Loading the player...

What is 'Scarcity'

Scarcity refers to the basic economic problem, the gap between limited – that is, scarce – resources and theoretically limitless wants. This situation requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs and as many additional wants at possible. Any resource that has a non-zero cost to consume is scarce to some degree, but what matters in practice is relative scarcity. Scarcity is also referred to as "paucity."

BREAKING DOWN '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 behaviour as a relationship between ends and scarce means which have alternative uses.

In a hypothetical world in which every resource—water, hand soap, expert translations of Hittite inscriptions, enriched uranium, organic bok choy, time—was abundant, economists would have nothing to study. There would be no need to make decisions about how to allocate resources, and no tradeoffs to explore and quantify. In the real world, on the other hand, everything costs something; in other words, every resource is to some degree scarce. 

Money and time are quintessentially scarce resources. Most people have too little of one, the other, or both. An unemployed person may have an abundance of time, but find it hard to pay rent. A hotshot executive, on the other hand, may be financially capable of retiring on a whim, yet be forced to eat ten minute lunches and sleep four hours a night. A third category has little time or money. People with abundant money and abundant time are seldom observed in the wild. 

The Concept of Natural Resource Scarcity

Even resources considered infinitely abundant, and which are free in dollar terms, are scarce in some sense. Take air, for example. From an individual's perspective, breathing is completely free. Yet there are a number of costs associated with the activity. It requires breathable air, which has become increasingly difficult to take for granted since the industrial revolution. In a number of cities today, poor air quality has been associated with high rates of disease and death. In order to avoid these costly affairs and assure that citizens can breathe safely, governments must invest in methods of power generation that do not create harmful emissions. These may be more expensive than dirtier methods, but even if they are not, they require massive capital expenditures. These costs fall on the citizens in one way or another. Breathing freely, in other words, is not free.

If a government decides to allocate resources to making the air clean enough to breathe, a number of questions arise. What methods exist to improve air quality? Which are the most effective in the short term, medium term and long term? What about cost effectiveness? What should the balance between th? What tradeoffs come with various courses of action? Where should the money come from? Should the government raise taxes, and if so, on what and for whom? Will the government borrow? Will it print money? How will the government keep track of its costs, debts and the benefits that accrue from the project (ie, accounting)? Pretty soon, the scarcity of clean air (the fact that clean air has a non-zero cost) brings up a vast array of questions about how to efficiently allocate resources. Scarcity is the basic problem that gives rise to economics.

RELATED TERMS
  1. Scarcity Principle

    The scarcity principle is an economic principle in which a limited ...
  2. Pricing Power

    Pricing power refers to how much a change in price by a company ...
  3. Economic Efficiency

    A broad term that implies an economic state in which every resource ...
  4. Common Resource

    A common resource is a resource, such as water or pasture, that ...
  5. Natural Capital

    A reference to the stock of natural resources, such as water ...
  6. Common Pool Resource - CPR

    A common pool resource benefits a group of people, but provides ...
Related Articles
  1. Personal Finance

    Currency Principle vs. Banking Principle: How Different?

    Understanding the difference between the currency principle and the banking principle helps to illustrate the most basic functions of money.
  2. Personal Finance

    5 economic concepts consumers need to know

    A solid understanding of economics helps build a strong foundation in almost every area of life. Here are 5 economic concepts consumers need to know.
  3. Investing

    Why Stock Investors Shouldn't Sell Now: Morgan Stanley

    Investors should stay firmly in stocks and resist the temptation to sell on pullbacks.
  4. Insights

    Here Are the Countries With the Most Natural Resources

    Commodities are the raw materials for all products produced worldwide. This article lists the top 10 countries with the most natural resources.
  5. Investing

    Oil As An Asset: Hotelling's Theory On Price

    Not sure where oil prices are headed? This theory provides some insight.
  6. Personal Finance

    The No.1 Reason Why Couples Fight

    Learn how to resolve the financial and emotional issues surrounding a scarce commodity.
  7. Insights

    When Will Interest Rates Rise?

    Find out if -- and why -- the Federal Reserve will keep raising interest rates and what that might mean for savers, investors and the entire economy.
  8. Insights

    What is Money?

    Money: It's a part of everyone's life, and we all want it, but what is it, how does it gain value, and how it was created?
RELATED FAQS
  1. What kinds of topics does microeconomics cover?

    Read about the purpose, derivations and uses of microeconomics, and see how the interaction of scarcity and choice drives ... Read Answer >>
  2. How is an economy formed and why does it grow?

    Find out how an economy forms and why it grows, including the role that financial markets play and how productivity increases ... Read Answer >>
  3. What is the difference between accounting and economics?

    Discover the difference between accounting and economics by comparing and contrasting the financial discipline of accounting ... Read Answer >>
  4. What Are the Best Measurements of Economic Growth?

    Learn how economists and statisticians track economic growth and why GDP might not be the best measurement of real economic ... Read Answer >>
  5. Why are the Factors of Production Important to Economic Growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  6. Which factors have the most influence on the law of demand?

    Find out what factors most influence the level of demand for a good or service, and see why demand is based on individual ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center