Scarcity

 

Diamonds were formed billions of years ago and are extremely rare, thus perceived as very special and valuable. 

Hey everyone, I am Prashant Kulkarni and welcome to my channel on behavioural economics. 

Today we are going to discuss a principle called Scarcity and Scarcity bias. Dictionary meaning of scarcity is deficient in quantity or number compared with the demand. Scarce resource will always have a value associated with it. So this onion can be a scarce resource if the demand is high compared to its availability. 

The scarcity principle simply means resources which are scarcely available are perceived to be more precious. Tigers, Diamonds, In some countries even Food is a scarce resource and thus very precious. 

But the scarcity principle goes even further and also deals with how these resources are allocated as compared to its demand. 

There are some methods to allocate these resources against its demand and these are some of the fundamental problems economists try to solve. 

Let’s take a look at some of the ways to allocate these resources… 

First come first serve basis in which if the car parking has limited slots available, cars coming first are allocated the parking spot. Same with the Movie tickets. 

Or another way to allocate the resources  is on the basis of gender or age. For example oldest or youngest first, or ledies first. When boats were scarcely available, Titanic captains decided to let the youngest and ledies first get off the ship. 

Another way is based on the Merit or performance. For example, students who get the highest marks get the seat to post graduation. Or someone who performs better wins the gold, silver or bronze medal. 

Lottery system is also another way to allocate scarce resources. 

In auction system, art piece is allocated to the highest payer. 

Another way is to allocated resources based on who needs them first. For example, Corona vaccine is first given to the frontline doctors and paramedics, then the oldest, and so on. 

In product context, Scarcity is widely used by product strategists and marketing executives. Look closely and you will find various ways the scarcity principle is used. 

For example - Deal of the day on Amazon makes you think you are going to lose a product if you don’t buy it today. Only 2 left makes the resource scarce and creates a sense of urgency in buyers. Deal ending timers or scheduled 1 hour window, or lightning deals are another example. 

In short, scarcity creates a sense of urgency and perceives resources as more precious. This principle is exploited by product strategists for hundreds of years to sell their products. 

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By the way, all these allocation principles have algorithms. Some are very simple and some are very complex.