Scarcity (4) - Solutions

Societies have dealt with this problem of scarcity in different ways.

1. In traditional societies, the king or chief did most of the allocation of goods and services, and they did fairly well from it. The ordinary people usually lived a life of object poverty, but they were expected to provide the ruling group with everything they wanted whenever they wanted it.

2. During the Second World War, coupons were use to allocate a limited supply of consumption good. Essential goods like petrol and fabric could only be bought with a coupon. This limited the demand for scarce goods.

3. In the Soviet Union, the problem of scarcity was solved by queuing. The supply of bread and meat was hardly ever sufficient to meet people’s needs. Most of the time the shops were empty. When supplies came into the shops, people would queue to make their purchase. Those who were to slow to get into the queue would miss out.

4. In market economies, the problem of scarcity is solved by prices. The price of every product reflects the supply and demand for that product. If the demand for a good increases relative to the supply, the price will increase, which will reduce demand. If the supply of the product increases then the price will fall, encouraging more people to buy the product. Prices adjust up and down until the demand matches supply.

The first three options leaves one group of people dissatisfied. The market option, also leave some people dissatisfied, but it does help people to adjust their wants to what is available, because prices allow them to quantify the costs of their choices. If a person wants a high definition television, they can work out exactly how many hours they will have to work to pay for it. They can see in advance the cost of satisfying this need.

Prices have the affect of reducing the demand for goods to a more realistic level. For example, if high-powered sports cars were free, everyone would want one. Because the price is actually well beyond the reach of almost everyone, most of us just take sports cars off list of things we might want. The high price means that we rarely think about the possibility of owning a sports car. Prices enable us to focus on choices that are more realistic for our situation.

Market prices do not eliminate scarcity, but they help people make choices that match their consumption and saving to their earning capacity.