There is No Such Thing as a Free Lunch – Economic Lowdown, Ep. 11

There is No Such Thing as a Free Lunch – Economic Lowdown, Ep. 11


Imagine that the friendly neighborhood pizza
restaurant set up a table full of pizzas outside your school about lunchtime and put
up a sign that said “Pizza and Soda – $0.00.” Wouldn’t this be a free lunch? In this episode of the Economic Lowdown we’ll
find out if there is such a thing as a free lunch. Lesson #1: Scarcity
The study of economics begins with the concept of scarcity. Scarcity describes the condition in which
our wants are greater than the resources available to satisfy those wants. We face the problem of scarcity every day
whether we think about it or not. It might be nice to dream about a world without
scarcity, but the sad reality is that the things we want are scarce because the resources
needed to produce them are scarce. If you want a new skateboard, it takes wood,
tools, and labor (all of which are resources) to produce that skateboard. The people who own the wood, the tools, and
the labor want something in return for the use of their resources because their resources
could have been used in other ways. If the wood were not used for skateboards,
it might be used to build windows or baseball bats. So, the first lesson is scarcity, which says
that society does not have enough resources to produce all the goods and services that
people want. Lesson #2: Choice
This condition of limited resources to meet unlimited wants means that we must constantly
make choices about which of our wants to satisfy. For example, because time is scarce you must
choose whether you will sleep away the morning or go to school. You must choose whether to spend or save your
allowance. Scarcity prohibits you from saving and spending
the same dollar; you must choose. If you decide to spend it, you may choose
whether to buy a video game or a DVD of your favorite movie. Tough choice, huh? If you choose to save your allowance, will
you save it for a car or for college? On a broader level, scarcity forces society
to choose how to use resources, as well. Will a piece of land be used for a park or
for housing? Will tax dollars be used for healthcare or
for education? Lesson #3: Opportunity Cost
When people make choices they incur a cost. If you choose to buy a video game instead
of a movie, there is a cost–not the price you pay for the video game, but opportunity
cost. Economists define an opportunity cost as the
most highly valued opportunity given up when you make a choice. So the opportunity cost of buying the video
game is that you cannot buy the DVD. The opportunity cost is the opportunity lost. The opportunity cost of spending money is
the lost opportunity to save the money. For society, the opportunity cost of using
land for a park is the housing given up. The opportunity cost of spending tax revenues
on healthcare is the lost opportunity to spend that same money on education. Keep in mind that the opportunity cost is
the most highly valued opportunity given up. Think about this: When your alarm went off
this morning, you had a number of options open to you. Assuming you first chose to get out of bed,
you could have chosen to go to school, watch TV, or go to the mall. Now, what is the opportunity cost of going
to school? Is it both watching TV and going to the mall? No. Because of the scarcity problem, you would
have only been able to do one of those options if you weren’t at school, so you are only
giving up the opportunity to do one of them, more specifically the one you were most likely
to do. So, if you were to place a value on your choices
you would choose the activity you valued most, which was go to school, your opportunity cost
would be the one on which you placed the next highest value-probably watching television. Lesson #4: There is no free lunch. This brings us to our last lesson. Nobel Laureate Milton Friedman was fond of
saying, “There is no such thing as a free lunch.” You’ve now come up on the pizza stand offering
pizza and soda for $0.00. Wouldn’t this be a free lunch? You didn’t pay a price for the pizza because
the price was zero. So, it may not have cost you in terms of money,
but remember: any time you make a choice, there is a cost-an opportunity cost. With his famous quote, Milton Friedman reminds
us of the lessons we have learned today: Because of scarcity we must choose, and choice means
that there is an opportunity cost. So, the reason there is no free lunch is that
your choice to eat pizza out on the sidewalk in front of your school means that you are
giving up the opportunity to dine elsewhere, for example eating in the cafeteria with friends. These three concepts-scarcity, choice, and
opportunity cost-help form the foundation for economic thinking and reasoning.

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