Scarcity

Diamonds. Gold. Oil. Oscar-winning actors. Seven-foot-tall dudes who can hit three pointers under pressure. These things are scarce.

A handful of beach sand. A box of garbage. Theses things are not scarce.

But what does “scarcity” mean in economic terms?

Let’s back up a bit. Beep. Beep. Beep. The basic forces of economics are supply and demand. The fundamental pricing action in an economy lies in figuring out how to distribute limited resources. Basically, finding a way to get supply and demand into balance. So that’s the theory.

Example:

People want stuff, like hamburgers. They get hangry and need comfort food and/or fuel and/or calories masquerading as love. Joe 6-Pack wants his burger. Demands it. So, yes, that's demand. Then someone provides the stuff. Supplies it. Like Freddie the Fry Cook. And that's supply. In the middle, you get prices, which help match and meter and measure the metrics of scarcity, i.e. where supply hooks up with demand. Everything is relative, or contextual. A bottle of water in the middle of the desert can be worth a hundred bucks. That same bottle in Kauai, where it rains 5 inches a day? Eh, not worth so much.

So, in context, when there's a lot of supply and limited demand, prices are low. People might love hamburgers, but there are a lot of them around (a lot of supply, i.e. they aren’t scarce), and all of the ingredients to a burger are easy to find. There are plenty of sources of all-beef patties. Plenty of special sauce. Plenty of lettuce, cheese, pickles, and onions, and plenty of wheat and sesame seeds to make sesame seed buns. Tons of suppliers. Easy to make. Commodities. There's no significant scarcity of hamburgers, so prices are relatively low. There aren't infinite burgers, but compared to
amber with dinosaur blood in it, and Olympic gold medalists, and brilliant, honest Congressmen...hamburgers aren't really scarce.

So what is scarce? How about beachfront property? Ever wanted to live in a mansion in Malibu? One of those babies will likely set you back a cool $20 mil. Beachfront property in a good location is rare (supply is very limited), but everyone anywhere near the coasts wants to live there. There’s a huge demand for this scarce resource.

Now technically, not all beachfront property is expensive. Remember Three Mile Island? Easy pickings. But if you want to live by the beach in California, you’re going to have to pay up, competing with other rich people willing to shell out millions for a close-up view of Moby or Flipper or, well, smog. And note that what’s scarce today might not always be scarce, or even prized. Beachfront property in California won’t always be as rare global warming continues, or a random nuke hits Greenland.

That $20 million Malibu home? It used to be beachfront. Now it’s Atlantis. And not the cool kind, where you can swim with dolphins. Or the kind with superheroes. No, just bottom-of-the-ocean, formally-20-million-dollar fish habitat. Demand has dropped to zero. It’s no longer scarce. It’s as common as junk on the bottom of the ocean. Meanwhile, with California’s new coastline, land that used to be inland orange and walnut groves, now has a spectacular view of the ocean. Farmer McGee, how about $12 million for a couple acres by the coast?

Want a two-carat diamond ring for your brand-new wife? The one who doesn't nag you daily to take out the garbage? That ring's going to cost you about $50,000, because there aren’t many diamonds that big, i.e. they're scarce...and they are desired. Want Denzel in your movie? It’s going to cost you a cool $5 million. If you want KD playing on your hoops team? It’s going to cost you about a quarter Unit a season. Why? They're scarce, not like a hamburger, and they’re desired by many, especially the rich.

So these are today’s prices for the intersections of supply and demand. Tomorrow, prices will move, as attributed values are continually in flux. An item might be scarce, but that doesn’t make it worth a lot of money...not if demand is low. The Shmoop Family Singers album is scarce and, um, oh so not desired. There’s only one Steven Seagal. Yeah, the fat and bald guy who used to be somebody.

The values attributed to scarcity can go the other way, too. Something that used to be very common can become scarce, and if demand remained flat or steady, these now scarce but demanded things can become…prized.

So watch out, Denzel. You might be one-of-a-kind, but scarcity doesn’t always mean high value. You’re always just one hamburger addiction away from heading down the Steven Seagal path to oblivion. But on the other side of the coin, maybe put a burger into your deep freezer, just in case. Who knows if it will be scarce one day? If all the cows are wiped out by a plague...burgers might become a scarce resource.