The principle of scarcity in economics is based on the idea that resources are limited and therefore people must make their decisions to produce or consume based on the available resources and choosing alternatives regarding what they want to obtain to satisfy existing needs.
Next, we will explain the principle of scarcity in economics and its relationship with the basic notion of scarcity (limited resources) and the basic principle of cost; By reading it, we hope that this principle, which is one of the foundations of economic theory, is better understood and where we will try to provide some examples to better illustrate this concept. We invite you to follow it and hopefully, it will serve to complement your knowledge.
Principle of Scarcity in Economics
The principle of scarcity, in economics, says that with unlimited needs and limited resources, we cannot have satisfaction with everything we need and, therefore, we must choose between several alternatives. (Avila, p.133)
For Araneda (p.13) the principle of relative scarcity has great significance for humanity, to the point that the evolution of society has come to be conceived as the story of a hungry being in search of bread.
In this way, the primitive stage of grazing in the nomadic peoples, who lived from their herds, is explained; later, the transformation of these communities into sedentary peoples, based in stable settlements, when they found fertile lands in their constant migration.
From that moment on, the agricultural stage began, the cities were founded and the way was opened for what would later be the manufacturing industry, with the appearance of artisan workshops, the industrial revolutions, always within relative scarcity, seek in technical progress to expand the scope of satisfaction of human needs, in increasing acceleration.
The scarcity and limitation of resources work as an accelerator of social change, production, and productivity.
Principle of Scarcity and marginal economy
Relative scarcity also serves as the basis for marginal analysis, typical of economics, which is, in essence, a science of quantities.
On this basis arises the concept of marginal utility, dependent on the amount of good available; the existence of free goods, such as air, without marginal utility due to their abundance.
The marginal cost varies according to the quantity produced; marginal productivity is different depending on the degree to which a productive factor increases without changing the others; marginal profitability, is linked to the volume of sales; and other similar concepts related to the relative scarcity of goods.
But perhaps the most important concept that derives from this principle is that of cost. If the goods were abundant, the cost would not exist, which, in its essential expression, is the renunciation of the alternative use of scarce goods, in the impossibility of fully satisfying all needs.
In economics, nothing is free, except perhaps the rare free goods, which were traditionally air, water, and sunlight; but, currently, they tend to be scarce due to air pollution, the increasing impurity of water resources, and high-rise construction, which forces additional prices to be paid for apartments that receive sun.
Relative scarcity is the basic principle of economic analysis, and in it is found the very origin of economic activity and its two fundamental processes: production and distribution.
At the same time, it constitutes the cause and the end of the economy, which only exists because goods are relatively scarce, and its sole purpose is to satisfy human needs with breadth and equity.
Churión (p.85) suggests that the principle of scarcity is one of the two basic principles of economic science; His statement is as follows: the amount of available economic goods is limited, while the material needs of society are growing and unlimited.
What is scarcity in the economy?
The notion of scarcity in economics is particularly different from the common notion, which refers to the non-existence or little existence of something.
In economics, it refers to the relationship between the supply and demand of a certain good, for example, oil exists in large quantities, which suggests from the point of view of the common man that oil is not scarce, but from the point of view of From the economist’s point of view, it is.
When comparing the existing quantities with the growing needs worldwide, it is verified that the offer is not enough to satisfy them; It is also necessary to consider the fact that the quantities of existing oil are more or less constant, since it is a non-renewable natural resource while the energy demand is constantly growing.
The principle of scarcity is one of the most influential factors in the formation of the price of goods and services in a market economy.
According to Arestis (p.237), scarcity is the cornerstone of neoclassical economics. Different circumstances will be established to keep it out of the standard conditions of exchange economies: full employment, a given stock of money, and so on. The scarcity justifies the analysis of supply and demand.
It gives prices a crucial role. It governs the behavior of the economy. It explains why neoclassical economists give so much importance to resource allocation and why so many of them define conditional optimization techniques as the epitome of neoclassical economics.
When all resources are scarce and fully utilized, then all questions revolve around the proper use of existing resources, rather than the creation of new commodities.
Scarcity is particularly evident in pure exchange models.
The complementary hypotheses that can be found in the various sophisticated neoclassical models of production have been introduced precisely to guarantee all the main conditions and results of the pure exchange model.
Scarcity and Neoclassical Economics
Production in neoclassical economics is a form of indirect exchange between individual consumer agents later called producers. Producers are just intermediaries trying to benefit from the existing scarcity.
Gómez (p.281) places it as one of the three major epigraphs of the principles of market logic, saying that: The principle of scarcity, responds to who the final product will be for indirectly.
Indeed, the principle of scarcity determines what kind of productive factors must be contracted and how they are going to be remunerated, the more scarce and more productive they are.
But this implies determining the “allocation of income” or economic purchasing capacity that corresponds to the different subjects and, therefore, the scarcity and ownership of the productive factors will determine the division of the product among the individuals of the society, as exposed by the Theory of Distribution.
Examples of the scarcity principle
Examples of scarcity in economics can be seen in multiple situations, at a personal, organizational, and even national or global level. Here are some cases that illustrate this principle:
Social investment: The mayor of a Town has a limited budget to carry out public works, he can build a new bridge with the budget he has or he can improve the state of the existing roads, but he does not have a budget to carry out both tasks.
Company: Faced with declining sales and having less cash available, the company can try to reduce costs by eliminating jobs or it can use available resources to expand its payroll and seek a recovery in sales.
Personal: After saving a sum of money, the person must decide whether to spend it on a trip or use it to buy a new vehicle.
Bibliography
- Araneda Dörr, Hugo. Political economy. Legal Editorial of Chile, 1993.
- Artist, Philip. Criticism of orthodox economics. Autonomous University of Barcelona, 2004.
- Avila and Lugo, Jose. Introduction to Economics. Plaza and Valdes, 2004.
- Churion, Jose Ruben. The economy is within everyone’s reach. Editorial Alfa, 1994.
- Gomez Fernandez, Jose Manuel. Economy and human values. Encounter Editions, 1992.
