Scarcity in Economics

Scarcity is one of the fundamental issues in economics. The issue of scarcity means we have to decide how and what to produce from limite resources. It means there is a constant opportunity cost involved in making economic decisions.

 

Readers Question: How do markets and the price system help the economic sectors to solve the problem of scarcity ? cite examples of good and not-so-good solutions to the economic problem (scarcity)

Diagram of Fall In Supply

supply fall

Scarcity in a Free Market

If there is scarcity of a good the supply will be falling. This scarcity causes the price to rise. In a free market this rising price acts as a signal and therefore demand for the good falls. Also the higher price of the good provides incentives for firms to:

  • Look for alternative sources of the good e.g. new supplies of oil from antarctic
  • Look for alternatives e.g. solar panel cars

Therefore, in a free market there are incentives for the market mechanisms to deal with the issue of scarcity.

However, the market can also have market failure. For example, firms may not think about the future until it is too late. Therefore, when the good becomes really scarce there might not be any alternative that has been developed.

Quotas

One solution to dealing with scarcity is to implement quotas on how much people can buy. An example of this is the rationing system that occurred in the Second World War. Because there is a scarcity of food, the government had strict limits on how much people could get. This was to ensure that even people with low incomes had access to food a basic necessity.

A problem of quotas is that it can lead to a black market; for some goods people are willing to pay high amounts to get extra food. Therefore, it can be difficult to police a rationing system. But, it was a necessary policy for second world war.

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