Scarcity in Economics

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

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 mechanims 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 rationning system that occured 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 rationning system. But, it was a necessary policy for second world war.