What’s it: Scarcity is a finite state, so it cannot fulfill something. In the introduction to economics, scarcity represents a condition in which limited resources cannot satisfy our needs and wants, which are unlimited.
Economic activity produces various goods and services using existing resources. However, they are insufficient to fulfill all our needs and wants. When we have satisfied our needs and wants by consuming some goods and services, we want others.
Our new needs and wants continue to emerge after satisfying existing ones. And we want more and more variety. This is the reason why economists view our needs and wants as unlimited.
What is the difference between scarcity and shortage?
We may often hear the words shortage and scarcity in microeconomics. Both describe a similar situation. Shortages occur due to insufficient supply to meet demand (excess demand). It could happen due to a decrease in supply, such as a natural disaster. Or, it’s because demand is increasing beyond our ability to produce. As a result, goods or services are not available even if their demand exists.
Meanwhile, scarcity occurs because finite quantities must satisfy unlimited wants. We cannot fulfill certain demands because our resources have already been used to produce others. And we cannot produce everything at once using the available resources.
Take a farm as a case. For example, the market asks for 100 units of oranges or apples. But unfortunately, the land only can produce 100 units of fruit. So, we can only use it to produce one type: oranges or apples.
Only producing apples can meet and satisfy market demand. The opposite applies if we produce oranges. However, we cannot produce both due to limited land capacity.
So, if we plant apples, we cannot grow oranges. But, on the other hand, if we grow oranges, we cannot grow apples.
Say, we plant oranges on the land. Apples are not available in the market, and it is not due to a shortage. Rather, it occurs due to scarcity. The available land can only produce 100 units, and we decide to grow oranges instead of apples.
Other times, bad weather causes oranges production to fall. As a result, the market faces a shortage of oranges, assuming the demand is unchanged. This situation is not a scarcity because we can still increase citrus production at a later time when the weather returns to normal. However, apples are still scarce because even though the production of oranges is decreasing, we can’t grow them either.
The case above shows us the shortage occurs because we cannot produce at maximum capacity due to weather problems. Therefore, even though the land is available to produce oranges, we cannot produce 100 units.
On the other hand, apples are scarce because there are not enough resources (land) to grow oranges and apples simultaneously. So, we decided to only grow oranges instead of apples.
In other words, scarcity occurs due to insufficient resources. Meanwhile, shortages occur due to production problems (which can also be due to increased demand) even though resources are available.
How do wants and needs relate to scarcity?
Economists explain scarcity by linking the resources to produce goods and services to our needs and wants. They view resources as limited. On the other hand, our needs and wants are unlimited.
We have many needs and wants. We fulfill them through:
- Physical objects (goods) such as food, drink, and clothing.
- Non-physical objects (services) such as education, health care, and entertainment
While needs may be limited, not with wants. Our dissatisfaction with what we have makes ours wants limitless.
Meanwhile, we have limited resources. They are not enough to meet our unlimited needs and wants. Thus, when we use resources for one good, they are not available to produce another. For example, when we have used labor to produce oranges, they are unavailable to produce apples and vice versa.
Therefore, we must make decisions to use resources at their highest use. This requires us to allocate them efficiently to produce the most desired goods.
Why is scarcity a major economic problem?
Economics is rooted in scarcity. Specifically, it studies how we behave in the face of scarcity. Through various theories, economists explain to us how we allocate limited resources.
For example, economists explain consumer equilibrium to describe how our consumption is constrained by our (income) budget. We have various alternatives to buying goods and services. However, they are limited because our income is insufficient to buy all the goods and services we need to satisfy.
So, we must choose the item we want the most by considering the available budget. First, we choose the most satisfying item (maximum total utility). Then, we choose which one maximizes the budget the most.
And consumer equilibrium is a situation in which we maximize satisfaction by buying the goods we want most using the available budget. In the graph, it is reached when the indifference curve intersects the budget line.
On the supply side, economists also explain scarcity through the production possibilities curve. They describe how producers face choices about what goods to produce using available resources.
Like consumers, producers cannot produce all the goods and services they want to sell to satisfy our needs and wants. Their resources are also limited. For example, they only have a few production machines and cannot recruit everyone.
As a result, producers must decide which goods can be produced by maximizing the available resources. For example, the available resources can only produce shoes and clothes. They can maximize resources at points along the production possibilities curve.
For example, firms can produce 700 clothes and 3,200 shoes at point A. Or, when they want to increase clothing production, they can operate at point B, producing 800 clothes with fewer shoes (3,000 units).
At point D, the producer is not maximizing the available resources. They have a higher capacity to produce more clothes and shoes.
On the other hand, point C is impossible to achieve using currently available resources. That can only be achieved if more resources are available or more productive. So, for example, they buy a new machine. Or, they replace old machines with technologically advanced machines, allowing them to produce more output with the same input.
What is the relationship between scarcity and innovation?
As mentioned earlier, our needs and wants are constantly growing and changing. We are never satisfied. The demand to satisfy needs and wants drives us to innovate.
How computers have evolved, from mainframe computers to laptops, provides a good example of explaining the link between scarcity and innovation.
Computers have been around for a long time. And because they help us in many ways, their demand increases yearly.
Even though mainframe computers have arrived, we are not satisfied with them. At the beginning of their release, mainframe computers were not economical. In addition, they are also slow and have many drawbacks, including having to require sufficient space for the mainframe. They also can’t store a lot of data or perform commands.
Such dissatisfaction triggers us to think better, considering the resources available at the time. We want better computers. We need them to be able to process faster and perform more tasks. In addition, we also want their size smaller. Then came the personal computer.
Entering a more modern era, our desires have changed again. Our mobility increases. Work requires us to work in various places, not just sitting at a desk. At the same time, we still need the help computers provide. Finally, we want computers to be more mobile and portable. Then comes the laptop, which supports us in performing tasks while accommodating our mobility.
Of course, a laptop is impossible to produce if it is not supported by better resources. In other words, it will remain scarce if we rely on old resources. This situation then requires us to improve the old resource. For example, we innovate manual machines into automated machines with more accurate precision to manufacture smaller devices, such as semiconductors.
Thus, dissatisfaction with existing products and services encourages innovation. Likewise, scarcity gives us a reason to continue to innovate by making available resources of higher quality (from manual machines to automated machines). Finally, better resources enable us to produce better products to satisfy our needs and wants.
Why is scarcity a relative concept and not an absolute concept?
Scarcity is a relative rather than an absolute concept. I mean, how available resources are to meet needs and wants varies between regions or individuals.
For example, some resources are abundant in one area but not another. Take water as a case. For some countries in Africa, water is scarce. Their geographic area experiences long droughts and shorter rainfall. But, in tropical rain areas like Indonesia, water is abundant, and we can find it anywhere. Thus, water is scarce in Africa but not in Indonesia.
Likewise, sophisticated physical capital is abundantly available in developed countries. However, they are not widely available in developing countries.
Then, at the individual level, resources are also scarce for some but not for others. Take money and time as an example. Unemployed people may have much free time with their families (satisfying the need to be closer to their children). However, they find it difficult to pay rent because they do not have enough money.
In contrast, rich people have less time for family and spend more time doing office work. However, they have a lot of money to meet their material needs.
How does scarcity affect choice?
Scarcity forces us to make choices about allocating resources. And the choices we make have an opportunity cost.
When resources are limited, we must prioritize their allocation. Take money as an example. We have to choose which products and services we need to buy. And every choice has consequences or costs. And in economics, we call this opportunity cost. It represents the next best alternative we sacrifice when choosing something.
Say we have two options for spending money: oranges or apples. When we buy oranges, consuming apples is an opportunity we must sacrifice. But, on the other hand, when we choose apples, the satisfaction lost from not consuming oranges is an opportunity cost.
And our choice is optimal when it comes to using resources at their highest use to satisfy needs and wants. For example, we use the money to get the things we want most. So when we decide to buy oranges, we believe it gives us higher satisfaction than when we buy apples.