Scarcity Principle - Explained
What is the Scarcity Principle?
Written by Jason Gordon
Updated at April 26th, 2023
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What is the Scarcity Principle?
The scarcity principle is a theory in economics that maintains that scarcity in the supply of a product and high demand for that product cause a discrepancy in the supply and demand equilibrium. Restated, a scarce or rare goods often has a higher value and this results in a mismatch between demand and supply.
What is a Scarce Product?
When there is a higher demand for a product than supply that exists, it means the product is scarce.
How to Create Equilibrium in Supply and Demand?
In order to reach an equilibrium between supply and demand, the scarcity principle offers that the price of a scarce product should be increased until the equilibrium is reached where the amount produced equals the amount demanded at the price reached.
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How does Scarcity Distort Market Equilibrium?
Oftentimes, market equilibrium is distorted as a result of a mismatch in the level of supply and demand. That is, there is insufficient supply to meet the demand at a given price.
For equilibrium to be reached, the scarcity principle suggests that the price of the scarce good be increased so that the levels of supply and demand will match.
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