Thursday, November 24, 2011

Scarcity vs Shortage

The terms shortages and scarcity are often used interchangeably, but there is a difference. So what is the difference? Simply explained, scarcity is a result of demand exceeding the natural ability to meet these demands. For example; gold, diamonds, and truffle oil are all scarce resources. Due to the limitations rooted from the inability of mother nature to provide abundantly, scare resources are simply limited in number. Keep in mind that scarcity is permanent. Contrary to this, a shortage is when equilibrium price exceeds current market price. Consumers are willing to pay more than the selling price, causing a greater demand than supply. A company can remove a shortage simply by increasing the price, therefore shortage is temporary.

Essentially, every resource is scarce, because each individual must decide how to allocate their limited resources. What does this mean? Well, every resource will eventually run out, and time or money spent on one thing is time or money you could have spent on something else. We have explored this idea in previous posts, and referred to this as opportunity cost. We can't all have everything.

The bottom line is that every resource experiences scarcity but not all resources experience shortage. For example, as of right now, everybody who wants gold can buy it if they are willing to give up something else. But, not everybody who wants gold can have it without a tradeoff.