Scarcity Principle: Definition, Importance, and Example

What Is the Scarcity Principle?

The scarcity principle is an economic theory 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.

Key Takeaways

  • The scarcity principle is an economic theory that explains the price relationship between dynamic supply and demand.
  • According to the scarcity principle, the price of a good, which has low supply and high demand, rises to meet the expected demand.
  • Marketers often use the principle to create artificial scarcity for a given product or good—and make it exclusive—in order to generate demand for it.

The scarcity principle is related to pricing theory. According to the scarcity principle, 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. And if the resource that is scarce happens to be grain, for instance, individuals will not be able to attain their basic needs.

Understanding the Scarcity Principle

In economics, market equilibrium is achieved when supply equals demand. However, the markets are not always in equilibrium due to mismatched levels of supply and demand in the economy. This phenomenon is referred to as disequilibrium. When the supply of a good is greater than the demand for that good, a surplus ensues. This drives down the price of the good. Disequilibrium also occurs when demand for a commodity is higher than the supply of that commodity, leading to scarcity and, thus, higher prices for that product.

For example, if the market price for wheat goes down, farmers will be less inclined to maintain the equilibrium supply of wheat to the market (since the price may be too low to cover their marginal costs of production). In this case, farmers will supply less wheat to consumers, causing the quantity supplied to fall below the quantity demanded. In a free market, it can be expected that the price will increase to the equilibrium price, as the scarcity of the good forces the price to go up.

When a product is scarce, consumers are faced with conducting their own cost-benefit analysis; a product in high demand but low supply will likely be expensive. The consumer knows that the product is more likely to be expensive but, at the same time, is also aware of the satisfaction or benefit it offers. This means that a consumer should only purchase the product if they see a greater benefit from having the product than the cost associated with obtaining it.

Special Considerations

Scarcity Principle in Social Psychology

Consumers place a higher value on goods that are scarce than on goods that are abundant. Psychologists note that when a good or service is perceived to be scarce, people want it more. Consider how many times you’ve seen an advertisement stating something like this: limited time offer, limited quantities, while supplies last, liquidation sale, only a few items left in stock, etc.

The feigned scarcity causes a surge in the demand for the commodity. The thought that people want something they cannot have drives them to desire the object even more. In other words, if something is not scarce, then it is not desired or valued that much.

Marketers use the scarcity principle as a sales tactic to drive up demand and sales. The psychology behind the scarcity principle lies on social proof and commitment. Social proof is consistent with the belief that people judge a product as high quality if it is scarce—or if people appear to be buying it. On the principle of commitment, someone who has committed themselves to acquiring something will want it more if they find out they cannot have it.

Example of Scarcity Principle

Most luxury products, such as watches and jewelry, use the scarcity principle to drive sales. Technology companies have also adopted the tactic in order to generate interest in a new product. For example, Snap Inc., unveiled its new spectacles through a blitz of publicity in 2016. But the new product was available only through select popups that appeared in some cities.

Tech companies may also restrict access to a new product through invites. For example, Google launched its social media service, Google Plus, in this manner. Robinhood, a stock trading app, also adopted a similar tactic to attract new users to its app. The ridesharing app Uber was initially available only through invites. The idea behind this strategy is to place a social value on the product or service and leverage the idea of exclusivity.