The Scarcity Principle and Its Implications

This article discusses the scarcity principle and its implications on an economy. It explains how limited resources affect the production possibility curve and how decision-making is important in allocating resources. It also discusses how scarcity affects the equilibrium price level and quantity of an economy.

Running head: THE SCARCITY PRINCIPLE AND ITS IMPLICATIONS
THE SCARCITY PRUINCIPLE AND ITS IMPLICATIONS
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1THE SCARCITY PRINCIPLE AND ITS IMPLICATIONS
The chief problem, faced by a country, is its limited resource. By the scarcity
principle theory, a country tries to fulfil its entire demand with its limited amount of
recourses. Due to scarce amount of recourses, there is always a difference between total
amount of demand and total amount of supply (Baumol & Blinder, 2015). As a result, price
of scarce factors are always remain high until it reaches to an equilibrium level. This
equilibrium level indicates certain level, where total market demand and total market supply
equate with each other.
The production possibility curve can explain the concept of scarcity resources. When
a country is producing only two goods with its limited resources then this curve can explain
the amount of possible outcome of that country.
Figure 1: Production possibility curve of an economy
Source: (created by author)

2THE SCARCITY PRINCIPLE AND ITS IMPLICATIONS
In the above diagram, the production possibility curve represents the maximum
potential level of output that a country can produce with its limited resources. With all its
resources, the country either can produce only good Y or only good X. Points A and B show
these level of output. On the other side, the country can also produce both good X and Y at
point C. However, it is important to mention over here that the country can produce
maximum of any good up to the production possibility curve (Adesina, 2017). The economy
never can produce any output beyond this curve. This happens due to limited resources of the
country.
Within an economy, human wants are unlimited. There are large numbers of products
existed within a country, as well. However, it is very difficult for a country or an economy to
produce all commodities with given resources and fulfil the want of all consumers. Hence,
decision-making is very important. In this context, the economy considers three basic
questions to take the decision regarding total production of a country. Firstly, they decide that
what product will be produced with scarce factors of production (Mankiw, 2014). This
question indicates proper allocation of resources. Secondly, the country decides the amount
that will be produced with those limited resources. Lastly, the country decides that how those
outputs will be allocated to the country.
After analysing all those questions, the country can take a proper decision regarding
total output of a country. Moreover, this scarcity principle helps to increase the price level of
a product in market. Due to scarce resources, total supply of a product decreases. On the
other side, total market demand of that particular product always remains high (Rees, 2017).
This excess demand leads the price level of that product at a higher level. After reaching to an
equilibrium level, this price level will stable.

3THE SCARCITY PRINCIPLE AND ITS IMPLICATIONS
Figure 2: demand and supply curve
Source: (created by author)
In the above figure, Pe is the equilibrium pirce level. Below this price level, total
demand is greater than total supply. This will increase the price level and will stop at point Pe
with Qe level of output.
Hence, scarcity principle is very important for an economy. It helps to decide the
equilibrium price level and quantity of an economy. At the same time, it helps to solve the
three basic questions of this economy.

4THE SCARCITY PRINCIPLE AND ITS IMPLICATIONS
References:
Adesina, A. A. (2017). The Measure of Scarcity. The Measure of Scarcity, 13.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Rees, J. (2017). Natural resources: allocation, economics and policy. Routledge.