A Lesson On Scarcity

When we hear the word “scarcity,” what do we think of? Do we think of shortages or having little resources? Do we think of how little time we have in the day, or how scarce our money is right before payday? In our era and specifically our society, it’s very difficult to visualize scarcity given the great abundance we see every day. Our grocery store shelves are stocked with food, retail stores supplied with thousands of options of clothes to wear from casual to formal, and our most fundamental need is provided: clean water. It is easy to forget the concept of scarcity and what it even means. In economics, we have a very simple yet clear definition: our needs and our wants are infinite yet our resources are limited. This has many implications for our economy and even more so for our normal lives.

To understand scarcity correctly, we must understand its economic implications first. Then, we might identify what consequences this may have on normal, everyday life. First, let’s understand that since resources are finite (i.e. scarce), this is what creates the supply in any market economy.

This, in turn, has theoretical consequences on the relation between the quantity supplied and the price at that given quantity. This is what creates the supply curve on the infamous supply and demand graph: a core staple of economic reasoning. The two, quantity and price, have a positive relationship to one another when thinking about supply. Why, you may ask? Because of scarcity! Since resources are finitely distributed, the opportunity cost of creating an extra unit item A increases (which means that type of cost of using resources for item A versus item B, for example) leading to a need to increase of the price of the increased quantity.

Or we may think of it in its inverse: as the price of item A increases independently of supply, the supplier also has extra incentive to supply more of this specific item. As a downward sloping demand curve (an explanation for another time) shifts along the supply curve, assuming ceteris paribus (Latin for other things equal), there are also changes in price which represent an item's scarcity. Price is therefore used to ration the otherwise scarce resources within the market.

Let’s move from a boring theoretical framework to the real world implications. As Millennials, I doubt any of us were alive during the stagflation of the 1970s created by the energy crisis. Stagflation represents the economic idea of high inflation and low economic growth, or in other words, high unemployment. As the demand curve may shift, the supply curve also shifts in either direction creating either more or less supply given any price. What we find is that fuel became more scarce and therefore, prices rose, not just in fuel but in other areas of life since many products rely on the byproducts of oil and/or petroleum.

This means many items became much more scarce and as a result, increased in price while unemployment also rose. As a result, President Nixon artificially froze prices during this season. This was much more a political decision than an economic one since economists like Milton Friedman warned him of such decisions. Because of this policy, we had fuel shortages throughout the nation during his tenure. President Nixon did not understand that oil had become even more scarce than it had been before for no reason he could control.

What can we learn? First, we should have a sense of gratitude and understanding that the abundance present in our great nation is not just happenstance, but the result of good faith and hard work to provide the technology and innovations which in turn efficiently grant us better final products with the limited resources we all have.

Second, we must also understand that our way of life is not the natural order of things but that we all started out with poor beginnings. This means that we cannot thrust a way of life or abundance on any person because that violates the economic concepts that, through scarce resources efficiently used in a market, can create wealth.

Third, let us realize the reality that in this world of scarce resources, there will be those who do not have certain goods that others do. It’s not our job to scream and groan about the injustices of those in those particular circumstances, but to understand the realities of their lives and aid those people in the best way we socially can.