Scarcity Principle

REVIEWED BY WILL KENTON Updated Jan 9, 2018

What is the Scarcity Principle

The scarcity principle is an economic theory in which a limited supply of a good, coupled with a high
demand for that good, results in a mismatch between the desired supply and demand equilibrium. In
pricing theory, the scarcity principle suggests that the price for a scarce good should rise until an
equilibrium is reached between supply and demand. However, this would result in the restricted
exclusion of the good only to those who can afford it. If the scarce resource happens to be grain, for
instance, individuals will not be able to attain their basic needs.

BREAKING DOWN Scarcity Principle

In economics, market equilibrium is achieved when supply equals demand. However, the markets are
not always in equilibrium due to mismatched levels of supply and demand in the economy. When supply
of a good is greater than demand for that good, a surplus ensues, which drives down the price of the
good. Disequilibrium also occurs when demand for a commodity is higher than the supply of that
commodity, leading to scarcity and, thus, higher prices for that product.

If the market price for wheat goes down, for example, farmers will be less inclined to maintain the
equilibrium supply of wheat to the market since the price may be too low to cover their marginal costs of
production. In this case, farmers will supply less wheat to consumers, causing the quantity supplied to
fall below the quantity demanded. In a free market, it is expected that the price will increase to the
equilibrium price as the scarcity of the good forces the price to go up.

When a product is scarce, consumers are faced with conducting their own cost-benefit analysis, since a
product in high demand but low supply will likely be expensive. The consumer knows that the product is
more likely to be expensive but, at the same time, is also aware of the satisfaction or benefit it offers.
This means that a consumer should only purchase the product if he or she sees a greater benefit from
having the product than the cost associated with obtaining it.

Scarcity Principle in Social Psychology

Consumers place a higher value on goods that are scarce than on goods that are abundant. Psychologists
note that when a good or service is perceived to be scarce, people want it more. Consider how many
times you’ve seen an advertisement stating something like: limited time offer, limited quantities, while
supplies last, liquidation sale, only a few items left in stock, etc. The feigned scarcity causes a surge in the
demand for the commodity. The thought that people want something they cannot have drives them to
desire the object even more. In other words, if something is not scarce, then it is not desired or valued
that much.

Marketers use the scarcity principle as a sales tactic to drive up demand and sales. The psychology
behind the scarcity principle lies on social proof and commitment. Social proof is consistent with the
belief that people judge a product as high quality if it is scarce or if people appear to be buying it. On the
principle of commitment, someone who has committed himself to acquiring something will want it more
if he finds out he cannot have it.