Why does scarcity determine the level of prices in a free-market system?

Question

Why does scarcity determine the level of prices in a free-market system?

Answer 1

Supply versus demand.

If you have 10 beachfront properties and only one person who wants to live on a beachfront property the prospective buyer can compare prices and negotiate a lower price.  

On the other case, if you have 10 beachfront properties and 100 people who want to live on a beachfront property the prospective buyers will compete with each other to purchase the properties.  Without a doubt, the prices will be higher than if there was only one buyer.

Look around your community.  There are certain neighborhoods that cost more.  Eventhough, the same house in a different neighborhood will cost much less.  The reason?  There is a scarcity of avaliable homes in more desirable neighborhoods.

Answer 2

laws of supply and demand

when there's less of something available and people want it,

the prices can go up because people will pay for it