What Is the Scarcity Principle: Basic Economic Theory & Harsh Reality of Life
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What Is the Scarcity Principle: Basic Economic Theory & Harsh Reality of Life

27 June 2022 5 days ago ~ 11 min read 2617 views
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Claspo Blog What Is the Scarcity Principle: Basic Economic Theory & Harsh Reality of Life

People always crave what is hard to get, whether it is a bottle of water, a luxurious necklace, limited edition T-shirt, or the last box of chocolates. In the age of consumerism, you might be tempted to fall into the fallacy of perceiving this world as rich rather than deficient in products. Yet, resources, means, and product scarcity infiltrates every level of the modern economy, starting from your weekend grocery shopping to international politics. Let’s see how you can use this construct to induce buying and facilitate customers’ decision-making.

  1. The Scarcity Principle. A Perpetuum Mobile of Economy & Financial Decision-Making
  2. The Principle of Scarcity. When Less Motivates Best
  3. Diamonds or Water? The Examples of the Scarcity Principle
  4. Understand the Scarcity Principle

The Scarcity Principle: a Perpetuum Mobile of Economy & Financial Decision-Making

Do you know why your blanket in the morning feels like the warmest, coziest hug in the world, making it impossible to get out of bed? Scarcity principle. Your mind is aware that you can only hit the “snooze” button a couple of times, and then it is time to go. Hence, your body starts to appreciate this comfort significantly more than it normally would.

The connection between the irresistibly warm embrace of your morning blanket and the scarcity principle leads us to a deeper understanding of economic laws. As a savvy businessman, you already have a grasp on some economic concepts. However, delving into the intricacies of the scarcity model requires us to start with the fundamental pillars that underpin every economic relationship.

  • Cost. This notion implies that you have to sacrifice something to get what you want. Like, breathing fresh air is a visceral function of your body, it comes naturally and does not require any effort. Meanwhile, when you desperately need to cool down after summer heat, you have to work and trade your leisure time and expertise for the money that you can spend on an air conditioner. Thus, fresh air does not have a cost, while turning hot air into cold does.
  • Demand. This means both the willingness and the ability to pay the cost. Of course, almost any woman would be excited to buy a fancy dress, but if this purchase resulted in eating bread with no butter for the rest of the month, most of them would back down.
  • Supply. Some people forget, but suppliers are actually the first to pay the cost, and they should be not only eager but also able to do it. You have to catch fish before you can sell it, right?

The motives behind people’s decision to pay the cost for obtaining object A instead of object B have been a mystery for a long time until Carl Menger invented the concept of marginal utility. Marginal utility refers to the additional satisfaction experienced by a consumer when they acquire an extra unit of a product or service. Menger focused on individuals and single items, rather than viewing buyers and sellers, products and resources as units or groups, as Adam Smith did.

It is not like people have the luxury of choosing from all the objects in the world. You can only possess a certain quantity of resources, yet your desires have no restraints. Hence, the utility of an item is circumstantial and subjective, this is why it is marginal. 

For instance, you have bread every day, but cake appears in your fridge only on special occasions. So, when your guest asks for a sandwich with the last piece of bread, you would not mind. Still, if it is the last piece of cake, you would be less inclined to share. However, if you prefer bread to cake, the situation will have different outcomes.

Overall, the scarcity of a product determines its value and its cost, making it more desirable. As the demand grows, so does the price. Now, fewer people can afford it or are willing to stand the cost, allowing the market to reach the price of a supply & demand equilibrium.    

The Principle of Scarcity: When Less Motivates Best

Some part of the scientific community believes that rapid technological progress (e.g., 3D printing, AI, synthetic biology, and robotics) has turned the concept of a “post-scarcity society” from a utopian dream into a viable possibility. However, these developments might contribute to making fulfillment of people’s needs easier, but they do not solve the “limited resources vs. unlimited wants” problem entirely. Plus, in many aspects, scarcity is not only an economic concept, but a social construct, deeply rooted in behavioral patterns, individual preferences, and ever-changing circumstances.

Well-being Needs

Thomas Malthus was the first one to realize that if there is scarcity, there should also be sufficiency and abundance. He defined them through requirements (R) and available quantities (A):

  • Absolute scarcity: R>A.
  • Absolute sufficiency: R=A.
  • Absolute abundance: R<A.

Yet, as a wise man said, “Only a Sith deals in absolutes”. That is why his scientific counterpart, Lionel Robbins, pointed out that due to the possibility of alternative use or substitutability of resources, most of the time people deal with relative scarcity or abundance.

You can use water to quench your thirst or to build a fountain, you can power your home with solar panels instead of buying electricity. In these cases, your ability to saturate your needs slowly drifts from restrained to proliferated. Still, if the crops suddenly get ill, and you risk dying from hunger, the value of food (which is now in the state of absolute scarcity) becomes insurmountable to you.

This principle appeals not only to the survival needs, a lack of certain products might simply jeopardize your habitual way of life. This is what fuels the cocoa crisis, caused by the decreasing number of healthy cocoa trees, which drives the prices up as the risk of losing the ability to refresh with morning coffee and brighten the mood with chocolate becomes more real. Truth be told, this is one of the most relatable environmental wake-up calls ever.      

Cacao Crisis Infograph 9999-01.png

Retrieved from The University of Arizona

Status Needs

If your resources are limited (Wants > Output), you would think twice before spending or utilizing them. In other words, you will be forced to economize. But as your income grows, you will be able to reach the state of sufficiency (W=O). The only problem is that humans are incapable of or unwilling to control their desires. This leads to the condition where it does not matter how many goods and resources you have, you will always crave more.

Essentially, this is how the concept of luxury was formulated. You might like your car, but if you have the means to sell it and buy a Rolls-Royce or Bentley, you will probably do it without hesitation. Being able to lay hands on something, only a few people can afford, is a powerful incentive.

Impulsive Behavior

A lot of consumer behavior researchers (e.g., Brehm, Cialdini) suggest that product scarcity agitates emotions, narrows focus, and interferes with cognitive processes, causing a “brain-clouding arousal”. This means that your desire to avoid the future loss or a direct threat to your freedom of choice instigates impulsive decision-making. Of course, people did not need that much toilet paper or groceries, yet as COVID-19 struck, panic buying made them empty the shelves. Underage students might not even like alcohol, but they will go through a series of troubles to get it.

As Meng Zhu and Rebecca Ratner proved with their experiment that this logic works regardless of whether people have witnessed the scarcity with their own eyes or were simply told so. This is what makes scarcity marketing so effective in impacting customer behavior.

Screenshot_3.png

Retrieved from Meng Zhu and Rebecca Ratner “Scarcity Polarizes Preferences…”

Diamonds or Water? The Examples of the Scarcity Principle

You might not notice it, but you face consequences of scarcity in your life constantly. You envy your cat because that fluffy cutie has all the time in the world to sleep, whereas you are forced to work almost every day. This is the reason behind your identity crisis, when you realize that you do not have eternity to accomplish your goals or simply enjoy life, so you start to question your choices.

1. Survival Kit

When Menger brainstormed ideas to resolve the “value paradox” of classic economics, he came across the comparison of water and diamonds. Naturally, water should be worth more than diamonds because humans cannot live without it. However, water is an easily accessible resource, while diamonds are incredibly hard to find, which makes them more valuable as possessions. Still, in case you get lost in a desert, you will be more than eager to trade any diamond for a sip of water because it is critical to your survival.

2. Luxurious or Rare Items

This list can be very long, so let’s just mention a few categories that can help you get the basic impression:

  • collectibles (e.g., vintage cars, vinyl editions of popular records, first editions of famous books, and even stamps, if you are a philatelist);
  • one of a kind designer objects like jewelry, dresses, or perfume;
  • handmade products;
  • celebrity signed things;
  • limited-edition product line;
  • one-time-only event (e.g., concert, wine tasting, performance).    

3. Invites Only Membership

As social beings, we always crave becoming a part of a group, and it brings us special joy if it is an elite one. Commonly, people are prepared to sacrifice a lot to become eligible for an event or establishment, whether it is a Met Gala, a gentlemen-only club, or even a Masonic lodge.

Many contemporary renowned online platforms like Facebook, Quora, or Pinterest started as invite-only communities, and many websites continue to adhere to this policy, including Behance, Clubhouse, and Dribble.     

4. Limited Time Offers

This technique uses scarcity to invoke your fear of future loss and generate psychological arousal. Of course, you might not need this product right now, but what happens if you need it later, and it is all sold out? With this logic, to buy or not to buy is not a question. 

One of the best ways to apply this tactic effectively is to create an attention-drawing pop-up message with a timer that counts down seconds until the sale/offer is over or shows the remaining quantity of the goods. It will instigate a sense of urgency and force shoppers not to postpone their purchasing. With the Claspo extensive functionality, you can do it in minutes.   

Understand the Scarcity Principle

Naturally, humankind will always want more than it can have. Therefore, product scarcity will remain the core factor in determining its value.

Thus, the ability to understand and use the scarcity principle, whether as an economic concept or as a social construct, provides you with multiple opportunities. As a merchant, you can induce people to buy from you more successfully. While as a consumer, it trains you to spot sellers' manipulation techniques.

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