Most people remember their first economics class in college. You were one of a hundred students packed into a theater-sized lecture hall just hoping to check off another requirement. And the professor, who shared the same detachment, gazed across the crowd before diving into some basic economic concepts; supply and demand, utility curves, and opportunity costs. But instead of saying opportunity costs, he/she uttered four simple words, “there’s no free lunch.” The professor goes on to explain that everything has a cost even when it doesn’t. If you go to the movies over the weekend, you can’t spend that time or money doing something else. So reading a book, grabbing a drink, or anything else for that matter is off the table.
The phrase “free lunch” began as an old sales trick bar owners used to attract customers. Bartenders gave out free meals with the purchase of a single drink even though the food cost more than the liquor. They assumed that customers—now eating and drinking in the establishment—would stay for more than one drink. So the price of the lunch, free on the surface, hides in the cost of a drink. Today, casinos and comedy clubs use a similar approach to draw in people and increase sales.
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Opportunity cost emerges in everyday situations too. Research suggests that the average person makes a staggering 35,000 choice per day, some of which happen without thinking like breathing while others involve conscious thought. With many decisions being made each day, there are infinitely more potential decisions that never materialize.
This becomes clear in the retirement space. Many Americans will start saving for retirement later in life only to forgo years of compounded growth. Here the opportunity cost represents what you gain today for not saving for tomorrow.
Investors face a similar situation when evaluating investments in a universe of stocks. If he/she invests in Apple (AAPL) over Netflix (NFLX), then the opportunity cost becomes the cost of passing on the video streaming service.
Here are three examples from TV that illustrate opportunity cost.
The Wire (Season 3, Episode 6)
When Marlo enters the game as an up and coming dealer, Avon and Stringer must devise a plan to maintain control of the valuable street corners. Avon, still in his first few days out of prison, believes waging war against the fresh face Stanfield will solve the problem. “Since when do we buy corners? We take corners,” says Barksdale. Stringer, second in command in the Barksdale organization, implores Avon that this overconfidence will cost him. “You gonna buy one way or another,” Bell retorts, “Whether it’s with the bodies we lost or are gonna lose, time in the join that’s behind us or ahead of us. You gonna get shit in this game, but ain’t shit for free.” Bell essentially tells Avon that there’s no free lunch. Strong-arming Marlo into giving up his corners might not cost fiat money but it costs time, lives, and even jail time.
How I Met Your Mother (Season 3 , Episode 6)
Marshall bursts into the apartment to tell everyone he received an offer from the NRDC. It was his dream job. But Marshall had also accepted an interview at a diametrically opposed firm that represented the interests of major pollutants—everything Marshall and the NRDC hated. And yet, he still decided to take the dinner interview and later accepted the job (he quits soon thereafter in case you never watched). Here is another example of opportunity cost at work. Marshall must decide between money and morals. The corporate gig offers a wealth of riches while the NRDC fulfills a moral and social obligation. Missing the potential gains, monetary or not, from not choosing one of the jobs represents the opportunity cost.
Seinfeld (Season 7, Episode 9)
When NYC pharmacies stop carrying the sponge, a female contraceptive, Elaine must decide if her newest suitor is worth sleeping with. “I have to conserve these sponges,” she tells Jerry, “ I mean, now I’ve got to re-evaluate my whole screening process. I can’t afford to waste any of ’em.” This provides a valuable lesson about scarcity and opportunity costs. Elaine must ration a limited supply of birth control to ensure that each sexual encounter minimizes the chance she can gain more from something else.