The gap between the availability of limited resources and the theory of limitless human wants for such resources

Rohan Arora

Reviewed by

Rohan Arora

Expertise: Investment Banking | Private Equity


November 15, 2023

What Is Scarcity?

Scarcity is also known as "paucity," an economic term referring to the gap between the availability of scarce resources and the theoretical theory of limitless human wants for such resources. There is a constant opportunity cost involved in making such economic decisions.

It is defined as the limited availability of a commodity in demand by the market or ordinary people. 

Whenever such situations arise, it requires people to make wise decisions regarding allocating resources efficiently, satisfying the basic needs, and any other additional demands possible.

The nature of scarcity is to limit human wants.

Since economics studies allocate limited resources, the limited-ness and economics go side by side. 

What is the importance of scarcity? It simply means that people must make wise decisions regarding the allocation of resources efficiently on how to maximize their utility. In other words, consumers must decide how to use the scarce resources to the fullest.

The consumers had to choose between options, representing an opportunity cost as the resources were limited. We forego the option when one is selected over the other. One cannot have both PlayStation and Xbox when there is only $300 to be spent.

When the resources are limited, decisions must be made based on the marginal utility of the value. 

Key Takeaways

  • Scarcity is the limited availability of resources relative to unlimited human wants, leading to the need for wise resource allocation and decision-making.
  • The value of resources is influenced by their rarity and demand; diamonds are valuable due to their scarcity, while water's low value is attributed to its abundance and widespread availability.
  • There are two types of scarcity: relative scarcity, which results from limited supply not meeting demand, and absolute scarcity, where a resource is naturally rare and cannot be increased.
  • Scarcity can be caused by demand-driven shortages (increased demand outpaces supply), supply-driven shortages (constant demand but declining supply), structural limitations (unequal access to resources), lack of alternatives, and irreparable damage to resources.
  • Societies can address scarcity by promoting economic growth, reducing wants, and maximizing satisfaction through productive and allocative efficiency, equitable distribution, and full employment.

Understanding Scarcity

Let us say a customer gets into the store to buy chocolate but only has $1 with him. The customer faces different brand choices but only has enough money for one. When the resources are limited, wise decisions must be made depending on what is most valuable to them.

Scarcity and Value

When the resources are limited, we should decide how to utilize them at their maximum. Let's take that the rarer the resource, its value is more significant. 

Let us take a look at diamonds. It is both rare and valuable and is a limited resource.

At the same time, it is a highly demandable resource globally, meaning that it is in high demand but also limited.

This valuation can be subdivided into consumer limitation - limitation of individual resources. Then there is producer limitation - limitation of goods and services to be purchased.

The Diamond-Water Paradox

It was said to have originated from Adam Smith, who stated the question in his book "The Wealth of Nations." Smith brought up the question about the price difference between water and diamonds.

He stated the question about why diamonds are so valuable, yet water, which is a human necessity, is valued low.

The reason is that diamonds are valuable because people are willing to pay for them. Yet, there is still no legitimate explanation for why water is so less valuable when it is essential for survival.

There are several factors, but the two most important factors are shortage and marginal utility. For example, diamonds are naturally rare and, therefore, more highly valued, whereas water is less valued as it is readily available almost everywhere in the world.

Types of Scarcity

There are two different types of shortages. Let us take a look at the two of them below:


A shortage occurs when the resources are naturally limited in supply. Only a finite number of resources are available. However, relative rareness is defined as naturally rare but is also limited to the public's demand.

In other words, supply does not meet the demand. This has nothing to do with an organization not making enough supply, but there is only a limited amount of resources available on the globe.

When more people want a particular resource, a shortage is created due to scarce supply or slow distribution. The resource exists, but it cannot reach the public immediately.

Relative scarcity is considered a fundamental element of economics by economists.

Some of the examples are:

  • As more houses are built, the demand for wood is high, leading to deforestation and eventually a shortage of timber.
  • When the news about the gasoline shortage is out, it causes panic, leading to an even colossal shortage.
  • When a bad flu season inspires more people to take the flu vaccine next year, its supply does not meet its demand.
  • We can also consider a painting relatively scarce if only limited pieces are produced, which falls short of the demand.


A shortage occurs when the resources are naturally limited in supply. There is no human possibility to increase the supply. It refers to a naturally rare resource but not in demand. It refers to a situation where the demand is high, but there is not enough resource to satisfy and meet the needs.

Absolute rareness can never be straightened out by increasing supply or distribution, unlike relative rareness.

Demand does not impact absolute rareness; the resource can be completely gone or nearly gone and cannot be increased.

However, absolute demand is rare, which is irrelevant to demand.

Some of the examples are:

  • Overfishing a specific type of fish can lead to its limitations.
  • Coal is a limited resource that can be mined, and an essential energy source is an efficient example.
  • Without access to clean water, we can experience limitations of water.
  • There is a shortage of milk and cheese as fewer farmers raise cattle.
  • A day has twenty-four hours, a week has seven days, and a year has 52 weeks. This makes time an absolute rareness.

What Are the Main Causes of Scarcity?

The main causes of Scarcity are explained below. 

Demand-Driven Shortages

Whenever the demand increases faster than the supply, the resources become limited and scarce.

 For example, 1 million barrels of oil is supplied to the market, which is enough to meet customers' demand; however, as time progresses, the demand for oil barrels increases from 1 million to over 1.5 million.

This increase in demand results in oil becoming a scarce resource. From the beginning, oil is a limited resource, but the new growth in the market is making oil relatively narrow.

The producers are failing to meet the new demands, thereby creating a shortage of oil in the short term.

Demand-Driven shortages can also occur due to:

  • The exponential population growth.
  • The growth in real Gross Domestic Product (GDP).
  • The rise in income of people results in the consumption of more resources than before.
  • The change of preference, e.g., rises in demand for cell phones and the demand for metals such as nickel and cobalt used in the production of lithium batteries. 

Supply-Driven Shortage 

When the demand is constant and there is a decline in supply, we have a supply-driven shortage.

However, this shortage is driven by scarce resources. In other words, there is a lack of supply in resources that can not be extended.

If the supply of a resource is close to scarce or put under threat, it leads to shortage and limits of the good.

Let us talk about: The gradual climate change has contributed to an increase in:

  • Land desertification
  • Deforestation 
  • Growth of the Sahara desert

Since 1900, the Sahara desert has increased to the south by 250 km. There is also a similar situation in China with the increase of the Gobi desert resulting in the reduction of land.

Supply-Driven Shortages can also occur due to:

  • Failure in production of crop or lousy weather. If there are particular problems, then a localized shortage can occur. For example, a fungal disease could harm crops like olive trees, causing a severe lack of olives.
  • When there is a degradation in supply, when the resources are polluted and unfit for consumption, the resources get scarce. For example, let us say radiation is caused by nuclear power disasters making drinking water and farming land unsuitable for use.

Structural Shortage

Structural Shortage occurs when a particular resource is limited to a proportion of the population. In other words, when the resources are at disproportionate access due to location or political issues. Some examples include:

  • An abundant amount of water is available worldwide, but there must be a water shortage due to a lack of access in particular areas.
  • People residing in the suburbs might not have the same access to healthcare and schooling as those living in the city.
  • Day by day, the increase in farming and the use of fragile land leads to the degradation of resources which causes a fall in the supply of helpful land, thereby creating a negative feedback loop of shortage, causing more pressure on the limited resources.

All of these scenarios can be attributed to issues caused by structural shortages.

No Alternatives

There is always a hope that when a good resource is on the verge of becoming scarce, incentives are to be provided for different alternatives to be developed.

For example, there is an alternative of electric cars that run on solar power or wind power are to be developed as oil is rapidly becoming limited.

However, this is a severe problem if technology were not advanced. There is an alternative to oil, but if water is depleted, there is no alternative water.

Damage to resources can not be rectified

When the clean air gets polluted by pollution or radiation, it is not easy to end the scarcity of clean air.

Even if the pollution is stopped, clean air depends on many global factors, and all the pollutants and radiation cannot be removed at once but lasting for a long time. 

How Can a Society Deal With Scarcity?

All societies must deal with this as there are limited resources but unlimited wants. There are three options for an organization to deal with a shortage, as mentioned below:

1. Economic Growth

An increase in the ability to produce goods and services. When more resources are present, more goods and services can be produced. 

This will lead to a reduction in the rareness of resources hence, giving more satisfaction. Therefore, every society should attempt to achieve economic growth.

2. Reducing Wants

If society reduces its expectations or wants, there will be fewer limitations. 

For example, we know both gasoline and space on our roads are scarce. Therefore, the president of the USA decided to launch a new idea to avoid this problem called "Share a car with your neighbor."

Reducing wants or expectations is not a good option and not a long-term solution to the long-term problem. 

3. By Maximizing Satisfaction

It can also be referred to as "Using the existing resources wisely." 

There are four different ways for a society to maximize satisfaction. It is also referred to as the 4Es of economics. They are:

i. Productive Efficiency

Productive Efficiency can be achieved by production at a minimum cost. Fewer resources can be used for maximum production, effectively reducing shortages and meeting demands.

The production can be done at a minimum cost to achieve productive efficiency by-

  • More resources to not be used than necessary.
  • Resources to be used wisely.
  • Use of best-suited and advanced technology.   

ii. Allocative Efficiency

It is described as using scarce resources to produce goods and services. It occurs when limited resources are used, either "too much" or "too little," resulting in efficiency and scarcity.

Whenever "too much" or "too little" is produced, it results in allocative inefficiency.

Allocative efficiency can be achieved by-

  • The proper proportionate mixing of goods.
  • Know about the wants and expectations of people.
  • Less likely of what people know.

iii. Equity is described as a "fair" distribution of goods, services, and income. 

iv. Full Employment

If there is full employment in the factories, mines, and fields, more goods and services can be produced. It can help society in achieving maximum satisfaction.

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Researched and authored by Ananya Dutta | LinkedIn

Edited by Aditya Murarka | LinkedIn

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