There Is No Such Thing As A Free Lunch Essay

Question 1. A. Using the concept of opportunity cost, explain the statement “There is no such thing as a free lunch”.

Answer. The statement “There is no such thing as a free lunch” indicates that it is impossible for a man to get something for nothing. The opportunity that is foregone is known as opportunity cost. That is, the price that we pay for doing whatever it is we did was the opportunity you can no longer enjoy. In other words, opportunity cost is defined as the cost of the best option forgone as a result of choosing an alternative

The phrase appears to have come about in response to the libertarian views of Henry Wallace, the US Vice President between 1941 and 1945. He wrote an article which was originally published by The Atlantic

Monthly in which he suggested a post-WWII worldwide economic regime offering "minimum standards of food, clothing and shelter" for people throughout the world and offering the opinion that "If we can afford tremendous sums of money to win the war, we can afford to invest whatever amount it takes to win the peace". Paul Mallon, a Washington journalist, responded to Wallace's article with a critical piece, published in several US papers, including The Lima News, January 1942
In addition, the statement “There is no such thing as a free lunch” is also considered as one of the best 10 pillars in Economic wisdom and is also abbreviated as TINSTAAFL. TANSTAAFL refers to the opportunity cost paid to make a decision. The decision to consume one product usually comes with the trade-off of giving up the consumption of something else.
(B) Evaluate the statement ‘The concept of opportunity cost is embedded in the demand curve’.
Answer. There is a significant relationship between opportunity cost and demand curve. Supply shows the amount that producers are willing and able to supply to the market at each given price. Producers must receive a price that covers the marginal cost of production. As the price of the good rises, producers are willing to produce more of the good even though there is an increasing marginal cost.

Question 2.In the study of Microeconomic, the question “How to produce” is one of the basic economic problems (BEPS). Using an example, discuss this concept. In your discussion, you must also discuss the rationale behind the principle of increasing cost.
Answer. One of the basic economic problem is finding the correct combination of mix of resource to create each good and service. Normally the companies decide on the combination of resource mix which in turn results them in products at lowest cost. For example, let us consider the situation of banking institutions that are planning to install various automatic teller machines for their services. Banking institutions have substituted the majority of their counter service individuals with automatic teller machines, phone banking and Net banking. These electronic devices have reduced the banks’ production costs to a greater extent. In the mid-19th centuries, the dams in china were being constructed using very high man power and also making use of containers and shovels. In United States, the dams were constructed by using huge earth moving devices. The first production in China represents less capital and involved huge labour works, and is called labour-intensive while the second, utilizing a little labour and a lot of capital, is capital-intensive. Each one of these ‘how’ decisions were made based on lowest cost and accessible modern technology.
Question 3. A. Explain why governments impose excise taxes on goods that are inelastic. Using cigarettes as an example, explain the impact of the government imposing a $1/packet tax on cigarettes. Use relevant diagram(s) to illustrate the effects of tax on this product.
Answer. An excise or excise tax is an inland tax for the production for sale or sold units of specific goods within a country or licenses for specific activities. There is significant difference between excise and custom duties. Excises are inland taxes, whereas customs duties are border taxes. This not the same as a sales tax in that it is levied per unit of the good, rather than as a percentage of the sales. The main reason of excise tax is to discourage the consumption of good or product.

Suppose we impose a $1/pack cigarette tax on buyers, the impact of the excise tax is to shift the demand curve faced by producers down by the amount of the tax and this will create surplus of good
A fall in the price of beef from $30 to $20 has led to an increase on quantity demanded from 40,000 units to 60,000 units.

Using the mid-point method, calculate the price elasticity demand for lamb and interpret the value obtained.

= 0.5/0.5

= 1

Therefore, the price elasticity demand for lamb is 1

Question 4.

The table below shows the demand and supply for iPods at varying price per iPod:

(a). In the graph provided, plot the supply and demand curves for ipods, and determine the equilibrium price and quantity.

(b). What effects will a decrease in the price of microchip (input) on the equilibrium price and quantity of ipods? What assumptions have you made to provide your answers?

Answer. A decrease in the price of microchip will eventually increase the demand to a greater extent and this will lead to stock out as all the stocks in hand will be supplied and we will end up in having very minimal number of units to supply

©.What effects will an increase in the price of a substitute on the equilibrium price and quantity of ipods? What assumptions have you made to provide your

answers?
Answer. A decrease in the price of microchip will eventually decrease the demand to a greater extent and this will lead to holding the unsold goods or products and thus increases the holding cost

(D). If the price in the market was $250 per iPod, explain the process where equilibrium can be restored in the market.
Demand for a market price of $ 250 was 8013
Supply for a market price of $ 250 was 9938
Money market equilibrium can be restored by some combination of a lower income and a higher interest rate that reduces the demand for money. Equilibrium can be restored either by abandoning the gold standard or by contracting credit till the consumers’ outlay is so reduced as no longer to attract an excessive share of the products supply. That is, equilibrium can be resorted either by increasing p or by lowering demand or by any combination of p and demand along the curve.

References

Robert Bloom, Hans Heymann, ‘Opportunity Cost in Finance and Accounting Hardcover’,October 19, 1990. ISBN-13: 978-0899304007
Philip A. Klein, ‘Beyond Dissent: Essays in Institutional Economics’, SIE Publications, ISBN: 1563243210