They must consider the fact that by buying one, they cannot have the other, so, therefore, will choose that good that brings them the highest utility. When we have scarce resources, we must decide how best to use them.
However, this equally depends on the resources we buy. For instance, the scarcer a resource, the greater its value. At the same time, it is a resource that is highly demanded across the world which means that it is in high demand but also has a low and limited supply. In turn, this contributes to its high valuation across the world. This valuation can be split down between consumer scarcity — the scarcity of our individual resources.
We then have producer scarcity — the scarcity of the goods or services we are purchasing. If, for instance, a customer would like a bottle of water, their value is much higher if they cannot get another for miles around.
To demonstrate, the value of water is much higher to a person stuck in the middle of the desert than in the comfort of their home. In short, the scarcity of the product can increase the value to the customer. This is because we, as consumers, place a higher value on it as a result. Smith questioned the price difference between water and diamonds.
Why he posed, are diamonds valued so highly, yet water, which is a human necessity, valued so low. In other words, what people are willing to pay for it. People are willing to pay more for diamonds, so they are naturally valued more highly.
After all, we need water to survive. There are several factors that contribute to this, but the two main variables are scarcity and marginal utility. Diamonds are naturally scarce, which gives it its value.
By contrast, water is readily available almost anywhere in the developed world. To explain, water is easy to access. We have more than enough to satisfy our immediate needs. Anything beyond our most crucial needs starts to lose value. For instance, after eating a large meal, the value placed on another drastically falls. The same principle applies to water. It is because our very basic needs are met that we can place a greater value on luxuries such as diamonds.
There are two types of scarcity, absolute, and relative. Let us first look at what relative scarcity is. Relative scarcity is where a good is naturally limited in supply.
So, there is only a finite number available. However, we define relative scarcity as being naturally limited, but is also scarce relative to demand.
In other words, relative scarcity is where supply does not meet demand. What is an example of a good which is not scarce? Water in the ocean? Sand in the desert? Any good whose supply is greater than the demand if their price were zero is called a free good , since consumers can obtain all they want at no charge. We used to consider air a free good, but increasingly clean air is scarce.
There are four productive resources resources have to be able to produce something , also called factors of production :. Productive resources and factors of production are explained again in more detail in the following video:. Improve this page Learn More. Skip to main content. Module 1: Economic Thinking. Search for:.
Understanding Economics and Scarcity Learning Objectives Describe scarcity and explain its economic impact Describe factors of production. As you watch the video, consider the following key points: Economics is the study of how humans make choices under conditions of scarcity. Scarcity exists when human wants for goods and services exceed the available supply. About us Help Center. Log In Where do you want to login? Sign Up. Income Tax Filing. Expert Assisted Services. Tax Saving.
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Supply and choice Tom McKenzie.
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