Scarcity

Factors of Production and Scarcity

Economists call an economy's resources - factors of production and classify them into four categories:

• Land
• Labor
• Capital
• Entrepreneurship

Land is the factor of production that can be thought of as any resource that comes from the earth, such as wood, water, minerals, oil, and of course, land itself.

Labor is the factor of production that can be thought of as the people who do the work required to produce something. Therefore labor can include all kinds of jobs, from engineers to construction workers, to lawyers, to metal workers, and so on.

Capital is the factor of production that is used to physically produce goods and services, but that first has to be manufactured itself. Therefore, Capital can include things like machinery, tools, buildings, and infrastructure.

Entrepreneurship is the factor of production that is required to take risks, invest money and capital, and organize the resources required to produce goods and services. Entrepreneurs are a key factor of production because they are the people who develop the products and services (or identify new ways to produce them), then identify the correct allocation of the other three factors of production (Land, Labor, and Capital) so as to successfully produce those products and services.

The factors of production are scarce, therefore, properly valuing, choosing, and allocating these in the production of goods and services is very important in Economics.

Scarcity and Opportunity Cost

Do you ever find yourself wondering, "was the thing I just bought worth the price?" The truth is, there's a lot more to that question than you might think.

For example, if you bought a jacket that cost $100, an Economist would tell you it cost you a lot more than that. The true cost of your purchase includes anything and everything you had to give up, or not have, in order to get that jacket. You had to give up your time to earn money in the first place, the time it took to go to the store and select that jacket, anything else you could have bought instead of that jacket, and the interest you would have earned if you had deposited that $100 into a savings account.

As you can see, Economists take a more holistic approach to the idea of cost. This more holistic view of costs is something Economists call Opportunity Cost.

The Opportunity Cost of you taking the time to read this explanation on Scarcity is essentially anything and everything you could be doing instead. This is why Economists take choices so seriously - because there is always a cost, no matter what you choose.

Causes of Scarcity

You might wonder, "why are economic resources scarce in the first place?" Some might say that resources such as time or natural resources are scarce simply by their very nature. It is also important, however, to think of scarcity in terms of what it means to choose to use a resource for one specific function versus another. This is known as the concept of opportunity cost. It is, therefore not only the limited quantities of resources we have to consider but also the opportunity cost implicit in how we choose to use them, that contributes to scarcity.

Besides the general cause of scarcity, which is the very nature of resources, there are four main causes of scarcity: unequal distribution of resources, rapid decrease in supply, rapid increase in demand, and perception of scarcity.

Let's peel the lemon back a little more. What ideas are implied in our example? Several actually. Let's consider them more closely, because they represent the causes of scarcity.

Fig. 1 - Causes of scarcity

Unequal distribution of resources

One of the causes of scarcity is an unequal distribution of resources. Often, resources are available to a certain set of the population, but not to another set of the population. For example, what if you lived in a place where lemons were simply not available? In cases like this, the problem is that there is no effective way of getting resources to a certain group of people. This could occur because of war, political policies, or just a lack of infrastructure.

Rapid increases in demand

Another cause of scarcity occurs when demand increases more rapidly than supply can keep up with. For example, if you live somewhere with mild summer temperatures when an unusually hot summer occurs, you can expect there to be a large spike in demand for air conditioning units. While this type of scarcity doesn't usually last for a long period of time, it does demonstrate how a rapid increase in demand can cause relative scarcity to occur.

Rapid decreases in supply

Scarcity can also be caused by a rapid decrease in supply. Rapid supply decreases can be caused by natural disasters, such as droughts and fires, or political reasons, such as a government imposing sanctions on another country's products making them suddenly unavailable. In cases like this, the situation might only be temporary but still create a scarcity of resources.

Perception of scarcity

In some cases, the causes of scarcity could simply be due to personal perspectives. In other words, there may not be any shortage of goods and services at all. Rather, the problem may be that someone simply thinks there is a shortage and tries to conserve more, or doesn't bother to look for the resource at all. In other cases, companies sometimes purposely create a perception of scarcity in order to entice consumers to purchase their products. In fact, this is a ploy commonly used in higher-end products and electronics.

Examples of Scarcity

The most common scarcity examples are money scarcity, land scarcity, and time scarcity. Let's take a look at them:

1. Scarcity of money: Imagine you have a limited amount of money to spend on groceries for the month. You have a list of items you need, but the total cost exceeds your budget. You have to make a choice about which items to buy and which to leave out, as you can't afford to purchase everything.

2. Scarcity of land: Imagine you are a farmer in an area where there is limited fertile land available for farming. You have to decide which crops to plant on your land in order to maximize your harvest and income. However, you can't plant every crop you want because of the limited availability of land.

3. Scarcity of time: Imagine you have a deadline for a school project and also want to spend time with your friends. You only have a limited amount of time to work on the project, and spending time with your friends will take away from that time. You have to make a decision about how to allocate your time between the project and socializing with friends, as you can't do both without sacrificing time for one activity.

10 examples of scarcity in economics

To help clarify this concept, we have compiled a list of 10 specific examples of scarcity in economics. These examples illustrate how scarcity affects different areas of the economy and provide practical insight into the challenges faced by individuals, businesses, and governments.

The list of ten scarce resources in economics:

1. Limited oil reserves
2. Shortage of skilled labor in a tech industry
3. Limited investment capital available for tech startups
4. Limited availability of high-tech materials
5. Limited transportation infrastructure in rural areas
6. Limited demand for luxury goods during a recession
7. Limited funding for public schools
8. Limited access to loans for small businesses owned by women or minorities
9. Limited availability of specialized training programs for certain professions
10. Limited number of doctors and hospitals in rural areas.

Examples of scarcity on individual and global levels

Another interesting way is to classify scarcity examples into two categories:

• personal scarcity - the one that we experience every day on a personal level. For example, time scarcity or your body's energy scarcity.
• The global level of scarcity which includes examples like food, water, or energy scarcity.

Examples of personal scarcity

On a personal level, if you are reading this, there is a good chance that you are taking an Economics class. Perhaps it is because you are extremely passionate about economics, or perhaps it's an elective course you decided to take because of passive interest. Regardless of the reason, you are likely experiencing a relative scarcity of time. You have to allocate enough time to your Economics course to review and try to best understand all the key concepts, which means you have to take time away from other activities such as reading, watching movies, socializing, or playing sports.

Whether you realize it or not, you're constantly grappling with the concept of scarcity in this manner, as it relates to time and other limited resources. Sleep can be an example of a scarce resource if it's the night before your Economics exam and you allocated too much time to socializing and not enough time to studying.

Fig. 2 - A student studying

Examples of global scarcity

At the global level, there are many examples of scarcity, but one of the most common is natural resources such as oil.

As you may know, oil is produced underneath the earth's surface, and the oil we extract today actually began forming millions of years ago. There is only so much oil the earth produces both because of the natural supply of its constituent ingredients (carbon and hydrogen) and because of how long it takes for the earth to form the final product.

Like time, there is simply only so much oil, and while countries that have direct access to oil-bearing land are continually working to improve the methods of oil extraction, it is precisely the scarcity of oil that makes it precious and valuable. On a global level, countries must decide between allocating resources such as labor and capital to oil extraction versus, for example, the research and development of renewable energy technologies. Many would say both are important, but at this time it is the oil industry that is getting the larger share of scarce resources.

Fig. 3 - Drilling for scarce oil

Types of Scarcity

Economists classify scarcity into three different categories:

1. Demand-driven scarcity
2. Supply driven scarcity
3. Structural scarcity

Let's take a closer look at each type of scarcity.

Demand-driven scarcity

Demand-driven scarcity is likely the most intuitive type of scarcity simply because it is self-descriptive. When there is a great deal of demand for a resource or good, or alternatively when the demand for a resource or good is growing more quickly than the supply of that resource or good, you can think of that as demand-driven scarcity because of the imbalance between demand and supply.

Supply-driven scarcity

Supply-driven driven scarcity is, in a sense, the opposite of demand-driven scarcity, simply because there is either not enough supply of a resource, or the supply for that resource is shrinking, in the face of constant or possibly even increasing demand.

Structural scarcity

Structural scarcity is different from demand-driven scarcity and supply-driven scarcity because it generally only affects a subset of the population or a specific group of people. This can occur for geographical reasons or even political reasons.

Effect of Scarcity

Scarcity is a key foundational concept in economics because of the effect it has, and the type of thinking it requires. The main implication of scarcity in economics is that it forces people to make important choices about how to allocate and use resources. If resources were available in unlimited amounts, economic choices would not be necessary, because people, companies, and governments would have unlimited amounts of everything.

However, since we know that is not the case, we have to start to think very carefully about how to choose between and allocate resources so that their use yields the best possible results.

Similarly, for companies and governments, critical large-scale and small-scale choices need to be made in terms of how to target, extract/cultivate, and apply scarce resources such as land, labor, capital, and so on.

It is the concept of scarcity that underpins the importance of the social science that is Economics.