he theory of abundance states that there is a limitless supply of raw materials and natural resources and that the scarcity we see today is only artificial. Proponents of this theory believe that if businesses were freed from antitrust regulations, production would increase significantly. If you read about economics or business strategies much, you may have heard about the “abundance theory.” It’s a different way of looking at how companies operate by assuming that raw materials aren’t the primary resource needed for production. Instead, abundance theorists suggest that artificial scarcity – controlling resources to drive prices – is why many commodities are so expensive. Often, businesses make it more costly to produce one item than another by containing which raw materials they can use and how much they cost. This article covers everything you need to know about the abundance theory in detail, including examples and its history.
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What is the abundance theory?
The theory of abundance states that there is a limitless supply of raw materials and natural resources and that the scarcity we see today is only artificial. Proponents of this theory believe that if businesses were freed from antitrust regulations, production would increase significantly. If you read about economics or business strategies much, you may have heard about the “abundance theory.” It’s a different way of looking at how companies operate by assuming that raw materials aren’t the primary resource needed for production. Instead, abundance theorists suggest that artificial scarcity – controlling resources to drive prices – is why many commodities are so expensive. Often, businesses make it more costly to produce one item than another by containing which raw materials they can use and how much they cost.
How does the abundance theory differ from other theories?
The abundance theory differs from the supply and demand theory in that it doesn’t consider the collective amount of a particular resource. Instead, all the “lots” of a specific item are assumed to be unlimited. This means that if one company can produce a particular commodity at a lower cost, the abundance theory believes that it should be able to lower its prices accordingly and capture a larger market share. On the other hand, the scarcity theory predicts that other companies in the same market will also fall their prices, causing a price war. This is why many commodities are much less expensive than they were years ago. However, there are still plenty of industries where scarcity is used as a pricing strategy, like medicine and real estate. While these industries may be able to charge more than they would if they were competing on price alone, they aren’t making as much as possible because other companies don’t have access to the same resources.
Example of the abundance theory in action
The abundance theory can be seen in action when we look at the change in the production of cars. From the 1940s to the 1960s, the most popular vehicle in the United States was the Ford Model T. At one time, this car was so popular that Henry Ford had trouble keeping up with demand. As a result, he began paying his workers based on how many vehicles they could produce each day. Fast-forward to the 1980s and 1990s, we see the Toyota Camry’s rise. With its increased popularity, Toyota expanded the vehicle’s cost by about $1,000 per unit. This spike in price was due to the scarcity of one of the materials the company used in the Camry’s production – the rare earth metals that go into the car’s radio antenna. Unfortunately, this is where the abundance theory breaks down. Ford could not raise the Model T’s cost because they couldn’t get the same rare earth metals. Instead of finding an alternative, Ford used an inferior material in the car’s production. This kept the cost the same and meant that Model T owners didn’t benefit from the price of the Toyota.
The fundamental problem with abundance theory
The fundamental problem with the abundance theory is that it ignores the value of specific resources. For example, if you are a doctor, you need particular tools and materials to perform your job. If you use cheap tools and materials, you are putting your patients at risk. The abundance theory also assumes that another type of resource can replace resources. For example, if a rare earth metal is used in one of your products, but costs rise, you can switch to another metal of equal worth. In reality, many resources can’t be substituted with something else. For example, there are currently no other metals that are a good substitute for radium. If radium costs go up, you can’t just switch to another material.
Why do most businesses not follow the abundance theory?
For any business to succeed, embracing the scarcity mindset and focusing on the right things to make money is essential.
As every business has limited resources, focusing on things critical to your business’s success is essential. For example, if you have a small team, you need to focus on hiring the right people, not on hiring as many people as possible. Likewise, suppose you have a small marketing budget. In that case, you need to focus on creative ways to increase your revenue instead of spending money on things that don’t directly impact your business’s success.
Many small businesses follow the scarcity theory because they have to — they have limited resources and can’t hire more people, so they must keep customers happy with their service. Larger enterprises also tend to follow the scarcity theory because the benefits of operating with an abundance mindset are not as apparent as the drawbacks of scarcity.
The abundance theory is more accessible said than done. It’s easier to stay focused on scarcity and maintain scarcity thinking than to change your review to abundance.
Abundance in practice: Tesla and SpaceX
Tesla is a company that follows the abundance theory. Elon Musk, the company’s founder, has stated that he wants Tesla to be able to produce 100,000 cars per year. At the time, the company made about 2,000 vehicles per year, so there was quite a lot of work to do. This would have been impossible if Tesla had operated on the scarcity theory. There aren’t enough rare earth metals and skilled workers to produce 100,000 cars annually. However, Musk and his team were able to design a vehicle that doesn’t need a rare earth metal and doesn’t require as many skilled workers to build. Instead of assuming that the supply of these resources is scarce and artificially increasing their price, Musk and his team thought that these resources could be replaced with an abundance of something else.
Abundance in practice: The Polynesian Resort Company
The Polynesian Resort Company (commonly referred to as the Polynesian) is a hotel chain that utilizes the abundance theory. The Polynesian was started by real estate mogul and billionaire Stephen Wynn. He used the abundance theory to determine how much the property would cost, how much it should be sold for, and how many he should build. Wynn knew that plenty of workers were available to make his hotels and that an ample supply of materials was needed to construct the buildings. However, Wynn didn’t know how to sell his hotels at the right price. He decided to sell the Polynesian for $650 million, a reasonable price, his team though. This price generated much interest, but investors kept asking if the hotels were worth it. Wynn and his team knew that they were. However, they also knew it would be difficult to convince the investors of their worth. So, they made a deal: Wynn would build another hotel for the investors for free. This got the investors’ attention, and they ended up paying $1.2 billion for the Polynesian, a price Wynn knew was fair from the start.
Abundance in practice: Walmart and Amazon
Walmart is a company that uses the scarcity theory. Walmart is notorious for its low prices, but the company was not always so inexpensive. Walmart used to be a small grocery store in rural Arkansas. The company slowly expanded, but it always kept an eye on its profit margins. The company used the scarcity theory to control costs and maximize profit. This meant that the company used only the needed materials and resources and nothing more. Walmart was also very selective when it came to its employees. The company only hired the people it knew could help it grow, and it fired those who weren’t a good fit. When Amazon was first getting started, it looked very similar to Walmart. Amazon only sold books and music, using the scarcity theory to control its costs. The company didn’t have a lot of employees, but it did have some of the best in the business. Amazon only used what it needed to succeed, which is why its first building was just one story tall. Today, Walmart and Amazon are both leaders in their industries. They use different theories to make decisions, but they both follow a similar business model: sell items at low prices while keeping an eye on profits.
Abundance theory and antitrust laws
The abundance theory contradicts the view that monopolies are harmful and that they should be regulated. Proponents of the abundance theory argue that the antitrust laws in America go too far. The abundance theory suggests that government regulations, including antitrust laws, keep prices up. They say that the laws force businesses to produce less, limiting the supply and increasing costs. For example, if the government forced a company to sell gravel at a low price, that company would either have to go out of business or find another way to make money. It could sell cars, houses, etc., and make a lot of money. However, that company would sell gravel very cheaply. So, lots of people would buy a stone to build houses. Tiny pebbles would be left for other projects and companies to use.
Abundance theory and the stock market
The abundance theory also explains why the stock market is booming. Companies issue stocks and then buy them with the excess money from selling their products. That means that the funds used to buy stocks aren’t taken from profits. Instead, it’s taken from the fact that the company has more money than it needs. People who buy stocks are lending money to companies. But companies can pay the money back to the shareholders because they have more money than they need. That means the stock market doesn’t rely on banks. When a company has more money than it needs to produce products, its stock price is higher than its actual value. As a result, the companies can sell shares at a higher price because investors know they will make more money than they would if they just put the money into a savings account. As a result, the stock market can stay afloat even during extreme economic uncertainty.
Final Thoughts on What is the Abundance Theory?
The abundance theory suggests that companies produce more goods than they need and can sell them at a profit. This creates a surplus that can be re-invested in further production or other projects. If the abundance theory is correct, there is a lot more money to go around, and prices will drop significantly as products become more accessible to more people. The abundance theory also suggests that plenty of raw materials are available for production. If the approach is correct, fewer businesses will depend on scarce resources, and more people will have access to the products they need.
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James is the editor-in-chief at wealthmindsetschool.com. James is a workaholic and an entrepreneur who has been in the tech industry for over ten years. He has worked with Microsoft, owns multiple websites, and now owns a mattress shop. Furthermore, when he has time left over, he will be in his woodworking shop building furniture as a side hustle. James has a B.S. in Business Management Information Systems and a Master’s in Business Administration from Liberty University. He is currently pursuing a Master’s in Executive Leadership, and once he completes that, he will pursue his Ph.D. in Business Administration – Entrepreneurship. James also seeks investment opportunities, putting his money to work instead of himself. James is an active believer that wealth begins with developing a wealth mindset. He now teaches, instructs, and helps others achieve that goal.