Scarcity: What It Means in Economics and What Causes It


Investopedia / Mira Norian

What Is Scarcity?

Scarcity is an economics concept rooted in one of the most basic facts of life: we live in a world of limited resources that requires choices about how they are allocated. In that sense, every product down to a pack of gum or a book of matches is scarce, since someone expended resources that could have been deployed elsewhere to produce it.

Scarcity is so fundamental to economics that scarce goods are also known as economic goods. In economics, scarce goods are those for which demand would exceed supply at a price of zero.

Some natural resources that may appear to be free because they are easily and widely accessible eventually prove scarce as they are depleted from overuse in a tragedy of the commons. Economists increasingly view clean air and a climate compatible with human welfare as scarce goods because of the significant cost of protecting them, and may place a price on them for the purposes of a cost-benefit analysis.

Key Takeaways

  • In economics, the concept of scarcity conveys the opportunity cost of allocating limited resources.
  • Scarce goods are those for which demand would exceed supply if they were free
  • Common resources like clean air and a sustainable climate have been increasingly recognized as scarce goods with costs as well as value.
  • Scarcity can also be used to denote the relative availability of production inputs or the decrease in the supply of a resource or product relative to demand over time.


Understanding Scarcity

In his 1932 Essay on the Nature and Significance of Economic Science, British economist Lionel Robbins defined the discipline in terms of scarcity:

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

In a hypothetical world in which everything of value—from food and water to masterworks of art—were so abundant it had no cost, economists would have nothing to study. There would be no need to make decisions about how to allocate resources, hence no need for theories about the interplay of such decisions and tradeoffs in an economy.

In the real world, on the other hand, all factors of production have a cost and therefore so too does every product. Every input incurs an opportunity cost because it can't be put to alternate use as a result. This opportunity cost reflects the inputs' scarcity.

Natural Resource Scarcity

Even abundant common resources long consumed at zero apparent cost often prove neither free nor limitless eventually. Climate isn't a tangible asset and its value is hard to calculate, but the costs of climate change for companies as well as the society are all too real. Air is free, but clean air has a cost in terms of the economic activity discouraged to prevent pollution, as well as value for health and quality of life.

To preserve the benefits associated with these resources, governments may require manufacturers and utilities to invest in pollution control equipment, or to adopt cleaner power sources. Governments and the regulated industries eventually pass on these costs to taxpayers and consumers. Breathing freely, in other words, is not really free.

Relative Scarcity of Inputs

While scarcity is fundamental to economics and the human condition, the term is also used to describe the relative availability of factors or production or economic inputs.

For example, imagine a hypothetical widget requiring just two labor inputs: workers and managers, with one manager required per 20 workers. Imagine further that the available labor pool consists of 20,000 workers and 5,000 managers. Clearly, there are more available workers than managers. Yet in terms of the proportion required to produce the widgets, workers are the relatively scarce resource, since they're required in a ratio of 20 per manager for production, but outnumber managers by a ratio of only 4 to 1 in the labor pool.

The factors of production compared this way could just as easily be land and dairy cattle. If pasture land were the limiting factor in milk production, land could be said to be relatively scarce. Conversely, if the principal production constraint was the size of the herd, cattle would be the relatively scarce factor of production.

Scarcity as Market Mover

Scarcity may also be used to denote a change in a market equilibrium raising the price of the resource based on the law of supply and demand. In those instances, scarcity denotes a decrease over time in the supply of the product or commodity relative to the demand for it.

The growing scarcity reflected in the higher price required to attain a market equilibrium could be attributable to one or more of the following:

  • Demand-induced scarcity reflecting rising demand
  • Supply-induced scarcity caused by diminished supply
  • Structural scarcity attributable to mismanagement or inequality

Does Scarcity Mean Something Is Hard to Obtain?

None of the economic definitions of scarcity require a product or resource to be unavailable to be called scarce. In fact, the definition of a market price is one at which supply equals demand, meaning all those willing to obtain the resource at a market price can do so. Scarcity can be used to explain a market shift to a higher price, to compare the availability of economic inputs, or to convey the opportunity cost involved in allocating limited resources.

Are There Goods That Are Not Scarce?

This article is free to read. Other forms of easily reproduced intellectual property, including films and music, derive their scarcity from copyright protection, while the inventors of new drugs and devices must secure patents to deter imitators. In a world of limited resources, many apparently free goods may have an indirect or hidden cost. If the free stock trade does not ensure best execution, perhaps it has a cost, just like clean air.

How Can a Society Deal With Scarcity?

Societies can deal with scarcity by increasing supply. The more goods and services available to all, the less scarcity there will be. Of course, increasing supply comes with limitations, such as production capacity, land available for use, time, and so on. Another way to deal with scarcity is by reducing demand. Rising prices may play that role in market economies, while command economies might use quotas or rationing. In practice, mixed economies also frequently use quotas and price caps.

Article Sources
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  1. Lumen Learning. "Understanding Economics and Scarcity."

  2. SSRN. "Relative Prices and Climate Policy: How the Scarcity of Non-Market Goods Drives Policy Evaluation."

  3. Environmental Economics. "Daily Demand and Supply: Is Air Scarce?"

  4. Lionel Robbins. "The Nature and Significance of Economic Science," Page 15. MacMillan, 1932.

  5. ScienceDirect. "Population and Technological Change in Agriculture."

  6. Economicshelp. "Scarcity in Economics."

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