No Free Lunch - Admission/Application Essay Example

 “No Free Lunch” is an intriguing phrase that leads me to think that, “Is there really such a thing as something free in this world? I would like to say that, really, nothing could be had for free. Even in the history of our forefathers, everything had its price. The price of victory in the days of the Romans was war and lost of peace. I will discuss this phrase as it relates to economics. How does business succeed under the theory of No Free lunch? This term has an acronym of TANSTAAFL that is referred to by economists in their discussions. TANSSTAAFL means “There is no such thing as a free lunch”, that indicates one cannot simply get something out of nothing. The literal meaning of :No Free Lunch” is taken from the Bible, “By the sweat of your brow, you will eat your food until you return to the ground.” Gen. 3.10 The phrase has been used in economics by several authors and was popularized by Robert Heinlein in 1966 in his science fiction novel “The Moon is a Harsh Mistress”. Milton Friedman, a well known economist referred to this phrase when he used it as a title of his book, while another economist , Campbell McConnell referred to it as a “core of economics”. (Absolute Astronomy) The word “Free Lunch” became popular in American bars during the nineteenth century that offered “free lunch” in exchange for bottle of beer. The word TANSTAFL suggests the acceptance of the idea of the society that nothing could be had for free. If there is something offered for free, particularly in business, something else is undisclosed or hidden or distributed. In simple transaction, “Buy one take one free” is not really free because the cost is distributed to the two items making you believe that you got it for free. Marketing strategy plays an important role here, as in when one restaurant says “Eat all You Can”. Customers are attracted to an array of foods offered, and buy lunch for “Eat All You Can”. We all know that there is a point of satisfaction to fill one’s stomach, and this point has been measured by the seller, so the customer is disadvantaged because normally, restaurant charges the customers more in this idea. The customer cannot eat as much as he can because of stomach’s limitation. Another marketing scheme plotted by salesmen to introduce new products is by giving samples and taste tests to create awareness on the product The hitch here is the response created by the Free Tastes and other Free items. TAANSTAFL is used in several branches of studies and science. Gregory Mankiw, an American macroeconomist and Chairman of the George W. Bush Council of Economic Advisers illustrated the concept as “To get something that we like, we usually have to give up another thing that we like, making decisions that requires trading off one goal against the other”. Mankiw demonstated in his study how the phrase applies to science, finance, public good, and to business as well. In science, scientists explain this theory in the sources of matter, fuel, light that is exhaustible in the future. The future generation is sacrificed for our use today of these resources. Finance and mathematics use the underlying theory of TANSTAAFL in taking advantage of a price differential between two or more markets, commonly known as an arbitrage. HOW DOES TAANSTAFL WORK? Let me illustrate this in several scenarios, saying again,” Nothing could be had for free. 1 In our first example, let us discuss the opportunity cost of 2 investments proposals. In finance, an opportunity cost is the cost of a foregone transaction as a result of making a decision Let us suppose for purposes of discussion that Lindsay Apparel faces a decision between two investment proposals. Typically, business finds many more opportunities to spend money than it has money to spend. Ultimately, the decision will lie on the investment mix that the business decides to attain on its investment. Whereupon, one losses the opportunity to pursue the other objectives, given 2 proposals at the same time. At this point, Lindsay Apparel compares two business proposals having two different outlays, patterns of revenue, and periods of savings. We will show comparison. (Hypothetical example). Project A costs $95,000 and a useful life of 5 years and cash revenue ranging from $15,000 to $40,000 per year. Project B costs $450,000 initial outlay, and a useful life of 10 years, with cash revenue of $40,000 to $175,000 per year. By mere looking at this, it is safe to conclude that this is TAANSTAFL situation, and deciding in favor of one is an opportunity loss. In subsequent analysis using mathematical tools, study found out that Project B is superior to Project A. Applying the description of Mankiw, a TAANSTAFL is a decision that uses the most resources. In our example, Project A has a profitability index of 1.19 while Project B has 1.59. Project B is more profitable decision that exercised “Free Lunch” over Project A Another example of TANSTAAFL in investments is choice of alternatives between stock market prices. Investment in stock markets requires an investor to choose between the low and high prices per share. But there are set of conditions that make alternative decisions favorable to one and disadvantageous to other. This is the opportunity costs of the investment in case it succeeds or fails. 2. A further instance of FREE USE is associated in the social cost of a project. The social cost is the sum of the private costs and external benefits of a public good. It is further explained that the consumption of the good by one individual does not reduce the availability of the good for consumption by others, and that no one can be effectively excluded from using the good, but someone has to pay the cost of producing these benefits. Thus, social cost is a cost borne by everyone in the society. Public good as a “Free Use” is further described as something that has no exclusivity of use’ that once it is created, it is impossible to prevent people from gaining access to it. (Economic Expert) Examples of public good are national defense, law enforcement, public fireworks parks, roads and highways. The public is free to use roads and highways, lighting and infrastructure; they are equally protected by the national defense, but these are not actually free. The society pays for it in form of taxes, but the cost is generalized, and the benefit is externalized to many users. As we have stated, one cannot have everything for free, as in the long run, a problem will exist. A free rider can produce a problem, “as people enjoy a good service without paying anything (or making a small contribution less than the benefit) in the long run the good will be underprovided or none at all.” (Economics.help) http://www.economicshelp.org/blog/economics/free-rider-problem/ A free rider problem also occurs when there is “over consumption of the resources”. For example, a logger falls trees and is not concerned on its preservation takes a free ride on others and the environment (Economics Help 2009) / 3. Other instances of Free Ride. Let us take the case in point of the internet services that says their web search engines, messaging, e-mail services are free. Internet users enjoy on line services of e-commerce thru the order line system. Yes, it is free service, but a sector is placed into disadvantage in this situation. How much income is derived from on-line marketing, and how much have been lost in business this way? But weighing the consequences, the free ride puts the small business in a losing position. Internet services are claimed to be free. However, it is not actually free as most of us have seen ads by Google in almost all the pages of the internet sites. That is how websites make money. Analysts commented that each website providers have their own business revenue models. For example, Google, Yahoo, Facebook and Twitter will not be able to survive if all services are free. The on line news system of NY Times and others have started charging certain amount for downloaded articles. The business revenue models of website companies comes from free rides that goes along when one uses its internet services. (Campbell, Collins 2009) Googles almost went broke with the free use of You-Tube to internet users. Googles spent a lot of money in the acquisition of You Tube, and there is no way of recovering the investment but to think of ways on improving their finance problems. (Campbell, Collins 2009)) Googles is a public corporation, and a lot of shareholders have put investments to this corporation, hoping to receive considerable returns on their investment. The TANSTAAFL situation prevails as somebody pays for the use of a lot people on the “good” Yahoo, MSN, Facebook and Twitter generates their revenue from users, for all we know because each time that we download a research, send a message and use messenger service, there are ads that goes with it. For a small fee being charged to advertisers, websites earn by the number of downloads daily. This fee, as compared to advertisements on television and newspaper are much lower. Again, there is a disadvantaged party here which is the television and newspaper companies who lost advertising income. A columnist jokingly described the situation wherein “newspapers are referred to as an endangered specie) source. Viewers and internet users earn a Free Ride in the internet services paid for by advertisers. 5. Free Ride in banks and investment. The phrase “money begets money” is best illustrated in banking and investment. In simple explanation, banking is based on trust; you give your money to the bank and they promise to hold it for you safely. Banks even pay you interest for keeping your money depending on the length of time that your money stays in the bank. You can withdraw it anytime you want your money out. It seems to be an ideal situation. But the bank, in keeping your money incurs costs, so it has to make money to put up with the cost and some income to keep business going. Then, the banks “sells money” by lending it in a higher interest rate which is much higher than the interest paid to depositors. Banks uses a “Free Ride” in using depositors’ money (Ellis, K.) 6. There is really no free ride in investments. Before the economic crisis in 2008, everybody enjoyed the benefits of loose credit policies as economies grew. Debts went high as creditors found the situation in investment encouraging. However, the economic bubble burst, and the realty mess in the United States came, everybody had to bear its crunch. Even those who did not participate in investments suffered as everybody felt the recession. The crisis was felt worldwide, and the FREE Ride enjoyed by scrupulous investors had to be paid by the society in one way or the other. There was unemployment due to closure of companies, foreclosure of mortgages and tight monetary policies that made it hard for businesses. Let us take a look at government spending along this line. President Obama, upon assumption to duty as President of the United States vowed to make stimulus economic package to remedy the economic problems of the nation. The budget of the Federal Government shows deficit estimated $1.8 trillion t for fiscal year 2008 meaning it has more debts than the level of income. The Economics of the Free Ride (Gary North) What does the government do when there is a deficit? It resorts to belt tightening of expenditures, cutting short the budget expenses and borrowings to pay the debt obligations. Gary North, an Analyst on the Economics field said that President Obama has a free ride in recession. North, in his article said that “economists believe government spending is the source of economic recovery and that budget deficits don’t matter Economists agree at this point that “there is no free lunch” in economics. author Edward Krowitz, a retired US foreign service economist and former consultant to financial institutions described free ride in a situation where the “enthusiasts insists on additional economic investments and failed to recognize the natural limits of sudden growth”. They ignore the obstacles of untrained labor force, transport and material bottlenecks, the price inflation shown in real estate and stock markets. They failed to see that savings are being shifted to speculative outcomes. Krowitz concluded that this is not a situation likened to a fairy tale that is supposed to end happily. It is realism that is supposed to take the investors to a free ride. Conclusion The economy today exists in a materialistic world where everything has a price, and almost nothing could be gained for nothing. In all areas of discipline, in private or government sector, free use of good has a consequence. The consequence mostly comes in the form of disadvantages one gets from the situation. It may be due to loss of income opportunity over a decision. In other case, Free Use results to deterioration of the public use due to over consumption. In investments, it may either cause loss of income, savings and employment due to wrong decisions. It is fairly concluded, based on arguments reviewed that free use is only a product of marketing imagination, and “There Ain’t No such Thing as a Free Lunch” w.c. 3447 BIBLIOGRAPHY Campbell, Colin. (2009) “Is the web’s ‘free’ ride over? McCleans.Ca http://www2.macleans.ca/2009/07/21/is-the-web%E2%80%99s-%E2%80%98free%E2%80%99-ride-over/#idc-container [Accessed 13 November 2009] Economic Expert. Definition. Public Goods http://www.economicexpert.com/a/Public:goods.htm [accessed 13 November 2009] Economics Help. 2009. “Economic free Rider Problem” http://www.economicshelp.org/blog/economics/free-rider-problem [Accessed 13 November 2009] Ellis, K. “How does a bank make money?” ehow.com http://www.ehow.com/how-does_4564407_banks-make-money.html [Accessed 13 November 2009] Krowitz Edward .2007. “In economics, there is no such thing as a free lunch:” Biz China, Weekly Roundup.China Daily.http://www.chinadaily.com.cn/bizchina/2007-07/25/content_6002105.htm [Accessed 13 November 2009] Mankiw, Greg. “TAANSTAAFL Demonstrating Opportunity Cost” Encyclopedia. Absolute Astronomy.com. http://www.absoluteastronomy.com/topics/TANSTAAFL#encyclopedia [Accessed 13 November 2009] North, Gary (n.d.) “The Economics of the Free Ride.” Gary North’s Specific Answers. http://www.garynorth.com/public/4852.cfm [Accessed 13 November 2009] TAANSTAAFL: Facts, Figures and Encyclopedia Article. http://www.absoluteastronomy.com/topics/TANSTAAFL#encyclopedia [Accessed 13 November 2009] http://www.garynorth.com/public/4852.cfm "There ain't no such thing as a free lunch" (alternatively, "There's no such thing as a free lunch" or other variants) is a popular adage communicating the idea that it is impossible to get something for nothing. The acronyms TANSTAAFL and TINSTAAFL are also used. Uses of the phrase dating back to the 1930s and 1940s have been found, but the phrase's first appearance is unknown.[1] The "free lunch" in the saying refers to the nineteenth century practice in American bars of offering a "free lunch" with drinks. The phrase and the acronym are central to Robert Heinlein's 1966 libertarian science fiction novel The Moon is a Harsh Mistress, which popularized it.[2][3] The free-market economist Milton Friedman also popularized the phrase[1] by using it as the title of a 1975 book, and it often appears in economics textbooks;[4] Campbell McConnell writes that the idea is "at the core of economics".[5] BTW, TANSTAAFL stands for “There Ain’t No Such Thing As A Free Lunch”. And boy does that apply to business success! In economics, a public good is a Good that is rivalry ed and excludability. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good.... , but someone has to pay the cost of producing these benefits External benefits social costs and social benefits Any action entails private costs and private benefits to the individual who initiates the action. It may also entail costs and benefits that are not borne by the individual—termed external costs and external benefits . The sum of private and external costs is termed the social cost. Social benefits similarly reflect the sum of private and external benefits. Thus, social costs reflect the cost to everyone in society, while private costs include costs only to parties in the transaction. Examples where social costs differ from private costs include 1. Externality, in economics, is described a As a positive or negative impact as a result of the transaction, and in such cases, prices do not reflect costs of benefit on consumption of a product or service from a public good. In economics social cost is defined as the sum of private cost and externality costs. Economic theorists ascribe individual decision-making to a calculation costs and benefits.... Similarly, someone can benefit for "free" from an externality Externality In economics, an externality or spillover is a positive or negative impact on a party not directly involved in an economic transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service....  or from a public good Public good In economics, a public good is a Good that is rivalry ed and excludability. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good.... , but someone has to pay the cost of producing these benefits. Mathematical finance is the branch of applied mathematics concerned with the financial markets. The subject has a close relationship with the discipline of financial economics, which is concerned with much of the underlying theory.... , the term is also used as an informal synonym for the principle of no-arbitrage Arbitrage In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.... . This principle states that a combination of securities that has the same cash flows as another security must have the same net price. n mathematical finance Mathematical finance Mathematical finance is the branch of applied mathematics concerned with the financial markets. The subject has a close relationship with the discipline of financial economics, which is concerned with much of the underlying theory.... , the term is also used as an informal synonym for the principle of no-arbitrage Arbitrage In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.... This principle states that a combination of securities that has the same cash flows as another security must have the same net price. Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision. Opportunity cost analysis is an important part of a company's decision-making processes but is not treated as an actual cost in any financial statement.... . Greg Mankiw N. Gregory Mankiw Nicholas Gregory "Greg" Mankiw is an American macroeconomics. From 2003 to 2005, Mankiw was the chairman of George W. Bush Council of Economic Advisors....  described the concept as: "To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another." The idea that there is no free lunch at the societal level applies only when all resources are being used completely and appropriately, i.e., when economic efficiency prevails. If not, a 'free lunch' can be had through a more efficient utilization of resources. If one individual or group gets something at no cost, somebody else ends up paying for it. If there appears to be no direct cost to any single individual, there is a social cost Social cost In economics social cost is defined as the sum of private cost and externality costs. Economic theorists ascribe individual decision-making to a calculation costs and benefits.... Similarly, someone can benefit for "free" from an externality Externality In economics, an externality or spillover is a positive or negative impact on a party not directly involved in an economic transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service....  or from a public good Public good In economics, a public good is a Good that is rivalry ed and excludability. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good.... , but someone has to pay the cost of producing these benefits. COST WEIGHING COST BENEFIT BANKING TRANSACTIONS HOW DO BANKS EARN MONEY 1.Define TANSTAFL. 2. Author- theory 3. Relation to economic issues. 4. Read More