ColombiaLink.com – SCARCITY – MICROECONOMICS

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also: List of Economic Topics

SCARCITY
microeconomics

Scarcity
is a central concept in economics. In fact, neoclassical economics, the dominant
school of economics today, defines its field as involving scarcity: following
Lionel Robbins’ definition, it is the study of the allocation of scarce goods
among competing ends. Scarcity means not having sufficient resources to produce
enough to fulfill unlimited subjective wants. Alternatively, scarcity implies
that not all of society’s goals can be attained at the same time, so that we must
trade off one good against others.

“Resources
scarcity” is defined as there being a difference between the desire and the
demand for a good. What this means is that a good is scarce if people would consume
more of it if it were free. Scarcity (S) can also be viewed as the difference
between a person’s desires (D) and his possessions (P). Mathematically, this can
be expressed as S = D – P. If P > D, a state of negative scarcity exists which
is abundance. For most people desire exceeds possession and this provides the
spur to material success.

Goods
and services are scarce because of the limited availability of resources (the
factors of production) along with the
limits on our technology and our management skills. These determine the location
of society’s production possibilities
frontier or curve (PPF). Inefficiencies in the use of resources (less than
full employment or inappropriate employment of inputs) may limit the amount produced
so the economy operates below its PPF. If it difficult to abolish them, these
inefficiencies imply institutional artificial scarcity.

Where
goods are scarce it is necessary for society to make choices as to how they are
allocated and used. Economists study (among other things) how societies perform
the optimal allocation of these resources — along with how societies often fail
to attain this optimality and are instead inefficient and how to solve this problem.

For
example, we may all want to own gold jewelry. However, the amount of gold available
is limited, so it is necessary to make choices as to how it is allocated. In a
market economy, this is achieved by trade. (Other ways to make this decision involve
tradition, community democracy, and government top-down or centralized command.)
In the market, individuals and organizations (such as corporations) trade resources
amongst themselves, reallocating resources to where they are most wanted by those
with purchasing power. In a smoothly operating market system, the rate of exchange
between different resources, or price will adjust so that demand is equal to supply.
One of the roles of the economist is to discover the relationship between demand
and supply and to develop mechanisms (such as pricing, incentives, or penalties)
to achieve an optimal outcome (in terms of consumer welfare).

Some
see the above definition of scarcity as invalid, on the grounds that it assumes
both human wants are unlimited. “Unlimited wants” seems a product of
indoctrination (say, by advertisers). Alternatively, the “unlimited wants”
may be the result of the unsatisfying nature of work in a capitalist economy.
In alienated labor, the needs resulting from a worker doing noncreative work under
some manager’s command to produce something that is of no interest (except to
earn a wage) can be “solved” by buying unnecessary product. Thus in
News from Nowhere, a somewhat Marxian utopian novel by William Morris, the existence
of creative work for all helps to abolish the scarcity of products. However, most
economists disagree with these critiques.

Certain
intangible goods are likely to remain scarce by definition or by design; examples
include awards generated by honours systems, fame, and membership of elites. These
things are said to derive all or most of their value from their scarcity. But
these are examples of artificial scarcity, reflecting societal institutions. That
is, the resource cost of giving someone the title of “knight of the realm”
is much less than the value that individuals attach to that title.

As
informational goods can be copied at negligible cost, they do not need to be scarce.
This is why copies of free software such as GNU/Linux are typically available
for very little cost. However, proprietary software and many other products are
kept artificially scarce by copyright and patent law.

Further
reading

Georges
Bataille’s The Accursed Share
Trade and Market in the Early Empires, edited
by K. Polanyi, C. Arensberg, and H. Pearson
Marshall Sahlins Stone Age Economics