Scarcity refers to a gap between limited resources and theoretically limitless wants. It involves making a tradeoff, sacrificing or giving something up to obtain more of the desired resource. Scarcity applies to physical goods as well as abstract ideas such as time and energy.
We place a higher value on scarce objects and a lower value on those that are abundant.
Take air for example. While more important to our survival than gold, we value it less for two reasons. On one hand, the production cost of air is zero (to us) and thus lower than gold’s. On the other, it’s a free good (unlike gold): your use of air doesn’t prevent my use of it, so we don’t have to fight over ownership.
We consider resources like air nonscarce when they meet 1 of these criteria:
- They have an infinite existence – like air.
- They can be infinitely replicated – open-source software, for example.
- Or, there is no sense of possession – we don’t have to compete.
Without scarcity, there would be no economic goods. They are scarce because there are not enough resources to produce them. And because they are scarce, we value them and compete for them.
As the economist Lionel Robbins phrases it: “Humans want what they can’t have.”
Scarcity appears in our lives in 2 ways:
- A limited supply of the resource we desire – a particular job, a meeting with someone or a particular product we want.
- A limited supply of our resources to trade for what we want – our time or money, for example.
What causes scarcity?
There are 3 types of scarcity:
Demand-induced: demand increases but supply stays the same.
Supply-induced: supply is low compared to demand.
Think of game consoles or new electronics when they are first released. Or concert tickets of popular artists, which then leads to scalping.
But also on in absolute terms: environmental degradation, such as deforestation and drought, or other forms of resource depletion that lead to less arable or inhabitable land.
Structural scarcity: when part of a population doesn’t have equal access to resources due to political conflicts or location.
Example: desert countries in Africa and their access to water. To get the water, they have to travel and make agreements with countries that have water resources. Political groups in some countries use this as leverage and hold the necessary resources hostage for concessions or money.
Absolute scarcity and relative scarcity
Absolute scarcity refers to a resource that is limited, regardless of demand. An example is time: no matter our effort its supply cannot be increased.
Relative scarcity, on the other hand, refers to a resource that is temporarily limited: its demand exceeds available supply. But it’s a resource for which the supply is not fixed.
Some examples of relative scarcity:
- Fuel during winter months
- Airline tickets during peak season
- Affordable housing in urban areas
- High-skilled labour in particular industries
- Medical equipment and medicine in a developing country
Scarcity heuristic: how it affects our decisions
A resource doesn’t actually have to be scarce for us to consider it scarce. It’s the perception of scarcity that matters most…and can lead to irrational behaviour.
According to psychology professor Robert Cialdini, the scarcity heuristic leads us to make biased decisions on a daily basis. 3 factors of scarcity that especially bias us:
- Quantity: the fear of losing access to a resource because of its small or diminishing quantity. Your favourite shirt becomes more valuable when you know you cannot replace it.
- Rarity: objects increase in value if they have unique properties or are difficult to replace, like art and other collectables.
- Time: urgency rushes us, leaving room for error in decision-making.
If that wasn’t enough, a few factors can increase the powerful force of the scarcity heuristic and its (negative) impact on our decision-making:
Social proof: when something is sold out, we perceive the product as good and valuable because everyone else is buying it.
Competition: when we have to compete for a scarce resource, we inflate its perceived value. This happens as soon as we feel we have to compete, even if it’s not the case. Advertisers often take advantage of this by indicating something is about to sell out.
Commitment bias: once we’ve committed ourselves to something, then realize we cannot have it, we’ll want the object even more.
New scarcity: going from abundance to scarcity increases our irrational desire for a limited resource. We react strongly when we think our future options will be reduced.
Worchel, Lee & Adewole demonstrated this in 1975 when they divided people into two groups: one received a jar of ten cookies, the other a jar with only two cookies. When asked to rate the quality of the cookies, the second group rated the cookies as more desirable – it’s rarer after all.
But when they removed 8 cookies from the jars of some people in the first group, before they could sample the cookie, those people rated the cookies even more desirable than the people who originally started with 2 cookies.
Scarcity heuristic examples
The scarcity heuristic can lead to hoarding behaviour and impulse buying. Because of perceived scarcity, especially when coupled with future uncertainty, we may be overwhelmed by the fear of needing something and not having it.
We could see this during the 2020 COVID-19 pandemic when people panic bought toilet paper out of fear of limited product supply.
Similarly, we see the impact of the scarcity heuristic with the Black Friday shopping extravaganza in the United States. The competition to get a scarce and in-demand product, even more so than a bargain on a great gift, compels many into impulse buying.
The scarcity heuristic also affects animals: birds and rodents (squirrels, for example) often hoard food and store or hide it in places other animals can’t reach.
Scarcity examples in real life
Recruitment
Research has shown that people place a positive, higher value on companies that advertise that few positions are available compared to ones with many positions available. The limited supply implies a higher demand and a more popular company to work for. Competition, social proof and status fuel the desire to work for such a company.
Advertising
Decades of advertising have consistently shown that we humans are susceptible to both scarcity (limited supply) and urgency (limited time). Our natural tendencies to compete and avoid regret/opportunity loss make us so susceptible to this irrational behaviour that only the perception of scarcity and urgency is needed, leaving us vulnerable to advertisers creating artificial scarcity.
Business
Many businesses employ artificial scarcity: a scarcity of items despite the availability of excess production capacity. Some examples of actions that create artificial scarcity:
- Cartels and monopolies
- Competition regulation that deters investment and new entrants
- Copyright and patents
- Hoarding (of products or commodities)
- Paywalls
Investing
The hoarding (or stockpiling) of products or commodities reduces the supply, thus creating a scarcity of that product and ultimately driving up the price of that product. Common examples include gold, money, stocks, fuel and medicine.
This behaviour can lead to the formation of a monopoly or oligopoly – 1 or a few parties dominating the market – which, with sufficient control of a particular product or commodity – can corner the market and manipulate the market price.
The price increases as a result of hoarding can lead uninformed people to “want to join the party” as a result of FOMO (fear of missing out). As people join, social proof and herding start to influence others, getting even more people to join, further driving up the price and creating a bubble. This continues until no more people join, at which point people start to sell and the price crashes almost overnight. Those who joined late are often hurt the most.