Foundations of Economics: The Law of Scarcity

Most of the basic laws of economics focus on ways to efficiently build wealth and prosperity over time.  But there are important financial concepts that turn this problem in the other direction, instead choosing to focus on the effects that a lack of available resources can have on the economy as a whole.  The Law of Scarcity is one of these foundational ideas – and its implications can have a drastic impact on the ways a society produces its goods and services.

Concept of Scarcity

In finance, the term scarcity refers to the idea that an economic system cannot possibly produce all of the goods/services that consumers want.  Furthermore, most consumers do not have the financial resources to buy all of the goods/services that they want.

scarcity

The combined effect of unlimited wants and limited resources creates a reduction in the availability of goods and services.  Ultimately, this suggests that consumers must make selective and complicated decisions about how finite resources (i.e. time or money) should be used.  As we will see in the case of natural water supplies, incorrect decisions in these areas can lead to drastically negative consequences in the everyday lives of consumers.

Microeconomic Examples

For some, these ideas might sound like unrelatable, abstract economic concepts.  But the reality is that these are occurrences that can easily be found on a day-to-day basis.  In the graphic below, we can see a scenario that many online shoppers find when making regular purchasing decisions.  

scarcity

Anyone interested in this Burberry handbag faces a purchasing decision that is closely tied to the Law of Scarcity.  Discounted prices can be found here but time and resource availability are limited to three days. In addition to this, there are only two of these handbags available in the market.  

This means a consumer must act quickly in order to take advantage of the item’s sale price. Of course, these are all factors that can have a significant impact on the ebb and flow of the daily activity that is seen in the consumer markets.  But the effects of these trends can extend into the macro-economy, as well.

Global Economic Theory in Practice

To illustrate this idea using real-world trends, we can look at water as a resource commodity that serves many of the most basic human needs.  But what many may not know is that a growing number of people face water scarcity to an alarming degree.

Water Scarcity

In the graphic above, we can see that water scarcity is already a significant problem throughout the world, with more than 2 billion people already impacted by the negative trends.  By 2025, analysts forecast water scarcity to rise throughout the world. China and India will be the two largest countries facing water stress for its citizens.

But what is most interesting here for economic students is the fact that the problems of scarcity are clearly widespread.  All continents have experienced these issues in some fashion – and this speaks to the universality of the economic laws that are at work here.

Water Scarcity

In this chart, we can see some of the added economic factors influencing water scarcity.  Factors like GDP and manufacturing infrastructure can play a major role in whether or not a region is negatively impacted by water shortages.  But, at the same time, it is important for city planners to have a strong understanding of the underlying economics in order to ensure that the needs of its citizens are satisfied.  

As we can see, the Law of Scarcity can play an important role in the daily lives of consumers.  Ideas that may seem to be abstract or overly academic of the face can actually have a significant influence in the ways that a society produces and sells its goods/services in the market.   As long as the world has limited means and unlimited wants, there will always be choices that must be made. The laws of economics can help us make more informed decisions in these areas so that we can meet as many human needs as possible.