Scarcity Principle


DEFINITION of 'Scarcity Principle'

An economic principle in which a limited supply of a good, coupled with a high demand for that good, results in a mismatch between the desired supply and demand equilibrium. In pricing theory, the scarcity principle suggests that the price for a scarce good should rise until an equilibrium is reached between supply and demand. However, this would result in the restricted exclusion of the good only to those who can afford it. If the scarce resource happens to be grain, for example, individuals will not be able to attain their basic needs.

BREAKING DOWN 'Scarcity Principle'

When a product is scarce, consumers are faced with conducting their own cost-benefit analysis, since a product in high demand but low supply will likely be expensive. This means that the consumer should only take action and purchase the product if he or she sees a greater benefit from having the product than the cost associated with obtaining it.

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  1. Can scarcity and surplus coexist together?

    Scarcity and surplus can exist together in the same market, but it requires active intervention to create this condition. ... Read Full Answer >>
  2. How can particular scarcities benefit specific stocks?

    In general, a scarce resource is one for which supply does not meet demand. This causes the price of the resource to increase ... Read Full Answer >>
  3. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  4. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  5. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
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