishing can all create scarcities. Property rights and environmental protections often establish restrictions to prevent the overuse of a body of water, land parcel, forest or animal.
Related: Supply-Side Economics vs. Demand-Side Economics: Definitions and Examples
Natural resources like gold, oil, silver and other fossil fuels are naturally rare. When demand exceeds the supply, these resources become scarce and prices can go up. Other commodities, like diamonds, command a high price because of their limited availability and control of their market.
Read more: What Is a Commodity? (Plus Benefits and Types)
With environmental concerns like global warming and changing weather patterns, some areas of the world are drier than they once were, with fewer rivers and access to water, for both humans and animals alike. Water scarcity can also happen through improper or poor maintenance of infrastructure, like the pipes for a city's water supply. Mindful usage of water during household activities like showers, washing dishes or watering plants can help conserve the supply of this natural resource.
You can have a labor shortage when there's not enough of a certain skill set, like doctors, nurses, teachers, pilots or engineers, for example. Historically, there have been labor shortages during and after wartime, because of the loss of lives and livelihoods. Undereducated populations and labor strikes can also result in labor scarcity.
Related: Service vs. Commodity: What's the Difference?
The health care industry experiences shortages through the limited number of hospital beds and health are employees, particularly when there's a health care crisis or a waiting list for certain operations and procedures. Medical supplies, prescriptions and medications, like the annual flu vaccine, are also prone to scarcity issues. Health care scarcity is a combination of other scarcity issues, such as labor and land.
Related: Aggregate Supply vs. Aggregate Demand: What's the Difference?
World health issues
Epidemics and pandemics like avian flu, swine flu or mad cow disease can cause scarcity in animal products, food supplies and imports or exports. In severe instances, they can also lead to a shortage of medical personnel to care for patients. Other world health issues can also create scarcity, such as an increased potential for dangerous storms.
Industries that work seasonal production, like construction, only operate for part of the year, which can affect the scarcity of certain products, supplies and services. Another seasonal shortage comes from consumer demand, like purchasing holiday gifts, for example. This can create temporary scarcities for popular consumer items.
Related: Seasonal Marketing: Benefits and How To Create a Campaign
International and national diplomacy
An embargo or tariff on imports from another country can cause a scarcity of products or resources, along with border disputes, inflation rates and government or international organization regulations. National laws or proposed legislation can also create a change in consumer purchasing habits and scarcity of a product, like ammunition for firearms. Another example of this scarcity is trade agreements ending because of war declarations between two or more countries.
Weather and natural disasters
Poor weather can give farmers a low yield, which can cause a scarcity of food for animals and people. Hurricanes, tornados, flooding, tsunamis and other natural disasters can also affect natural resources, imports and exports, food, housing and supplies. Also, harsh climates can experience delayed shipments or deliveries of goods and services, causing temporary scarcities in communities.
Congestion on roadways can create delivery delays and with a scarcity of land available to build new roadways or railways in certain areas, certain regions or communities can experience reoccurring scarcity. Roads damaged through natural disasters or weather can also create temporary scarcity. Finally, epidemics can decrease the number of people who can transport goods, causing scarcity.
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