‘Free’ , nice yet a tricky word. Things which look free to us are often not free, they have some or the other opportunity cost attached to it.
What is opportunity cost?
It is the cost of the next best alternative. For eg: You have two job options with you, one paying you Rs. 15,000 and the other paying you Rs. 20,000. Obviously, you will take the latter. But, the opportunity cost of taking the latter is the cost of the former opportunity ,ie, Rs. 15,000.
There ain’t no such thing as a free lunch is a quite famous adage. History of this phrase is super-fascinating. So, it goes back to nineteenth century when American bars used to make use of the phrase ‘free lunch’ to attract drinking customers. The policy was very simple, whosoever buys one drink will get unlimited amount of free food. Sounds fair ? Well, it was not.
Many types of food on the offer were high on salt, so those who ate them ended up buying a lot of beer. So, the bar people were the only one benefiting from the policy while the customers lived in an illusion that they are getting a real profitable deal.
This implies, that even if something appears to be free, it has some external cost attached to it. Therefore making choices considering all the factors is important. So, if a friend takes you for a lunch and pays for your meal, you’ve still made an investment. You’ve invested your time and energy which you could have utilised somewhere else to be there. Even, going on a date has an opportunity cost. If you choose to go on a date with a particular person, you may are losing a chance to go on a date with some other person. So, that is a choice that you have to make.
Weighing your choices is an important task. From the simple task of choosing between going to gym or eating a cookie? to complex choices like applying for more challenging jobs or being satisfied with the current one?, opportunity costs plays an important role.
And, if you chose to do nothing, then that has its own opportunity costs.
An important thing to remember about opportunity costs is that they are different for different persons. We all have our own preferences and hence make different judgments. Each one of us would probably choose something different for different reasons. Like, you might choose vanilla ice cream after the chocolate one, and I might choose strawberry; so opportunity costs of chocolate ice cream is different for both of us. Therefore, all of us will incur different opportunity costs.
Apart from opportunity cost, there is one more term known as Sunk costs. Both of them have different meanings, sunk costs refers to the cost that cannot be recovered and hence should not influence your decision.
Example for the same can be, suppose you bought a movie ticket for Rs. 100 and you lost it. The utility you get from watching the movie is Rs. 150. Now you should not calculate your costs as Rs. 100 (Lost ticket) + Rs. 100 (New ticket) = Rs. 200 which is greater than Rs. 150 (which will force you to not to buy a new ticket) because the former Rs. 100 is your sunk cost which cannot be recovered and hence should not be considered. So, your cost is still Rs. 100 which is lower than the benefit derived. Therefore, you should go and buy the movie ticket.
Coming back to the topic, now when someone asks you for free food, you know it’s actually not free. So, make your choices wisely.
IIM, Ahmedabad (A reputed institute for management studies) has a cafe in its campus named TANSTAAFL which is an acronym for ‘There ain’t no such thing as a free lunch’. The cafe represents a clear warning to students that spending too much leisurely time at the 24-hour cafe may come at the cost of poor grades in classes.
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