Scarcity and Supply and Demand

Foundational Econ Problems 1 The argument that the economy is a result of scarcity because a country must make choices on how to use its limited resources to meet the unlimited needs and wants of its population is an economic theory that takes into consideration the fact that supply and demand is what moves markets; in times of scarcity, demand equilibrium is unbalanced and prices rise until that balance is achieved.

This makes it so that some goods are priced beyond the point where ordinary consumers could reasonably expect to obtain them. If this happened for such basic goods as food like grain or milk, scarcity would drive the country into a state of starvation and chaos. This can happen in third world countries where there is no strong infrastructure in place—but in a country like the U.S., the economy is not driven by scarcity so much as it is by the law of supply and demand.

Some researchers have attempted to show that scarcity does drive some markets in the U.S., such as water scarcity—but Rijsberman (2006) countered these arguments by indicating that scarcity is typically artificially created; there is generally more than enough competition in major markets in the U.S. and if there is great demand for something, someone will find a way to meet that demand and the creation of a competitive market will follow.

This situation of course changes from country to country and the issue of scarcity does begin to play a larger and more impactful role in countries that have not developed to the point where there are competitive free markets. In a competitive free market, the focus on what drives markets is entrepreneurship (Olssen & Peters, 2005). Countries that lack support for entrepreneurs are likely to suffer more from the problem of scarcity than economies that promote a free market.

2 The economy is a result of human behavior because a country must prioritize its economic goals to determine how to deal with scarce resources. Some countries have a command economy, where the centralized government essentially sets the prices for all goods. This was the case in the Soviet Union where, for instance, the price of sugar was set and not determined by the principle of scarcity or the law of supply and demand.

In the U.S., price fixing of this nature is supposed to be illegal, but in reality because of the globalized nature of the economy today human beings are constantly in communication with one another and do engage in price fixing by agreeing to only generate a set amount of product so as to move the price of something one way or another. This certainly happens in the oil industry, as OPEC and other countries determine how many barrels they will pump, which ends up determining the price.

In a free market like the U.S., behavior is more impactful because of competitive forces (Olssen & Peters, 2005). 3 A government can effectively manage people’s wants and needs by supporting innovative responses to scarcity in order to avoid crises. This is where the promotion of a free market and entrepreneurship comes into play. Olssen and Peters (2005) point out that.