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.
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.
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.
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
