In economics, scarcity refers to a the finite amount of resources that exists or is capable of allocation. This applies equally to consumers with a fixed budget or producers who have limited resources (factors of production) to allocate to operations.

• Recall, microeconomics focuses upon individual decision making and the allocation of scarce resources.

How does Scarcity Relate to the Supply of Goods and the Demand for Goods?

The decision by consumers to purchase creates demand for goods and services in the market. The decision to produce goods creates supply in the market.

Consumers allocate their resources in a manner that yields the highest utility from them. Producers supply goods and services to meet the demands of consumers. The amount produced, however, depends upon the benefit received from selling to consumers.

In essence, the supply and demand for scarce resources gives rise to a market.

What is the Scarcity Principle?

The scarcity principle is a theory in economics that maintains that scarcity in the supply of a product and high demand for that product cause a discrepancy in the supply and demand equilibrium. Restated, a scarce or rare goods often has a higher value or price in the market.

Think of it like this, if lots of people want a few things, the individuals willing to pay the most will be able to purchase them. This means the scarce items will be very expensive.

This results in a mismatch between demand and supply. The result is a shortage where individuals wishing to purchase the product will not be able to do so at the high price.

How to Create Equilibrium in Supply and Demand?

In order to reach an equilibrium between supply and demand, the scarcity principle offers that the price of a scarce product should be increased until the equilibrium is reached where the amount produced equals the amount demanded at the price reached.

How does Scarcity Distort Market Equilibrium?

Oftentimes, market equilibrium is distorted as a result of a mismatch in the level of supply and demand. That is, there is insufficient supply to meet the demand at a given price.

For equilibrium to be reached, the scarcity principle suggests that the price of the scarce good be increased so that the levels of supply and demand will match.

Why is this Relevant to Business?

Businesses want to understand how much of a good or service will be demanded at a given price. This will help in making production decision. It will also help make the decision of how to price the product.