Question:
How does scarcity determine the economic value of an item?
A. By the amount of goods that are produced
B. By the capital required to build the factory
C. By the unlimited wants of the consumers
D. By the resources consumed in production
Answer: D. By the resources consumed in production
What is Scarcity
Scarcity refers to the limited supply and availability of a product, service, or opportunity.
The scarcity of any economic factor of input (land, labor, capital, and entrepreneurship) is always compared to the needs of an individual, group of people, or community at large. The scarcity of these input resources increases if their demand is higher than the supply.
For instance, the scarcity of land increases as more people demand land to construct premises on or use for agricultural purposes.
In economics, the interplay between demand and supply gives an economic resource input its monetary value. A resource’s economic value is low if it has high supply and fairly low demand. This is because consumers of such factor input can satisfy their needs and probably not fully exploit such resource input’s availability.
The opposite is true; when a resource input, say labor, is in limited supply and cannot meet demand, at this point, labor becomes valuable. This value is derived from a high, almost insatiable labor demand that the current labour supply cannot meet.
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Perfect Competition Profit Maximization
Perfect Competition Profit Maximization is attainable through the production level at which marginal revenue (MR) equals marginal cost (MC).
Therefore, scarcity determines the economic value of an input or output by the resources consumed in production. For every single output from a company, there is an opportunity cost in question. Thus, the exclusivity and scarcity of an item is from all the foregone options.
If there is an abundance in the supply of resources used to produce an item, the final product is less likely to have any sense of scarcity and exclusivity. Such products may not have high economic value because replicating their production is possible.
Scarcity Principle
The scarcity principle is the psychological, economic behavior of people placing a higher monetary value on products and services in limited supply making their accessibility hard.
Aspects of the Scarcity Principle
1. Higher perceived value: the product or service in question is likely to be worth less economically than people perceive it to be. This higher perceived value than the actual is driven by a sense of exclusivity and urgency.
2. Heightened motivation: intended buyers or consumers of a resource input or output fear missing out on some value from a scarce resource. Thus, they must act as quickly as possible and acquire such resources as soon as possible. This heightens their decision and actual acquisition behaviors.
3. Competitive purchase behavior: individual and group consumers of a resource in question often compete to acquire the resource in question. This competition is driven by the desire of each individual to enjoy the exclusivity of utility that a scarce resource has.
Examples of the Use Case of Scarcity to Create Economic Value
Companies highly leverage scarcity and economic value to produce highly-priced products. For instance, a watch manufacturing company can make limited units for a certain watch. Such watches get their economic value because of their limited supply. Since many people will be trying to buy one of these limited watches, there is a certain sense of exclusivity to those who have at least one.
This is how collectibles get their economic value. Not every single item can be termed a collectible. However, a selected few products qualify to be called collectibles. These are always in limited supply, they are desirable and have some form of historical or cultural significance.
