Scarcity Principle

The Scarcity Principle, like other principles of economics, comes from the principles of psychology and behavioral sciences. As per the simplest definition, it states that any commodity gains economic value if it is scarce i.e. not enough to fulfill the demand. This is regardless of the actual importance of that commodity. The principle, therefore, suggests that the price of the commodity which is available in lower quantity than needed should be higher.

When Scarcity Principle is applied to the prices of commodities high in demand and low in supply, consumers conduct their own cost-benefit analysis in order to understand whether the value lies in purchasing or not. This will limit the purchase of the commodity to the demographic that can afford the higher prices, therefore, creating a balance between the demand and supply.

A Generic Example of Scarcity

A simple example that should explain how the principle applies is to take ‘air’ as a commodity. Despite being extremely important, air has no economic value. In order to make air valuable, it must be polluted enough to make pure air scarce. Not that people will buy pure air, they will be paying a higher price for consuming pure air because they will have to spend on purifiers. The pure air will then have a high economic value.

In addition to the principle of scarcity, there are two more principles used to create economic balance and manage resource in a more efficient manner; the principles of efficiency and sovereignty. Like scarcity principles, these two are also borrowed from the principles of psychology and human behavior.

Further Reading

  • Beyond scarcity: a reappraisal of the theory of the monetary circuit – [PDF]
  • The 'principle of scarcity', pension policy and growth – [PDF]
  • Preserving natural capital in a world of uncertainty and scarce financial resources – [PDF]
  • The expected failure of the European Economic and Monetary Union: A false money against the real economy – [PDF]
  • Economies of dying: The moralization of economic scarcity in US hospice care – [PDF]
  • Safe asset scarcity and aggregate demand – [PDF]
  • Transformation of the resource scarcity principle in increasing return economics – [PDF]
  • Scarce capital and Soviet doctrine – [PDF]