Scarcity(Economics)

Scarcity and opportunity cost represent two interlinking concepts in economics as companies must often choose among scarce resources. In most cases, economic resources are not completely available at all times in unlimited numbers. Therefore, companies must make a choice about which resources to use during production. The opportunity cost represents the alternative given up when choosing one resource over another. For example, scarcity and opportunity cost have a direct link because companies may use a lower quality but more available resource for producing goods.

Choice is among the most common activities in an economy. Both individuals and companies must decide what items to use when filling the needs and wants inherent in all parties in an economy. Scarcity can force choices as resources begin to deplete. For example, a lumber manufacturer may need to make a choice about which timber to harvest as some species become unavailable. This is the starting point between scarcity and opportunity cost in economic terms.

Opportunity cost carries the classic definition of selecting the next best alternative. For example, a furniture manufacturer desires mahogany lumber to make a bedroom set. Due to the scarcity at local lumber manufacturers — that is, the lack of sufficient mahogany wood for sale — the furniture manufacturer must use cherry wood instead. Therefore, the opportunity cost is the mahogany wood the furniture manufacturer desired in the first place. Scarcity and opportunity cost can typically be the biggest drivers in choices made due to the inability for a company to continue producing certain goods in a long-term manner.

Scarcity and opportunity cost are also present in the lives of individuals in a free market economy. For example, a consumer desires a brand new personal computer with a specific operating system and software components. The only problem, however, is the personal computer of choice is not widely available, making the item scarce in economic terms. The consumer needs to find the next best alternative, which represents an economic choice and opportunity cost. The alternative personal computer will work just fine, but it is simply not the consumer’s first choice.

Standard economic theory states that each consumer is a rational individual. Therefore, the concept of scarcity and opportunity cost dictates that individuals and companies will select the next best economic option when necessary. For example, a company may not select an alternative economic resource when the desired resource is scarce. The company could simply forgo production on the particular product. In this option, no opportunity cost exists because the company avoided the next best alternative
Scarcity vs. Shortage
The main difference between scarcity and shortage is that one is based on limited resources and the other is based on the decision of the seller to not sell more than a certain amount of a product at the current selling price.

•Scarcity - The unavailability of resources or materials to manufacture the product. When the demand of a product is limitless because of need or desire on the part of the consumer and the resources to manufacture the product are limited, the market experiences a scarcity of the product. When a scarcity exists, the market price of the product will be driven up until the purchase price of the product is equal to the available supply.
•Shortage - The reduction in the supply of the item. A shortage occurs when a producer cannot or will not produce an item for the current price.
Scarcity Example
An example of a scarcity is the availability of fresh strawberries year-round. Strawberries are a resource that has limited availability based on growing season and crop production. During the strawberry season, the price of fresh strawberries is low and the availability is high. As the season wanes, the amount of fresh strawberries on the market drops off and the price rises significantly. By the middle of winter, there are no fresh strawberries to be found and there is a scarcity of them.

Shortage Example
A good example of a shortage is what happens during a gas shortage. During the 1970’s, the gas shortage experienced in the US was due to the fact that the oil companies were raising the price of gas and consumers were forced to cut back on the amount that they used due to the high cost.

Government stepped in, established an excess profits tax on the oil companies, and fixed the price of gasoline. The oil companies had plenty of gas in their storage facilities but were unwilling to sell more than a certain amount at the price dictated by the government. Because of this, the market had less gas to distribute to consumers at the government defined price. The results of this were lines to buy gas and rationing.

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