What is Scarcity?

Scarcity is like having two sandwiches for four people…

You may have to get creative, cutting the two sandwiches in half to feed four people. Or, you might sell the sandwiches to the two highest bidders, in which case the price of a sandwich will go up.

Scarcity happens when the limited availability of a resource is not enough to meet the theoretically infinite need for that resource.

With natural resources, for example, there is a finite supply, and we as humans can’t create more.

Let’s look at water, for example. When a drought occurs, the supply of water literally dries up. The demand is still there. And as the amount continues to decrease, it becomes more and more scarce.

In many cases, the cause of scarcity is a decrease in supply. Sometimes it’s unexpected, such as when a drought occurs, and the water dries up. In other cases, it’s merely slowly decreasing as we use up the supply — think of coal.

There are also situations where a change of circumstances can cause the demand to increase drastically, and the supply doesn’t grow at a pace that can keep up.

A historical example of a drastic increase in demand is the Industrial Revolution. It’s not that the supply of coal spontaneously decreased during that time. Instead, the rise of the industry caused a massive increase in the demand for coal.

It is only because of our increased demand for the resource that scarcity occurred. There is a finite amount of coal on the planet, and if demand doesn’t decrease, it’s plausible that we could simply run out.

Ultimately, we can break scarcity down into three primary types:

• Demand-induced scarcity: This happens when an increase in the population or an increase in consumption outpaces the availability of a resource.
• Supply-induced scarcity: This occurs when environmental factors decrease the availability of a resource, such as water during a drought.
• Structural scarcity: This is a result of unequal access to a resource. This might be a result of political or economic factors.

When we think of scarce resources, our minds often immediately go to the scarcity of natural resources — those that exist naturally without the actions of humans.

Many natural resources are finite — and we, as humans, use a lot of them. Some, like food, we can produce. But others, like oil, may just be gone forever once we use them up.

These are things that will only become more scarce as the population increases and as we continue to use them.

Though some natural resources are scarce, other natural resources fall outside the realm of scarcity altogether. An example of this is air.

Air is free. We don’t have to pay to use it. No matter how much we use, the quantity never decreases. Our governments don’t have to worry about rationing air.

Power from the air — wind power — is likewise a renewable resource that doesn’t become more scarce the more we use it.

You might be tempted to use the terms “scarcity” and “shortage” interchangeably.

While the two economic terms may look similar at first, they have some key differences and two very different causes.

Scarcity refers to the naturally limited availability of something that can’t be immediately replenished. Natural resources, for example, can’t be replenished on demand if we’ve used them all up.

A shortage, meanwhile, is a market phenomenon. It is something that happens when the demand for a product is greater than the quantity supplied at the market price.

When the market is in equilibrium, the supply of and demand for a product are in sync. When these get out of sync, we can have a shortage. A couple of different things can cause this.

First, the shortage could be a result of increased demand. For example, let’s say a celebrity shares a photo of the $15 shirt she got at Target. Suddenly everyone is rushing to Target to buy the shirt, and we end up with a shortage. It’s not permanent — The company can always create more.

A shortage could also be a result of decreased supply. Let’s say a company finds out the production costs for one of its products is going up. As a result, they decide to produce less of the product this time. If they haven’t also increased the price of the product — and we assume the demand for the product will stay the same — we’ll end up with a shortage.

Ultimately, supply and demand usually can be adjusted in the market to end a shortage. This is a critical difference between shortages and scarcity. With scarcity, there’s simply a finite amount of the resource available, and little to nothing can be done to fix it. In a shortage, the market usually can solve the problem.

Relative scarcity is when an uneven distribution of resources causes a resource to be scarce for some, but not for all. For example, in some parts of the world, water is an abundant resource that people never have to worry about going without. It comes out of the tap in seemingly unlimited supply.

And yet, there are millions of people throughout the world living with water scarcity, some with no access to clean drinking water. In the United States, there are parts of the country that face drought conditions for years on end.

In the areas where water is scarce, the price goes up, and governments and people have to make tough decisions about how best to allocate the resource.

Another example of relative scarcity would be land.

In rural areas, land is plentiful. There are forests and farm fields; houses often come with generously sized yards. And you’re not paying a premium for that land, because there’s a seemingly endless supply.

But in New York City? Land is a scarce resource for which you’ll pay dearly. City planners have put a lot of work into ensuring the land is allocated in the most efficient way possible. Still, no government or company can simply create more available land to keep up with the demand. It is finite. And the price reflects that.