Scarcity Principle
Categories: Econ, Financial Theory
See: Scarcity.
Firms sell stuff. Consumers buy stuff. But...who decides the prices?
The firms do. They will set prices (and quantity) to the profit-maximizing level. If the firm isn’t a monopoly, that’ll probably be a decent amount of the good at a decent price. Where supply and demand cross, we have our equilibrium price and quantity of a good.
But what happens when there’s a limited supply of that good? Say, parking near the stadium on game day, or bananas during a banana shortage? This is where the scarcity principle enters the game.
The scarcity principle refers to the economic situation of high demand and low supply. What we’d expect to see if firms were to raise their prices up, up, up...until a new equilibrium of supply and demand is achieved. As the price goes up, demand goes down; you’re not going to pay fifty bucks for parking when it usually costs two. You can’t justify the cost-benefit analysis based on your income. Forget it.
Unless fifty bucks is nothing to you...then you’re a part of the remaining demanders. That’s the thing about the scarcity principle: it “works” in the economic sense of finding a new equilibrium, but it reduces access to goods only to those who can afford it. While this might be all right for parking and bananas, it’s more of a social crisis when it’s water, food, housing...the basics of living.
Firms can use the scarcity principle to justify high prices on luxury goods, or limited edition goods. "Get it now, while it lasts!"
Farming subsidies to farmers is an interesting case of the government protecting farmers from the scarcity principle. To keep farmers happy, the government gives farmers subsidies. This causes farmers to make too much supply compared to the demand. Thus, the government must additionally buy up the excess. Without the subsidies, there wouldn’t be that artificially high demand. Some farms would go out of business, and farm goods would become more scarce, leading to higher prices. If demand increased enough, more farmers could enter the market.
Related or Semi-related Video
Econ: What is scarcity?71 Views
And finance Allah shmoop What is scarcity Oh diamonds gold
oil Oscar winning actors These things are scarce Well a
handful of beats sand a box of garbage An alley
cat You have things Things are not scarce But what
a scarcity even mean in economic terms All right let's
back up a bit Basic forces of economics supply and
demand Well the fundamental pricing action in an economy lies
in figuring out how to distribute Limited resource is basically
finding a way to get supplying two man in tow
balance Yeah remember that graph This one right here Supply
demand And here's why Base wife Right So that's the
theory Okay People want stuff like hamburgers They get angry
and need comfort food and or fuel and or calories
masquerading as love Joe six Pack wants his burger demands
it So yes that's demand And someone provides the stuff
like supplies it like Freddie the fry cook and that's
applied in the middle You get crisis which helped match
and meter and measure The metrics are of Scarcity III
where supply hooks up with demand Everything is relative or
contextual right A bottle of water in the middle The
desert can be worth a hundred bucks that same bottle
in Kawai Hawaii where it rains five inches a day
not so much so in contact When there's a lot
of supply and limited demand Prices are low People might
love hamburgers but there are a lot of them around
a lot of supply They aren't scarce and all the
ingredients to a burger well easy to find There are
plenty of sources of all beef patties special sauce lettuce
cheese pickles onions and plenty of wheat and you know
sesame seeds to make the sesame seed buns there Yet
tons of suppliers easy to make their called commodities a
good or service that's more less the same wherever you
biden in whatever form you receive it in But there's
no significant scarcity of hamburgers so prices are relatively low
in this sense There aren't infinite burgers but compared tto
amber with the dinosaur blood in it and Olympic gold
medalists and no brilliant honest Congress People Yeah Hamburgers aren't
really scare So what is scarce How about beachfront property
Everyone to live in a mansion in Malibu Yeah This
little baby will set you back a cool twenty mil
in this one eighty mil beachfront property in a good
location is rare supplies very limited But everyone anywhere near
the coast wants to live there There's huge demand for
this scarcely supplied resource Now technically not all beachfront property
is expensive but remember Three Mile Island you have this
thing easy pickings But if you want to live by
the beach in California without nuclear waste well you're going
to have to pay up competing with other rich people
willing to shell out millions and millions for a close
up view of movie your flipper or well smog And
note that what scarce today might not always be scarce
or even prized beachfront property in California won't always be
as rare if global warming continues There are a random
new kits Greenland and all that ice sheet melts Well
then here's the U S Map At that point the
ice sheets melted oceans have risen and you remember that
twenty million dollars Malibu home Well that used to be
beachfront Now it's Atlantis and not the cool kind where
you can swim with dolphins or the kind with superheroes
know just bottom of the ocean Formally twenty million dollars
fish habitat Yeah Demand has dropped to zero It's no
longer scarce It's as common as junk on the bottom
of the ocean Which basically is meanwhile with California's new
coastline will land that used to be inland orange and
walnut groves now has a spectacular view of the ocean
Farmer McGee Yeah How about twelve million dollars for a
couple of euro woman acres there by the coast Yeah
I think that one of two carat diamond ring for
your brand new wife Yeah The one who doesn't nag
you daily to take out the garbage Yeah well that
ring's gonna cost you about fifty thousand dollars because well
there aren't many diamonds that big guy either Relatively scarce
and they are desired If you want Cady playing on
your hopes team Well it's gonna cost you about a
quarter unit a season That twenty five million dollars because
you know units hundred million bucks Why Well they're scarce
They're scarce their desired They're not like a hamburger and
their desired by many rich people who bid up pricing
and well that's just how the game is played So
these air today's prices for the intersections of supply and
demand Tomorrow prices will move his attributed values or continually
influx We value something's more today than we will in
the future and all that stuff and I did might
be scarce But that doesn't make it worth a lot
of money Not if demand is low like well the
Shmoop Family Singers song album is scarce and oh so
not desired Yeah there's only one Steven Seagal this fat
bald guy here he used Teo you know be somebody
big action star in the day But he's not getting
Denzel or even Brad Pitiful money These days the values
attributed to scarcity can go the other way to something
that used to be very common can become scarce you
know like a bald eagle about that And if demand
remained flat or steady well these now scarce but demanded
things can become prized So watch out Brad you might
be one of a kind of scarcity doesn't always mean
high value your homies Just one hamburger addiction away from
heading down the Steven Seagal path to oblivion But on
the other side of the coin will maybe put a
burger into your deep freezer just in case Who knows
If it'll be scarce one day if all the cows
were wiped out in a plague you know that mad
cow disease thing is the thing Well Burger's just might 00:05:19.384 --> [endTime] become a scarce resource again