Scarcity is a concept that sits at the intersection of economics and psychology. Scarcityimpacts a business’s supply-side policies and demand-side strategies, and it affectssupplychains and operations, necessitating careful management in order to protect business models.At the same time, scarcity is a phenomenon to be harnessed by companies in their marketingstrategies. Understanding the basics and variations of scarcity can help business leadersunderstand how to translate this concept into action.
What Is Scarcity?
Scarcity is what causes the underlying tension between supply and demand. In a“perfectworld,” supply and demand would be at equilibrium. However, that is rarely thereality. Anoverabundance of a resource causes consumers to be complacent and undervalue it, while ashortage creates a sense of urgency that increases value and prices.
Scarcity is specifically defined as the gap between limited resources and unlimited wants.It’s the underpinning of economic theory and the related principles of opportunitycost,resource allocation, price elasticity and risk. Prices and perceived value rise whenresources are scarce and fall when they are available in abundance. A business that suddenlyfinds its raw materials becoming more scarce is likely to suffer increased costs andpotentially reduced profits. In the extreme, a real dearth can cause operations to ceasecompletely.
Beyond economics, scarcity has been proven to have a significant impact on human behavior.Consumers see items in short supply as more valuable. They adjust their purchasing decisionsto avoid missing out. Savvy marketers use approaches that take advantage of this humanbehavior to spur sales and raise prices.
Key Takeaways
- Scarcity is the result of an imbalance in supply and demand for a good or service.
- Scarcity is caused by excess demand, insufficient supply or lack of access; it can alsobe the result of natural resource limitations or purposeful business strategy.
- Scarcity can significantly impact economics — and human behavior.
- Businesses deal with scarcity when managing their supply chains and marketingstrategies.
- Scarcity requires business leaders to pay careful attention to data and trends in orderto manage its implications on revenue, costs, operations and profits.
Scarcity Explained
Scarcity can impact a business’s supply chain, causing fluctuations in the cost andavailabilityof raw materials. It is a primary issue for supply chain and procurement managers who aretasked to keep supplies flowing at acceptable cost. Consider how vulnerable a commercialbakery’s cost structure is to a supply-side scarcity such as wheat shortages caused bydrought,or to skyrocketing costs of cleaning supplies caused by excess demand during the globalpandemic. Reduced availability of either product can cause the bakery’s costs to rise,squeezingprofits. Further, scarcity can limit production of finished inventory, in turn reducing revenuepotential. And in the case of scarce natural resources, a focus on sustainable sourcing today can help avoid issuesof scarcity in the future.
Scarcity also plays an important role in product positioning and pricing. Businesses can usescarcity to help drive the sale of their products. By carefully orchestrating supply, abusiness can buoy the image of their products, raise selling prices and simultaneously optimize inventorycarrying costs. This means that by creating a scenario where the supply of a productis less than the demand, the price of the product can be increased. It’s a delicatedance,since reduced supply also means lower volume of products sold. Many luxury brands arepositioned in this way.
What Is the Scarcity Principle?
The scarcity principle is one of several principles of persuasion, discussed by RobertCialdini in his book Influence: The Psychology of Persuasion. In a nutshell, theprinciple suggests that it is typical, repeatable human behavior to want more of what wecan’t have. The same item becomes more valuable to us if we believe that wecan’t have asmuch of it as we want or that it will become unavailable. The fear of missing out drivesconsumers to change their buying habits, tending to accelerate their purchases and/or pay ahigher price. Classic examples of how the scarcity principle is used in marketing include“limited time offer,” “x items left in stock” and “X customersare viewing this item rightnow.”
Scarcity in Business
Because most businesses are both buyers and sellers of products, they deal with scarcity inmanaging their supply chains and their marketing. When making purchase decisions, businessesstrive to source products efficiently, effectively and with an eye on availability. Assellers, business marketers consider scarcity not only when strategically positioning abrand or product, but also at the tactical level as well.
Scarcity is a primary challenge for supply chain managers, who are tasked with maintaining asteady, reliable and cost-controlled flow of supplies and raw materials. Predictingpurchasing needs within the context of external demand can help a business stay ahead ofscarcity issues. However, given the geopolitical turbulence affecting interconnected globalmarkets, not to mention continuously evolving government regulation, this is not an easytask. Scarcity can cause volatile pricing that leads to unpredictable gross profit, or itcan require alternative sourcing in order to avoid insufficient supply. Scarcity requiresbusinesses to be more innovative and creative when managing inputs.
In marketing and selling, the perception of scarcity can help position a product as rare oruncommon. Human nature assigns more value to items with such attributes, as compared withcommodities that are abundant. High-end pricing, limited quantities and greater demand are acircular marketing trifecta that is powered, in part, by the psychology of scarcity.
Several marketing tactics leverage the effects of scarcity, which boil down to the idea ofmissing out and cause consumers to complete a purchase they may otherwise have spent moretime thinking about. Using time pressure, such as countdown clocks or limited-timepromotions, is one approach. Displaying real or perceived stockout is another approach,such as warnings about dwindling available quantities or how many other customers areviewing the same item. This tactic also plays into the scarcity principle by creating asense that the item is valuable and a good purchase because it is popular.
Why Is Scarcity Important?
A fundamental aspect of scarcity is that demand exceeds supply, making it an importantconsideration for many businesses. Scarcity can have an impact on prices and availability ofcritical inputs for a business, challenging business leaders to allocate their resourceswisely to mitigate that supply-side risk. As such, it’s a good idea to be prepared forpotential changes in scarcity. Supply chainplanning involves predicting future demand and can be helpful in identifyingpotential scarcity issues as well as alternative sources. Scenario planning can help abusiness create action plans inthe event of increased scarcity. Beyond supply chain planning for raw materials, scarcitycan apply to other critical resources, such as employee talent, time and knowledge.
Causes of Scarcity
There are several types of scarcity, characterized by what causes the supply and demand tobe unequal.
Demand-Induced Scarcity
This type of scarcity is caused by demand that exceeds supply. It’s driven by theconsumer.This means buyers have changed their level of desire for a product, while the volume ofavailable product has remained the same. Changes in demand can be caused by any combinationof expansion of the customer base, growth in customer income or changes in customerpreferences. For example, the current growing demand for electric vehicles is expected bysome to create demand-induced scarcity for some electric vehicle battery components.
Supply-induced Scarcity
In supply-induced scarcity, the level of supply goes down while demand remains constant.Suppliers drive this type of scarcity. For example, a high-end doll manufacturer may chooseto retire a product, effectively depleting its future supply, but because there is constantdemand, the doll is considered scarce and more valuable. Sometimes the“supplier” is theenvironment; for example, droughts and fires reduce the supply of crops or timber. A famousexample is the 2011 earthquakes and tsunami that dramatically reduced Japan’ssemiconductormanufacturing capacity. Regardless of whether the change in supply is natural or man-made,supply induced scarcity can be temporary or long-standing.
Structural Scarcity
This is when supply and demand are misaligned for some buyers but not for all. Thesesituations usually stem from unequal access for physical or financial reasons. Physicalaccess challenges might be caused by lack of proximity to the supply or gaps in distribution— for example, the scarcity of authentic New York bagels in areas that are distantfrom theU.S. east coast. Another version of structural scarcity is unequal access to a product dueto lack of financial resources, such as the inability of certain poor populations to accessclean drinking water.
Types of Scarcity
Scarcity is a concept that can be viewed in two different ways: relative scarcity andabsolute scarcity. Relative scarcity refers to the comparison of the availability ofresources between two or more entities, while absolute scarcity looks at the amount ofresources available as compared to an individual business's needs. Both types of scarcityhave important implications for businesses, which must consider both when making decisionsabout resource allocation and pricing. By understanding the difference between relative andabsolute scarcity, businesses can better plan for their future success.
Relative Scarcity vs. Absolute Scarcity
Another dimension to scarcity relates to a resource’s innate supply. Absolute scarcityandrelative scarcity both describe scenarios with limited supply of resources, though onlyrelative scarcity takes demand into account.
Absolute scarcity describes resources that are fixed in supply and cannot be increased ordecreased, regardless of demand. Their supply is hard-capped due to intrinsic limitations.There is no ability to generate more of an absolutely scarce resource, and there are no truesubstitutes. Examples include:
- Time, because once it’s past, it’s gone.
- Fine art, as in there can only be one Mona Lisa.
- Land, because we’re not making any more of it.
- Bitcoin, which has been described as a currency with absolute scarcity since it isintrinsically capped by its own mining protocol.
In contrast, a resource with relative scarcity is one that has a limited supply but only inrelation to demand. Most discussions of scarcity in a business setting are examples ofrelative scarcity. The key difference between absolute scarcity and relative scarcity is therelationship between supply and demand.Resources that are relatively scarce may exist in large quantities, but the supply justcan’t keep up with demand. Relative scarcity requires consumers to make choices,evaluatesubstitutes and allocate resources. The three causes of scarcity — excess demand,insufficient supply and structural access — describe situations of relative scarcity.
Comparing Absolute and Relative Scarcity
| Absolute Scarcity | Relative Scarcity | |
|---|---|---|
| Limited supply | Yes | Yes |
| Flexible supply | No | Yes |
| Substitutes | No | Yes |
| Caused by excess demand | No | Yes |
| Examples | Time Land | Video games on the day of release Sanitizer during flu season Gasoline before a storm |
Examples of Scarcity in Business
Businesses often use scarcity to their advantage when marketing their products. We see manyexamples in daily life, though the most effective are done subtly. Here are a few examplesof how businesses use scarcity to drive sales:
- Travel companies highlight how many times rooms at a particular hotel have been bookedthat day.
- Airlines warn about the limited number of available seats left on a flight.
- Online retailers display colors or sizes that have been sold out beyond the colors orsizes being selected.
- Businesses add “while supplies last” to the fine print in a print ad.
- Coffee shops create seasonal, limited-time premium offerings.
- Art dealers use a numbered series on commercial art.
- Websites of all kinds include countdown timers to spur action before time runs out.
- Businesses list items as “back in stock,” cleverly letting consumers knowthat theymissed something that others previously found popular.
Prep For Economic Change With NetSuite ERP
Because scarcity poses challenges and opportunities that touch nearly all aspects of mostbusinesses, both on the supply side and the sales side, dealing with it calls for acomprehensive enterprise resource planning (ERP) system. Identifying potential supply chainchallenges before they occur can help keep operations flowing and sustain profitability. Onthe sales side, careful execution of marketing tactics that leverage scarcity is a provenway to spur sales. In both cases, the ability to harness the power of scarcity relies onhaving access to the right, most up-to-date data.
NetSuite ERP, with its core accounting and financefunctionality surrounded by a dozen operational modules, enhances a business’s abilitytomanage scarcity issues. NetSuite supply chain management helps a companystay on top of the flow of goods coming from suppliers to manage availability and costs.Plus, integrated ERP modules such as demand planning and inventory managementhelp businesses predict future demand and optimize inventory levels. On the sales side,modules for ecommerce and financial managementprovide the ability to position scarcity relative to product promotions and to drill down oncosts, profitability and production at the product level, which can help identify whichofferings to promote and for how long.
Scarcity is the result of an imbalance in supply and demand for a good or service. Theimbalance can be caused by excess demand, insufficient supply or lack of access. Sometimesscarcity is the result of natural resource limitations and other times it is manufactured bythe business. Regardless of its origins, resource scarcity can cause price volatility andhigher costs for businesses. Managing supply chains with this in mind is critical to keepingoperations flowing and sustaining business models. At the same time, businesses can usescarcity to their benefit when developing and marketing their products. In all cases,scarcity requires careful attention to data and trends so that business leaders can managethe implications of scarcity on revenue, costs, operations and profits.
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Scarcity FAQs
What is scarcity in economics?
Scarcity is the gap between limited resources and greater demand. It’s theunderpinning ofeconomic theory and several related principles, including opportunity cost, resourceallocation, price elasticity and risk. Prices and perceived value rise when resources arescarce and fall when they are abundant.
Why is scarcity a fundamental aspect of economics?
Supply and demand are fundamental to economic theory, and scarcity is the concept thatdemand for a resource exceeds its supply. This can have an impact on prices and availabilityof critical inputs for a business. Due to scarcity, both consumers and businesses areconstantly challenged to allocate their resources wisely and manage risk.
What are some of the most important issues regarding scarcity?
Scarcity can have an impact on a business’s supply chain, causing fluctuations in thecostand availability of raw materials. Further, scarcity can limit production of finishedinventory, which reduces revenue potential. Scarcity can also play a role in marketing, forexample, as a consideration in product positioning and pricing. When managed carefully, theconcept of scarcity can help a business drive the sale of its products.
What are the effects of scarcity?
Scarcity has been proven to have a significant impact on human behavior. Consumers see itemsin short supply as more valuable, so they adjust their purchasing patterns to avoid missingout. Savvy marketers use approaches that take advantage of this human behavior in order tospur sales and/or raise prices.
How does scarcity affect decision-making?
The scarcity principle is one of several principles of persuasion, discussed by RobertCialdini in his book Influence: The Psychology of Persuasion. In a nutshell, theprinciple suggests that it is typical, repeatable human behavior to want more of what wecan’t have. The same item becomes more valuable to us if we believe that wecan’t have asmuch of it as we want or that it will soon become unavailable. The fear of missing outdrives consumers to change their buying habits, often by accelerating their purchase and/orpaying a higher price.
