What is scarcity? The invisible hand that pushes prices up

There are several things we wish to buy or wish to have; however, we have to come to face with the unfortunate reality of money or cash limits. For example, think about the time you went to a grocery store and realized you could pick and choose only a few items. This is how scarcity manifests itself into our everyday lives.

The problem of scarcity fundamentally trains our brains to think of the possible alternatives and weigh them against our limited resources. We aim to achieve and accumulate limitless, wantable resources but even our time and money are limited. Each and every decision taken includes the alternatives and is paired with the opportunity cost. Economics is a social science that looks at the supply, demand, production, and consumption of goods and services. Understanding how the problem of scarcity and the trade-off affects our decision-making improves the ability to think critically. As a result, we seek to understand the basics of Economics.

What Is Scarcity? Key Takeaways

Economics tells us scarcity is the lack of plentiful resources in comparison to theoretically infinite wants. This term can be boiled down to this simple definition: any resource with a non-zero cost associated with consuming it means that it's scarce to some degree.

The concept of scarcity drives people to make decisions about how they want their resources allocated so that everyone can satisfy not just their basic needs, but also additional wants whenever they can.

In short:

• Scarcity means limited resources vs. unlimited wants.
• It’s the foundation of supply and demand, influencing prices in every market.
• Scarcity affects everyone, not just those with fewer resources.
• It forces individuals, businesses, and governments to make decisions about allocation.
• Every choice under scarcity involves opportunity cost, the value of the next best alternative.

The Economic Foundation of Scarcity

Most students of economics will tell you that Lionel Robbins’ definition of economics is the most cited in the world. “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” What this tells us is that the economy will never be able to fully meet human wants and needs. Because of this, we will always have to make choices about how to use the resources available to us.

Consider the relationship between the three terms. If supply is low and demand remains high, the price will increase. During the pandemic, the rapid increase in prices of a variety of products, including cars and laptops, was due to a shortage of microchips. Whether you are a student managing your time with a productivity app, a property owner balancing multiple bills, or a government managing a budget, you will always have to make difficult choices.

Types of Scarcity

Economists classify scarcity into three major types:

• Absolute Scarcity: These are genuinely finite resources such as oil, rare earth minerals, or land in city centers. Once they are gone, they cannot be replenished.
• Relative Scarcity: These resources may exist in abundance overall but are limited by distribution or production. For example, in water-rich areas, people seemingly never have to worry about running out of water as the supply is limitless while in other areas people have no access to clean running water. In water-scarce areas, the cost of water increases, and authorities and citizens have to decide how to efficiently allocate resources. The same can be said about land prices when you compare the prices of properties in the countryside versus an affluent city center. It’s impossible to produce land out of thin air, so as more and more people move into a city, the prices can only move in one direction.
• Artificial Scarcity: This type of scarcity is unique as it is purely human-created. Luxury brands that limit production to increase exclusivity are a good example of this, or pharma companies that use patents to control product availability. Concert tickets are another example. If you take too long to buy your tickets, you are out of luck. Limited supply is willingly maintained even though more could be produced on paper.

Real-World Examples of Scarcity

All markets are affected by scarcity. Here are a few examples:

• Look at modern housing markets. There are a number of cities over the globe, such as London and New York, where property prices are astronomical due to the high demand coupled with limited land.
• The secondary market for concert tickets demonstrates scarcity as well. Due to lack of supply for a given event, tickets ‘sell out’ due to what is called in the industry a ‘scare’ tactic.
• The burning of Ethereum fees demonstrates scarcity in the crypto world. Ever since 2021, Ethereum has burned, or destroyed, a portion of the transaction fee with every transaction. Because a lower supply of things can sometimes increase demand, destroying a portion of the transaction fee can potentially increase the value of ETH.

What Are the Three Causes of Scarcity?

Economists refer to a situation in which a resource is, or can be, made limited as scarcity. In such a situation, even what was previously in abundance can be transformed into scarce resources. The three primary causes of this are:

Demand-induced scarcity occurs when consumers are demanding more of a good or service when it is in short supply, e.g. during the global pandemic when there was an insufficient supply of face masks.

Supply-induced scarcity occurs when there are external factors that make a resource more difficult to acquire. In such a case, supply is reduced with little or no change in demand, e.g. in a drought, there is less water available.

Structural scarcity is a type of scarcity that occurs when particular people have more access to a resource than other people. In such a case, it can be argued that there is a political or economic imbalance that created such a condition.

The Psychology of Scarcity

Scarcity doesn’t just change markets; it changes how people think. Behavioral economists describe the scarcity effect. This is when people perceive something as scarce, its perceived value increases. That’s why limited-edition sneakers sell for thousands.

Scarcity also fuels FOMO (Fear of Missing Out); the opposite of FUD (fear, uncertainty, and doubt). Marketers use countdown timers, “only 3 left in stock” alerts, and exclusive drops to trigger quick decisions. While artificial, these tactics rely on the same psychological mechanisms as natural scarcity. At a personal level, scarcity of time or money can narrow focus, sometimes leading to poorer decisions such as payday loan cycles or unhealthy food choices when stressed.

Scarcity in the Natural World

We usually think of scarce resources as natural resources that exist on Earth without humankind's intervention, such as gas, coal, or water. These commodities often have a limited supply. Food can be produced, for example, but the fuel we need to move it around is gone forever once we use it.

The scarcity of natural resources also generally increases with growing populations. This brings in relative scarcity, which refers to the scarcity of a resource in one region while it may be more abundant in another. This concept applies not only to commodities but also to services that rely on these resources.

Scarcity in the Economy

Economic scarcity occurs when the quantity individuals want to purchase exceeds the amount available for trade, driving up its monetary value. For instance, Bitcoin, with its limited supply of 21 million coins, illustrates this concept. As the coins become scarcer, their value grows higher, making it a potentially valuable choice for traders.

Scarcity vs Shortage

While scarcity and shortage might sound like interchangeable terms, there are several key differences between these terms and very different causes. 

Scarcity looks at the limited availability of something that cannot be replenished, natural resources for example. On the other hand, a shortage refers to a market phenomenon where the demand for something is greater than the quantity supplied at the market price.

When the market is balanced, there is an equal amount of supply and demand for a product. If these become unbalanced, we can have a shortage. Several things can create this scenario.

Firstly, it could be a result of increased demand. This is rarely permanent and can easily be reproduced. Secondly, it could be a result of a decreased supply. If the costs of a product increase causing the manufacturers to create less, and the demand stays the same, this will result in a shortage. In both instances, changes to the market can fix this. 

The main difference between scarcity and shortages is that shortages can usually be solved by altering supply and demand. With scarcity, however, there is a limit on the amount of a resource available with little that can be done to fix this problem. 

Living with Scarcity: Conclusion

Economics as a discipline is often rooted in the concept of scarcity. The way it drives human choice regarding the allocation of finite resources. It drives grocery shopping to global energy supply management and everything in between.

There is no avoiding scarcity; however, it can be managed through innovation, trading, and disseminating accurate information. Individuals and governments can increase the efficiency of their allocated resources by recognizing opportunity costs and making informed decisions.

In the end, scarcity teaches that real value comes from boundaries, and that every decision, in fact, is consequential.

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