“Scarcity” in Economics — What is it and why is it important?

Aditya Syam
3 min readJan 29, 2021

The general definition of scarcity is that it is the lack of something. The concept of scarcity in economics refers to the phenomenon that humans have apparently unending desires which cannot be satisfied by the limited resources available to society. It is said to be the “basic economic problem”. Almost all the resources which humans use in the production of goods and services (the factors of production) are considered scarce. In the pursuit of individual desires, humans tend to use up greater quantities of resources, intensifying scarcity.

The three primary factors of production — land, labour, and capital — are scarce. “Land” refers to any natural resources used by humans, from minerals and fossil fuels to agricultural land. These resources have greatly depleted and continue to deplete. “Labour” encompasses all human effort, physical as well as intellectual, used to produce any commodity. Labour is also scarce, especially in certain fields such as medicine. “Capital” is all the money, machinery or technology used by humans for production, and is limited as well.

The Tragedy of the Commons is another major problem in economics, also related to scarcity. It refers to the overexploitation of public resources by individuals without regard for sustainability and future availability of the resources.

Much of the field of economics is dedicated to an efficient allocation of resources so as to overcome scarcity to some extent, by fulfilling as many desires of as many people as possible. In fact, economics is often defined as the “study that concerns itself with the allocation of the scarce resources between the competing needs and wants of society”. Scarcity is one of the most important factors which affects demand and supply in a free market, and it also affects price levels. For example, goods which are scarcer will have higher price levels. Different levels of scarcity in the goods market or the labour market also help consumers and workers to make informed decisions about their purchasing habits and employment.

The concept of scarcity is in fact what gives rise to the three basic economic questions. The first one “What should be produced?” asks what the scarce resources of society should be employed for. The question of what goods and services should be produced in what quantity by a nation is a vital point which must be answered. Further, in a market economy, the relations between demand and supply tends to decide what is to be produced, and this is determined by scarcity. The second question, “How should it be produced?”, refers to the methods of production of goods (for example, to what extent should technology be used for production). The third question, “For whom should it be produced?”, relates to the efficient allocation of goods and services amongst the consumers and how much of economic output should be yielded to each person.

Thus, scarcity is one of the pivotal concepts in economics and influences many other factors present in the open market. The principle of allocative efficiency, one of the main aims in economic policy, is also modelled based on the concept of scarcity.