Image Credit: <a href='http://shutterstock.com' target='_blank'>Shutterstock.com </a>
 

No Really, There Is No Free Lunch

In our previous discussion about sunk costs, we said that we ought to consider the sunk costs compared to the future value and the opportunity costs. This process is essential to helping us be good stewards of our resources. While we discussed future value a bit, we didn’t really define the economic concept of “opportunity costs.”

We are all familiar with the phrase, “there is no such thing as a free lunch.” This term is a reference to opportunity costs. It means that nothing is ever truly free.

Even if someone else is paying for your lunch, it’s not free to you entirely because you are investing your time into having lunch with that person. And we all know that time is money, or in other words, time is valuable. If you and your friend chose to go to a pizza place instead of the Chinese buffet, than one of the opportunity costs incurred is the value to you of the Chinese buffet. Another opportunity cost, however, might be the option of just staying at work over lunch to prepare for that afternoon’s meeting.

“An important thing to remember about opportunity costs is that they are different for each person.”

Maybe the situation is that you’ve won a free meal from the pizza place. The above opportunity costs still exist, but in this case your friend isn’t paying for the meal, the pizza place is. The ingredients of the pizza weren’t free, and the labor of their employees certainly isn’t free, but the business covered the cost of your pizza as a promotional or marketing expense. The opportunity cost for them might be using that money to pay for on online ad instead.

When discussing sunk costs, we used an example about dating, and let’s do so again here. Just as there is no such thing as a free lunch, there is also no such thing as a free date. There will always be an opportunity cost. Ladies, even if he is paying for dinner (which you should, gentlemen), ask yourself these questions:

  • What else could I be doing with my evening?
  • How much is dinner going to cost? And what could he have spent that money on?
  • Who else could I be having dinner with tonight?

Even a casual date holds great value because you chose to go on that date with that person over watching that same movie with other friends, or staying at home and re-reading your favorite book, or picking up an extra shift at work. And he chose to ask you to dinner, instead of that other woman. These choices are all economic decisions. They are all significant.

An important thing to remember about opportunity costs is that they are different for each person. We each have unique preferences and make different value judgments. Back to the lunch with a friend: If you were paying for your meal, you might have chosen the Chinese buffet. Each of us would probably choose something different for different reasons. Therefore, all of us will incur different opportunity costs.

Being a good steward requires not only that we understand our own opportunity costs, but that we create conditions where other people can properly understand theirs as well.

Theme developed by TouchSize - Premium WordPress Themes and Websites