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December 13, 2010 / Lukasz Cerazy

Why Nothing Is Really Free

Do you like getting things for free? Most people do, but did you know that there is a hidden cost associated with all goods or services? For instance, there is no such thing as a free cinema ticket – even if you did not pay any monetary value for it. That may seem strange at first; however, you paid for it in time. Even if your friend offered you a spare ticket to go with him or her to see the new Harry Potter movie, you would have to give up your time to get to and from the cinema and watch the film, so in fact you are forgoing the chance of doing anything else with your time. You could potentially spend that time doing something else, like working or performing any other activity.

Image: Pixomar / FreeDigitalPhotos.net

If I had to choose the most important economic concept I would have to pause, not for long, but I would still have to consider if anything could challenge the idea of opportunity cost. I believe that opportunity cost is such a powerful and universally applicable concept that it would be my number one. The theory goes back to the foundations of economics and was developed by John Stuart Mill in the classical period. The theory is embedded into much of the thinking at the time and was actually informally understood before Mill’s conceptualisation. David Ricardo understood opportunity cost because it was intrinsic to his comparative advantage theory.

Opportunity cost describes the relationship between scarcity and choice. Formally it is defined as the opportunity foregone of the alternative option. The resources used to acquire a certain good or service could have been put to an alternative use, which cannot be enjoyed because they have already been utilised. The alternatives are therefore mutually exclusive and play an important role in deciding what to do with the limited resources that are available to us. The real cost a good or services takes does therefore not only depend on how big its monetary value is. Its real value also takes time, utility and foregone opportunity into account and is therefore a much better estimate than an accounting value.



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