Scarcity Versus Shortage

Scarcity and shortage are not synonyms.  Scarcity is the simple concept that, while some resources may be limited, supply equals demand.  Shortage, on the other hand, occurs when markets are out of equilibrium and demand exceeds supply.

Investors should understand the differences between scarcity and shortages before making a portfolio decision.  Just because a product is scarce, does not mean that there is unfilled demand.  Rolls Royces are not something you see every day, and could be viewed as scarce.  However, as demand and supply are generally in balance, there is no shortage of Rolls Royces.

Taking the automobile analogy a step further, over the last year, Tesla’s Model 3 has been scarce, and there has been a shortage, as production has not kept up with demand.  As the company ramps up production, the shortage should be mitigated, but the Tesla Model 3 is likely to remain relatively scarce, as anticipated production and sales rates represent a tiny fraction of worldwide vehicle sales.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA