What Is the Difference Between Scarcity and Shortage?

The difference between scarcity and shortage must be viewed with an economic eye on the problem. These terms are related to goods and services that are produced for public consumption. When the public chooses to consume a good or service, they pay a monetary price for the ability to use the item or service. All of these things are interrelated in the economic sense. Supply is the availability of a good or service. Demand is the number of consumers that desire the good or services. The price of a good or service is set by measuring the point at which the supply equals the demand.

The main difference between scarcity and shortage is that one is based on limited resources and the other is based on the decision of the seller to not sell more than a certain amount of a product at the current selling price.

• Scarcity - The unavailability of resources or materials to manufacture the product. When the demand of a product is limitless because of need or desire on the part of the consumer and the resources to manufacture the product are limited, the market experiences a scarcity of the product. When a scarcity exists, the market price of the product will be driven up until the purchase price of the product is equal to the available supply.
• Shortage - The reduction in the supply of the item. A shortage occurs when a producer cannot or will not produce an item for the current price.

Scarcity Example

An example of a scarcity is the availability of fresh strawberries year-round. Strawberries are a resource that has limited availability based on growing season and crop production. During the strawberry season, the price of fresh strawberries is low and the availability is high. As the season wanes, the amount of fresh strawberries on the market drops off and the price rises significantly. By the middle of winter, there are no fresh strawberries to be found and there is a scarcity of them.

Shortage Example

A good example of a shortage is what happens during a gas shortage. During the 1970’s, the gas shortage experienced in the US was due to the fact that the oil companies were raising the price of gas and consumers were forced to cut back on the amount that they used due to the high cost.

Government stepped in, established an excess profits tax on the oil companies, and fixed the price of gasoline. The oil companies had plenty of gas in their storage facilities but were unwilling to sell more than a certain amount at the price dictated by the government. Because of this, the market had less gas to distribute to consumers at the government defined price. The results of this were lines to buy gas and rationing.

Supply and Demand Rules

In a perfect world, supply and demand would work flawlessly and there would always be an appropriate supply of every product. However, things are not always this simple.

To produce a good or service, certain resources are required. These resources may be natural in form like water, wood, ore or any number of other types of raw materials. Resources can also be in the form of human labor, which means the need for people that have a certain level of skill, knowledge or natural ability.

When products are manufactured and placed in the marketplace, the price placed on an item will determine the demand for it. If the price is set too high, the demand will be low. The converse is true also; a lower price will increase the demand.

Fluctuations in the price will occur until the supply and demand are equal. The supply of a product will rise and fall based on its profitability. If the price the market will bear on an item realizes a lower profit than a different item the manufacturer makes, then it is in the best interest of the manufacturer to produce less of the first item and more of the alternate item. This increases the overall profit for the manufacturer.

Decreased production results in the supply of the first item dropping, at which point the price will adjust to a higher value until the new price matches the demand for the reduced supply.