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. According to this principle, a scarce or rare goods often has a higher value and this results in a mismatch between demand and supply. In order to reach an equilibrium between supply and demand, the scarcity principle offers that the price of a rare product be increased until the equilibrium is reached. Hence, only individual with higher purchase power will be able to afford a scarce commodity, denying others the chance to obtain the product.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

How does the Scarcity Principle Work?

Oftentimes, market equilibrium is distorted as a result of a mismatch in the level of supply and demand. For instance, when there is more demand for a product than the number that is supplied, equilibrium cannot be reached. When there is a higher demand for a product, it means the product is scarce, 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. According to the scarcity principle, a scarce or rare product has a higher value than other normal products. When a product is scarce, there is high tendency that it will be more expensive than other products and this denied people with insufficient funds the opportunity to purchase the scare product. This is thereby cause a decline in demand until the levels of demand and supply are at equilibrium.

Scarcity Principle in Social Psychology

Psychologists have been able to draw a connection between scarce goods and behavioral tendencies of consumers. According to their study, a scarce good often arouse a feeling of being wanted over other goods. When a product is scarce, people would like to purchase it, despite that they may not have the financial capacity to buy it. A product that is not scarce on the other hand, attracts little value and people do not desire it as much as they want scarce products. According to the psychologists, social proof and commitment are the underlying concepts of scarcity principle. Based on social proof, there is often a high tendency that people see a scarce product as a product of higher quality. On the part of commitment, people are more committed to purchase a scarce product than a product that is not scarce.

Related Topics

• Scarce Resources
• Scarcity Principle
• Radner Equilibrium
• Queuing Theory

Other Related Topics

• Market Economy
• Consumer Goods
• Consumption
• Scarce Resources
• Market Equilibrium
• Self Interest
  
• Economic EfficiencyExternality
• Invisible Hand