What Is the Difference Between Scarcity and Shortage?
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Summary:
Scarcity and shortage are foundational economic concepts. Scarcity refers to the economic reality that unlimited human desire pursues limited resources. Shortage refers to the availability of a good or service being less than the quantity demanded.
You’ve heard people discussing the housing shortage or the scarcity of gold. You probably got the gist of what they meant by scarcity and shortage, but do you know the precise difference between them? Scarcity describes the reality that resources are not unlimited so it is not possible for all people who desire a given resource to get all they want. Shortage describes the state where a service or good’s availability falls short of demand.
No matter what your profession and interests are, understanding these terms is important. Keep reading to get a clear grasp of these key economic concepts and how to distinguish one from the other.
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Basics of supply and demand
To understand the difference between scarcity and shortage, you need to understand supply and demand. The law of supply and demand is a fundamental principle of economics that describes the balance of sellers, buyers, goods, and services in an open market.
Supply
Supply is the available quantity of goods and services in a market at a specific price. The law of supply says that — assuming all other variables are constant — as the price of a good or service increases, the supply of that good or service will increase.
Demand
Demand is the number of buyers in a market willing to pay for goods and services at a specific price. The law of demand says that — assuming all other variables are constant — as the price of a good or service increases, the demand for that good or service will decrease.
Supply meets demands
Supply and demand exist and fluctuate alongside one another. In theory, the balance between the two determines the actual market prices and supply within the economy.
Though you experience the effects of supply and demand every day, such as when you pick up groceries, one way to watch supply and demand in action is to watch the investment markets.
There is a lot more to be said about supply and demand, but these basics will set you up to better understand the concepts of shortage and scarcity.
Scarcity defined
Scarcity is the result of unlimited human wants or needs and the limited resources to satisfy those wants or needs. In other words, the supply of scarce resources is naturally limited. Scarcity refers to a problem every economy has dealt with throughout history. The main objective of economies is to solve this problem.
What causes scarcity?
To know what causes scarcity, we must first know just what economists mean when they talk about it. One can actually distinguish between two distinct uses of the term.
Natural scarcity
Scarcity is a naturally occurring limitation in this world. Scarcity occurs when a resource is rare or difficult to produce. A scarce resource must be distributed and used carefully, in accordance with its value. Despite these resources being available freely in the natural world, once people desire them, their scarcity warrants putting a price on them.
Because scarcity is a fundamental characteristic of a finite physical world, saying that it is “caused” by demand seems inexact. Wouldn’t it be more precise to say that demand highlights scarcity? In other words, the scarcity or abundance of a resource would not be perceived if there were no present demand for it. We know from the law of supply and demand that when prices decrease, demand increases, and supply decreases. When the prices of finite resources fall and demand increases, scarcity is highlighted by shortages in the goods or services dependent on those resources.
Economic scarcity
This is not how economists generally use the term ”scarcity,” however. What they have in view is the economic phenomenon of scarcity, not natural scarcity per se. So, rather than say that scarcity is just a fact of nature that demand reveals to us, they usually say that human demand, in interaction with limited natural supply, causes scarcity. If there is no demand for a resource, it is never scarce in the economic sense, no matter how scarce it is in the natural or physical sense.
For economists, scarcity no one notices doesn’t exist. If the price of a limited resource drops and demand increases, the resource’s (natural) scarcity becomes more apparent and concerning until the price rises enough to relieve the strain. When describing this phenomenon, economists say that falling prices and increased demand for resources cause (economic) scarcity.
Like the economists, this article focuses on economic scarcity, touching upon natural scarcity only when necessary for clarity.
Examples of scarcity
Natural resources exemplify the concept of scarcity. For example, oil, land, natural gas, water, precious metals, and minerals are all scarce resources. They are raw materials of importance to the functioning of modern society. Therefore, we exchange money for them within the economy to moderate their depletion.
Shortage defined
Shortage is a result of human activity. It is a condition that occurs when demand exceeds supply. In other words, the quantity supplied of a good or service is less than the current demand of buyers in the market. This results in an increased market price for the supply of that good or service.
We find a shortage condition resolved when one of two things happens. One is when supply catches up to demand, at which point prices stabilize or if supply outstrips demand, decreases. The other is when demand dies down, such as when consumers lose interest in a fad product, at which point, again, prices stabilize or decrease.
Since this problem results from human activity, its resolution also depends on human action.
Shortage causes: how shortages happen
- Intentional. Though a short-sighted strategy that can backfire, sellers and producers can inflict supply shortages to drive prices up.
- Spontaneous. Another way a shortage occurs is when an item is popular and easy to obtain. This decreases the supply faster than sellers and producers can fill the demand.
- Catastrophic. Shortages can also occur due to wars and other similar economic crises.
- Accidental. Other causes of shortage include price ceilings, government bans, and miscalculation of demand by a supplier.
Whatever the cause, the free market will correct itself via producers or sellers increasing the supply or increasing the price, or consumers fulfilling their demand with another good or service.
Paradoxical as it seems the best cure for high prices is high prices, which automatically correct themselves by curtailing consumption and stimulating production. National economic law will always be vastly more effective than any artificial government edict.” — Henry Clews (1836–1923), American financier
Examples of shortage
A real-world example of a shortage is toilet paper during the early weeks of the COVID-19 pandemic. Prior to this crisis, toilet paper was reasonably priced and easy to get. Once the pandemic hit and people started panicking, the demand skyrocketed. This resulted in a toilet paper shortage evidenced by empty shelves and ravenous shoppers.
Another example could be a factory worker strike that causes the production of a good to halt. Consequently, this good’s supply will decrease, causing a shortage until the strike is over.
One more example could be a supplier holding products in its warehouse instead of sending inventory to the marketplace. This causes an artificial shortage that allows the supplier to raise prices and then release the product — provided consumers haven’t already found another way to fulfill their demand or discovered they can do without the products.
Someone always disagrees
Economist Murray N. Rothbard (1926–1995), who taught at Brooklyn Polytechnic Institute and the University of Nevada, Las Vegas, actually objected to using the term “shortgage.” In 1977, he wrote:
[O]n the free market, regardless of the stringency of supply, there is never any ‘shortage’…there is never a condition where a purchaser cannot find supplies available at the market price. On the free market, there is always enough supply available to satisfy demand. The clearing mechanism is fluctuations in price. If, for example, there is an orange blight, and the supply of oranges declines, there is then an increasing scarcity of oranges…[which are then] ‘rationed’ voluntarily to the purchasers by the uncoerced rise in price, a rise sufficient to equalize supply and demand.”
Ready to get actively involved?
Scarcity, shortages, and the supply chain are interesting in the abstract. But perhaps you have more practical reasons for wanting to learn about these concepts. For instance, you may be planning to open a business. Or you may already have done so.
If you want to get your business off to a running start or to kick your existing business into high gear, it may be time to consider a business loan.
Scarcity vs. shortage
Scarcity and shortage are often interchanged in casual usage. There are some similarities between the two concepts. However, in economics, each has a distinct meaning.
Similarities between scarcity and shortage
Let’s discuss how scarcity and shortage are similar to one another. Both refer to limited quantities of something, resources in the case of scarcity, goods or services in the case of shortage. Scarcity and shortage are both intimately related to supply, demand, and market prices. The principles of supply and demand help us understand both. Other than these broad similarities, they are different from one another.
Differences between scarcity and shortage
What is the difference between scarcity and shortage? Well, there are several differences between the two. The following is a list of the key differences between scarcity and shortage:
| Factor | Scarcity | Shortage |
|---|---|---|
| Economic scenario: | Scarcity is an ongoing state of limited resources that people want or need. The finite quantity of natural resources dictates the market price and supply. | A shortage is a situation in which a supply falls significantly lower than demand. The market price increases to decrease demand, or the supply increases over time to meet demand. Sometimes both occur. |
| Origin: | Scarcity originates in nature and becomes an economic phenomenon due to human demand. | Shortage originates in human action on both the supply and demand sides of the economy. |
| Permanence: | Natural scarcity is permanent. Economic scarcity persists as long as humans have a use or desire for a resource. | Shortage is temporary. |
| Supply: | Scarcity refers to the limited, decreasing supply of natural resources that humans want or need. | Shortage refers to the decreased supply of goods or services relative to demand. |
Pro tip — If you can’t remember which is which between scarcity and shortage, use this memory tool. Scare rhymes with rare. Scarcity occurs with relatively rare resources such as oil, gold, and land. Once you remember that scare rhymes with rare, you will know that scarcity refers to naturally occurring resources and shortage refers to supply decreases caused by human activity.
FAQ
What is the difference between scarcity and demand?
Scarcity occurs when a natural resource is difficult to obtain and reproduce, forcing the economy to place a high value on it, monetarily and physically. Demand is an economic term describing the quantity of a good or service that buyers in a market want or need. Though these two terms are related, they do not mean the same thing. At the same time, though they mean different things, they are not inverses or opposites of one another.
What are shortages in economics?
A shortage is when there is not enough supply to meet the demand for a product or service. Shortages can be caused by incompetent suppliers, economic crises, and other scenarios resulting from human activity in the market.
What is an example of a shortage?
A recent example of a shortage in May 2022 is the baby formula shortage in the United States. This troubling crisis is widely alleged to have been caused by the inefficiency of factories and government organizations to recover from recalls and the pandemic.
Don’t stop educating yourself
By reading this article, you’ve just begun to scratch the surface of what you can learn about economics. Keep learning from SuperMoney in this article about what capital goods are, the major companies that control them and available jobs
Key takeaways
- The law of supply and demand explains that, as supply increases, prices decrease, and as demand increases, prices increase.
- Scarcity is the inability to satisfy unlimited human wants or needs with the limited resources of this world.
- Shortage is the temporary economic imbalance when demand exceeds supply.
- While the two terms may seem similar, they have key differences in the economic scenario they describe, where they originate, whether they are permanent, and what they tell us about supply.
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