What is scarcity? Definition and meaning

Scarcity or Paucity in economics refers to limitation – limited supplies, components, raw materials, and goods – in an environment with unlimited human wants. It is the fundamental economic problem of having what appears to be limitless human wants in a world with limited resources.

Economic assumptions

Scarcity is one of the economic assumptions that economists make. The others are self-interest, trade-offs, costs and benefits, and models and graphs.

Determining how to make the best use of scarce resources is fundamental to economics. The factors of production are not limitless, i.e., there is scarcity. Therefore, we must make choices about how best to use them. This is where economics comes in.

Factors of production are the building blocks or elements that we use to produce goods and services. Economists divide factors of production into land, capital, labor and enterprise (entrepreneurship).

In the world of economics, we have to learn to live with one basic problem: the gap between scarcity – limited resources – and unlimited wants. In order to satisfy those wants, suppliers need to determine how to use those limited resources carefully.

A fundamental part of economics

Scarcity is a fundamental part of economics. It is all about using the resources we have, i.e., the factors of production – which are limited. Using them, that is, to try to satisfy our seemingly unlimited wants.

The study of economics involves not just identifying scarcity, but also crafting strategies for efficient resource allocation to optimize the well-being of society.

British economist Lionel Charles Robbins (1898-1984), known for his leadership of the London School of Economics, is famous among economists today for his definition of economics, which he laid out in his 1932 Essay on the Nature and Significance of Economic Science:

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

Scarcity

No scarcity = no economics

Imagine a world with no scarcity, i.e., a land of plenty. Imagine that everything, even time, metals, minerals, raw materials, money was limitless.

In such a world, economists would have absolutely nothing to study. Nobody would have to think carefully about how to allocate resources. Also, there would be no trade-offs to consider or quantify.

The world we live in, however, is not like that. Absolutely everything around us costs something, because every single resource is scarce to some degree.

The Economist’s glossary of terms makes the following comment regarding scarcity:

“Market forces operating through the price mechanism usually offer the most efficient way to allocate scarce resources, with government planning playing at most a minor role. Scarcity does not imply poverty.”

“In economic terms, it means simply that needs and wants exceed the resources available to meet them, which is as common in rich countries as in poor ones.”

Consequently, the pursuit of efficiency in allocating scarce resources becomes a primary objective in both microeconomic and macroeconomic analyses.

Scarcity and sacrifice

The concept of scarcity is that there is never enough of something to satisfy all our conceivable wants. Even in the super-advanced economies with state-of-the-art technologies, there isn’t enough.

When there is scarcity we must make sacrifices, i.e., we must give something up or make a trade-off. That is, if we want to obtain more of the scarce resource that is sought after.

In our world, the condition of scarcity necessitates competition for scarce resources. In the book – The Economic Way of Thinking – authors Paul Heyne, Peter J. Boettke and David L. Prychitko wrote:

“[Competition occurs] when people strive to meet the criteria that are being used to determine who gets what.”

One of the ways we allocate scarce resources is through market prices or the price system.

In the same book, Heyne, Boettke and Prychitko also wrote:

“If a society coordinates economic plans on the basis of willingness to pay money, members of that society will [strive to compete] to make money.”

If economic agents use another criterion, we would expect to see competition in the environment of this other criterion.

Etymology of scarce and scarcity

Etymology is the study of the origin of words and how their meanings have changed.

According to the Online Etymology Dictionary, the English word ‘scarce’ first appeared in thirteenth-century Britain with the meaning ‘restricted in quantity.’ It came from Old North French scars, meaning ‘scanty, scarce.’

The Old North French term originated from Old French eschars. Eschars came from Vulgar Latin scarsus, which came from classical Latin excarpere, meaning ‘to pluck out.’

The opposite of scarcity, i.e., when there is an oversupply, is a glut.

“Scarcity” in compound nouns

There are many compound nouns containing the word “scarcity.” A compound noun is a term consisting of at least two words. Let’s have a look at some of them, their meanings, and how we can use them in a sentence:

  • Scarcity Mindset

A belief that resources are limited, leading to a focus on shortfalls and limitations rather than abundance and possibilities.
Example: “The scarcity mindset can lead individuals to make fear-based decisions rather than seeking creative solutions.”

  • Resource Scarcity

The economic situation where resources are insufficient to satisfy all wants and needs.
Example: “Resource scarcity in the region has driven up the prices of basic commodities, affecting local populations.”

  • Water Scarcity

The lack of sufficient available water resources to meet the demands of water usage within a region.
Example: “Water scarcity is a pressing issue in many arid countries, necessitating innovative conservation measures.”

  • Time Scarcity

The feeling of having less time available than is required to manage one’s responsibilities and desires.
Example: “Modern lifestyles often lead to a sense of time scarcity, even with technological advancements supposed to save time.”

  • Food Scarcity

The shortage of food resources or the inability to access adequate amounts of food.
Example: “Food scarcity in areas affected by drought has prompted international aid organizations to intervene.”

  • Scarcity Principle

An economic theory which suggests that a limited supply of a good, coupled with high demand for that good, results in a mismatch between the desired supply and demand equilibrium.
Example: “The scarcity principle is often used in marketing to create urgency and increase demand for products.”

  • Energy Scarcity

A state where the demand for energy is greater than the supply.
Example: “Energy scarcity has become a global challenge, prompting investment in renewable energy sources.”

Video – What is Scarcity?

In this visual guide presented by our affiliate channel, Marketing Business Network on YouTube, we explain what “Scarcity” is using straightforward language and easy-to-understand examples.