January 6, 2013

Production as Privilege: Scarcity and Elasticity

This post is the third in a series attempting to breathe some new life into the connection between production and distribution. Each post presents a different tool for understanding the relationship; the hope is to articulate some ideas that have been furtively dwelling in my head and perhaps arrive at some new insights.

Thus far, the posts have been covering standard "econ 101" ideas. If you have a decent understanding of economics you can skip the two "tools" sections and start right after the squigglies, although I rather like my cat example.

Conceptual Tool #5: Scarcity

Everybody knows that economics is about supply and demand, and everyone has most likely seen the ubiquitous supply and demand "X" graph. "Scarcity" is a convenient shorthand for any situation where the supply and demand curves are not simply at zero along the vertical axis. In other words, when the supply cannot costlessly meet the demand--i.e. most situations, and certainly most situations where anything is exchanged. If something is more scarce, then we can expect people will give up more for it.

It may be useful to note that in common usage, "scarce" may mean simply something that is rare; in economics it connotes something that is both rare and desired. For example, imagine a pet cat with stripes. The exact pattern of the cat's stripes may be entirely unique, and thus extremely rare. However, if pet owners are only interested in a cat with stripes, and do not care exactly what the stripes look like, the pet cat would not be scarce in the economic sense. If any old stripes will do, a certain exact pattern is rare but not scarce.

Conceptual Tool #6: Elasticity

Elasticity is another foundational concept in economics, and one way to understand it is as how much "bargaining power" buyers or sellers have in a market. Technically, elasticity is the change in quantity demanded (or supplied) divided by the change in price. It represents how willing buyers are to pay more, or sellers are to sell for less, and is represented by the slope of the lines on the supply and demand "X". This technical representation amounts to "bargaining power" because it determines the range of other possible market outcomes: it shows whether a side of the market is able to reject market outcomes that are unacceptable to it, ensuring that market transactions will be more on their terms. More elastic supply or demand is associated with a stronger bargaining position.

Bargaining power is largely determined by the amount of substitutes in a market. Examples of elasticity are everywhere, but to continue the cat example from above, demand for a particular striped pattern may be very inelastic because buyers (people looking to buy a cat) do not care what pattern of stripes are on the cat. No one will be willing to pay more for a certain pattern of stripes if they can buy another pattern of stripes less and they do not care what the pattern of stripes is. However, if one cat's stripes look like Jesus, demand might become more elastic, with people willing to pay more for a Jesus cat because no other cats have stripes that look like Jesus. The demand side is unable to find substitutes and therefore becomes inelastic, willing to pay any amount for the same amount of cat.

Elasticity determines how each side of the market will react when either the other side of the market changes, or some other factor changes affects both sides of the market. If taxes are imposed, for example, the elasticity of each side of the market determines who pays the majority of the tax. Elasticity has a similar effect when other costs or benefits come into play, including natural "background noise"-type disruptions in a market.

While it is clearly an important determinant of market outcomes, elasticity is difficult to measure. It therefore often ends up playing a muted role in economic analysis. Measuring elasticity is hard because most economic data show only the intersection of supply and demand (i.e. the sale price and quantity sold in a market), and not the range of potential other prices that buyer and seller might agree to. There are some tricks to untangle the separate supply and demand elasticities, but they typically rely on isolated incidents and do not provide a comprehensive view.


Scarcity and elasticity provide the most fundamental rationale for the standard economic story about distribution. Simply conceived, we distribute income according to the scarcity of what we produce: we are paid according to how rare and desired the things are that we are able to do. If the thing we do is not rare, we may have weak leverage because the demand for the things we produce is inelastic (it is easy for buyers to find substitutes).

I have titled this series "Production as Privilege" because I want to think about where that scarcity comes from. "Privilege" is not necessarily the truest or clearest way of thinking about production, but it does turn the idea of production on its head, in a way, and because of that provides an interesting starting place. Work is not typically thought of as a privilege because it is a mutually agreed-upon exchange: we do something we do not like (unless we are one of the lucky love-my-jobbers) and get paid in return.

Yet neither the type of work that we are able to get paid for, nor the amount of pay we are able to secure in return, is as straightforward as it may seem. Scarcity and elasticity are helpful concepts for explaining the dynamics within a market, but they are less helpful for explaining how and why scarcity exists in the first place. Economists have a few basic platitudes (limited resources and unlimited wants) and a powerful toolbox of "market failures" that explain why markets might not function as well as they could (e.g. monopoly power, a la the previous post in this series).

But even these more powerful tools can explain only so much of an economy. Take the word "privilege" itself--what is privilege from an economic viewpoint? You can begin to explain privilege as economic rents--certainly we could think of rents as a type of privilege--or as exceptions to market rules. But privilege is much more. It is being born on the right side of the tracks, skipping the line, or waking up with a roof over your head. We can try to frame privilege in terms of scarcity, or even in terms of market failures, but these ideas only capture a small portion of what privilege is and means in a society.

Still, we have to start somewhere, and scarcity provides a useful framework.

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