Scarcity

Scarcity is the basic economic condition in which the resources available to satisfy human wants are limited while the wants themselves are, for practical purposes, unlimited. Because land, labour, capital, time and money cannot cover everything people would like to have, individuals, firms and governments must choose how to use them. Scarcity is the starting point of almost every economics course and the reason prices exist.

The idea is best known from Lionel Robbins, whose 1932 Essay on the Nature and Significance of Economic Science defined economics as the study of human behaviour as a relationship between ends and scarce means that have alternative uses. Scarcity is related to, but not the same as, a shortage: a shortage is a temporary gap at a given price, while scarcity is permanent. It leads directly to the ideas of trade-off and opportunity cost.

Think of a family with one car and one Saturday. One person wants to visit relatives across town, another needs to get to football practice, a third wants to go shopping. The car cannot be in three places at once, and the day has only so many hours. Someone has to decide who gets the car and when, and every choice leaves something undone.

Economies face the same puzzle on a vast scale. There are only so many workers, fields, factories and hours of machine time. Deciding what to make, how to make it and who gets it is the core problem every society has to solve, whether by markets, by government plans, by custom, or by a mix of all three.

Economists group scarce inputs into the factors of production, also called productive resources:

• Land, meaning natural resources of every kind, from farmland and water to minerals and radio spectrum.
• Labour, the time and effort of people, limited by population, health, skills and hours in the day.
• Capital, the tools, machines and buildings, or capital goods, made in the past to produce things in the future.
• Entrepreneurship, the organising skill and risk-taking that combines the other three, which some textbooks list as a fourth factor.

Because each factor can be used in more than one way, putting it to one use means giving up the next-best use. A field planted with wheat cannot grow cotton the same season. This is the link between scarcity and choice that sits at the centre of microeconomics.

In a market economy, prices do most of the rationing. When something becomes scarcer relative to demand, its price rises, which discourages some buyers and encourages producers to supply more; the interaction is described by supply and demand. Prices also carry information, telling producers where resources are most valued. Economists judge outcomes against benchmarks such as Pareto efficiency, where no one can be made better off without making someone else worse off.

Markets do not handle every case well. Clean air and national defence are public goods that markets tend to under-supply, and pollution is an externality whose cost is not reflected in prices; both are examples of market failure. Other allocation methods include queues, lotteries, rationing coupons in wartime, central planning, and rules based on need or seniority. A budget is the household and government version of the same exercise.

Scarcity helps explain why some things are valuable and others are not. Water is essential yet usually cheap, while diamonds are inessential yet expensive, a puzzle classical economists called the paradox of value. The resolution came with marginal utility: what matters for price is the value of one more unit, and an extra glass of water is worth little when water is plentiful.

Money itself depends on controlled scarcity. Commodity money such as gold was valued partly because it is hard to mine, and fiat money keeps its value only as long as the central bank limits its supply; printing too much leads to inflation. In crypto-assets, scarcity is written into code: Bitcoin has a fixed maximum of 21 million coins, and token projects publish a total supply to signal how much will ever exist. Programmed scarcity does not, on its own, guarantee value; demand still has to exist.

Some economists and philosophers argue that the textbook assumption of unlimited wants is too strong, pointing out that many wants are created by advertising or social comparison, as with positional goods whose value comes from being scarce relative to others. Ecological economists stress that some resources are not just scarce but exhaustible, so prices may not signal depletion in time.

Research in behavioral economics has also studied how scarcity affects thinking. Sendhil Mullainathan and Eldar Shafir, in their 2013 book Scarcity, argued that having too little money or time narrows attention and can lead to decisions that make the shortage worse, a finding used in designing anti-poverty programmes.

• Library of Economics and Liberty: Scarcity