Scarcity Principle

What is the 'Scarcity Principle'

The scarcity principle is 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'

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. When supply of a good is more than demand for that good, a surplus ensues, which 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.

If the market price for, say 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 is 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, since 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 can give to him/her. This means that a consumer should only purchase the product if he or she sees a greater benefit from having the product than the cost associated with obtaining it.

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 – limited quantity in supply, limited time offer, liquidation sale, only 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 himself to acquiring something will want it more if he finds out he cannot have it.