Scarcity Definition and Why It’s Important in Business

By Indeed Editorial Team

Updated September 8, 2021 | Published February 4, 2020

Updated September 8, 2021

Published February 4, 2020

Scarcity is one of the most important aspects of business and economics. It has the potential to affect how businesses utilize resources, manufacture their products and address their personnel requirements. Understanding scarcity and how it could affect you is essential for successfully managing a business. In this article, we discuss what scarcity is and why it is so important, with answers to frequently asked questions.

What is scarcity?

Scarcity refers to the limited availability of resources that are typically available for use. Also known as paucity, it is opposed to the theoretically infinite demand for resources that we have as a society.

In economics, scarcity refers to the gap between insufficient resources and the theoretical needs people have for these resources. In situations characterized by scarcity, societies have to decide how to allocate scarce resources efficiently, to address the needs and wants of the majority population.

In general, all resources that entail some cost during consumption can be considered scarce. In reality, however, what really has the most effect on society is relative scarcity.

Some examples of scarcity related to business are:

  • Scarcity of exported products resulting from an embargo on imports of materials used in production

  • Refusal of pharmaceutical companies to manufacture drugs that do not incur significant profits, resulting in scarcity of those medications

  • Insufficient corn harvests due to poor weather, which results in insufficient food supply and ethanol for fuel

  • Scarcity of high-level skilled workers due to insufficient or substandard education

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Types of scarcity

Scarce goods are those that are associated with a virtually limitless demand. These can range from limited, valuable resources such as petroleum oil to T-shirts that go on a limited release from a designer clothing company. When a large number of people line up to purchase those shirts over the supply, the shirts effectively become scarce goods. In contrast, goods that are readily available at little to no cost are known as non-scarce or free goods.

Scarcity generally falls under three categories:

  • Demand-induced scarcity. This occurs when the demand for a particular product or resource far exceeds the supply that the economy can provide.

  • Supply-induced scarcity. This occurs when environmental degradation or other unforeseen factors cause the supply of a resource to decrease significantly despite the demand being within normal limits.

  • Structural scarcity. This occurs when there is unequal access to particular resources among members of the population.

Why is scarcity important?

Scarcity is one of the most significant factors that influence supply and demand. The scarcity of goods plays a significant role in affecting competition in any price-based market. Because scarce goods are typically subject to greater demand, they often command higher prices as well. This is part of the reason why high-end cellphones and designer clothing are more expensive than their more abundant counterparts. Problems arise when resources that are essential to the function of society become scarcer over time.

Scarcity affects more than just products or natural resources. Everything usable can be considered resources. Common examples are oil, coal and precious metals. When these materials become scarce, the ability of businesses to meet production goals can be affected adversely.

In some cases, even time can be considered a resource. Consequently, time is subject to the rules of scarcity as well. To illustrate, most people have only eight or nine hours per day to perform their duties at work. If you have to go on a personal errand, you are taking away from the hours that should be allotted to work. You could, therefore, end up with a scarcity of time to do the duties that are expected of you by your employers.

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How does scarcity work in business?

Scarcity helps people make more informed choices about how to use available resources. The concept of scarcity works in business in the following ways:

Scarcity is essential to the study of economics

A fundamental aspect of scarcity is the mismatch between supply and demand. It is the scarcity of goods that requires economists to study the effective allocation of resources, as well as assess opportunity cost and risk reduction.

Scarcity enables businesses to ensure continued profitability

When faced with the scarcity of a particular product or resource, manufacturers have to make adjustments to ensure continued profitability. They may switch to alternative packaging materials, for example, or substitute certain ingredients in their products.

Scarcity helps provide for the needs of customers

High demand for certain products often results in their scarcity over time. Companies that want to keep providing their customers with these products may decide to release a limited run or increase production to meet the demand.

Scarcity helps you navigate the job market

Employment opportunities and labor can also be considered finite resources. Depending on the circumstances of a specific job market, job openings or qualified personnel may be scarce. Job seekers may choose to target certain positions where qualified personnel is scarce. Conversely, they may also relocate to another city or country if employment opportunities are scarce in their chosen field.

Related: Economic Demand: Definition, Determinants and Types

Frequently asked questions about scarcity

Here are answers to some commonly asked questions about scarcity:

  • Why is scarcity a fundamental aspect of economics?

  • What are some of the most important issues regarding scarcity?

  • What are the effects of scarcity?

  • How does scarcity affect decision-making?

Why is scarcity a fundamental aspect of economics?

The effective allocation of resources is a significant aspect of economics. The limited nature of resources relative to the unlimited bounds of human needs and wants makes the study of scarcity an integral part of economics.

What are some of the most important issues regarding scarcity?

The constant presence of scarcity in most of the world requires asking some pressing questions, including:

  • Why is there such a disparity between rich and poor countries?

  • Why have some countries experienced more economic growth than others?

  • Why do some countries develop at a rapid and constant pace while others do not, regardless of previous economic growth?

  • What can we do to reduce poverty and encourage economic growth?

What are the effects of scarcity?

The scarcity of resources may lead to widespread problems such as famine, drought and even war. These problems occur when essential goods become scarce due to several factors, including the exploitation of natural resources or poor planning by government economists.

How does scarcity affect decision-making?

Because scarcity involves working with limited resources to satisfy unlimited wants, people are often compelled to choose from different alternatives. In most cases, they have to give up the expected value of one particular option in preference to the expected value of the next best option.

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