What Is Scarcity? How Scarcity Works in Economics

In economics scarcity, or paucity, occurs when there is a disparity between the limited availability of a given resource and the demand for that resource. In theory, human wants can be infinite, but there is a finite amount of material resources, meaning there will always be some degree of scarcity. An economic good has a degree of scarcity, allowing it to be priced. A free good, such as air, that is not scarce is thus not commodifiable. The two main categories of economic scarcity are relative and absolute scarcity. These scarcities differ because of [supply](https://www.masterclass.com/articles/what-is-the-law-of-supply) and demand: - __Relative scarcity__: A commodity is relatively scarce when there is a rising [demand](https://www.masterclass.com/articles/law-of-demand-explained) for it, and there is flexibility in producers' ability to meet that demand. For example, there might be a natural limit on the materials to produce electric motors. As demand increases, production methods will improve, but supply eventually will catch up, at least in theory. - __Absolute scarcity__: When a commodity has physical limits on its availability, it is subject to absolute scarcity. Crucially, absolute scarcity does not relate to demand. For example, there is an absolute scarcity of hours in the day—you cannot add more time to a twenty-four-hour period. Works of art are absolute scarce commodities; their price could theoretically keep going up because they are unique. However, demand could also fall due to lack of interest; they are subject to absolute scarcity either way. The [tragedy of the commons](https://www.masterclass.com/articles/understanding-the-tragedy-of-the-commons) is an economic theory first formulated by evolutionary biologist Garrett Hardin. The theory posits what will happen if a given population's theoretically limitless wants and needs are paired with a limited shared resource, such as a field for grazing animals. The idea is that, eventually, the resource will be completely depleted to everyone’s detriment. Many economists question the relevance of this example to the field of [macroeconomics](https://www.masterclass.com/articles/learn-about-macroeconomics) because there are real-world commons that have been well preserved over long periods. Nonetheless, the theory is a common example of scarcity causing widespread hardship. The concept of scarcity is vital in economics, as it affects the factors of production in national and local economies. Scarcity is a basic economic problem, and examples of scarcity include: 1. __Land__: Land is one of the original scarce natural resources. Land will continue to increase in value as more of it is put into some kind of value-creating activity. Land is crucial for human survival, whether for the growing of crops, fostering biodiversity, or providing space for living, so it tends to be an expensive resource. 2. __Labor__: While the human population continues to grow, only a specific subset of the population is available to work over a given period. Constraints include the elderly and the young being unable to work. This scarcity is further exacerbated by members of the working-age population lacking the necessary skills for many jobs, as well as other factors. 3. __Housing__: Housing is de facto a scarce commodity because there is an uneven distribution of housing stock across geographical locations. Local economic conditions, the presence or lack of public subsidies, and profit-seeking also contribute to its scarcity. Demand, limited supply, and availability of resources can cause different scarcities. Consider the following types and causes of scarcity: 1. __Supply-induced scarcity__: This occurs when the supply for a resource falls short of the demand. Drought may cause crop yields to plummet, while demand will remain the same or increase somewhat. The diminished supply can cause significant disruptions. 2. __Demand-induced scarcity__: This type occurs when the supply for something remains stable while the demand increases. As the population increases, the demand for essential goods like food, clothing, and shelter increases. There may be constraints on the ability of a society to provide those goods, leading to supply-induced shortages. 3. __Structural scarcity__: Structural scarcity is when one segment of society has access to resources that are unavailable to another part of society. This scarcity is due to human factors; the design of supply chains, manufacturing practices, and financial machinations affect the allocation of goods and services. Scarcity can have varying effects on society and the operations of economies. Some of the impacts of scarcity will be relatively mild and ordinary, while others can be devastating: 1. __Inflation__: One of the most noticeable impacts of scarcity is [rising prices](https://www.masterclass.com/articles/what-is-inflation-in-economics). This can happen gradually over time as a resource becomes more scarce, or it can happen quickly in the case of a natural disaster. 2. __Shortages__: If severe enough, the scarcity of resources can lead to shortages of basic goods and services. A scarcity of food or potable water can cause widespread hardship. 3. __Competition__: Economic competition for scarce resources can lead businesses to provide a good or service for a lower price than their competitors, but still high enough to profit. In this instance, scarcity can spur entrepreneurship and economic growth. Large-scale economic competition can also contribute to devastating effects, such as war. 4. __Innovation__: Scarcity can drive innovation. As raw materials become increasingly scarce, people will find new ways to use them more efficiently. Modern refrigeration and transportation are two examples of technological advancement leading to better production processes. 5. __Opportunity costs__: There will always be some constraints on consumers’ buying power, causing scarcity. By choosing to purchase one item over another—like buying a new computer instead of replacing a broken appliance—people can contribute to the demand and availability of goods and services. Get the [MasterClass Annual Membership](https://www.masterclass.com) for exclusive access to video lessons taught by the world’s best, including Paul Krugman, Doris Kearns Goodwin, Ron Finley, Jane Goodall, and more. Scarcity is a key economic concept that examines the relationship between theoretically unlimited wants and limited resources. Learn how scarcity affects demand.