What Is TANSTAAFL?

TANSTAAFL is an economic term that refers to the expense of opportunity and scarcity. Scarcity means that the services available are insufficient to meet everyone’s wishes and needs. For eg, if you have a small budget, you won’t be able to afford anything you want, so you must prioritize your needs. Alternatively, opportunity cost demonstrates that any advantage has a cost (Grossmann, Steger, & Trimborn, 2013). The theory behind TANSTAAFL is that when making a decision, the opportunity cost should take precedence over numerical benefit. An anecdote may be when a customer is offered free lunch then they assume that afterward they will be offered a drink. In real sense, the cost of both lunch and beer were put together. Even though there is no change for the lunch, it can only be consumed at the opportunity cost of cheap drinks and thus the true opportunity cost is hidden carefully (Quiginn, 2015). Therefore, the phrase points out that services that seem to be provided for “free” by the government, they have opportunity cost. These services are funded by taxes or by decrease in different areas of public expenditure.

Opportunity cost is directly implicated by scarcity. Consumers have to choose between different alternatives when deciding on their expenditure. TANSTAAFL means that in a world where there is scarcity, there is an opportunity cost for everything (Mankiw, 2014). All the decisions that we make, there must be tradeoffs involved. An example is when a student goes to college; all the direct costs required example supplies in school, text books, and tuition are added. All these are referred to as explicit costs as they require payment of money. Nonetheless, the costs are minimal compared to the time the student takes to attend classes and do their homework. The amount of money that the student could have made if she had forgone school and worked is the implicit cost of going to college, that is, costs that do not require monetary payment. The opportunity cost therefore consists of implicit and explicit costs.

Comparative advantage is experienced by producers as they deem fit to produce one good than another. The evaluation done is in terms of opportunity cost rather than the production cost. From the table below, Germany and USA produce cars and bikes but Germany produces more of each product that USA. In addition, Germany produces more cars than bicycles. The opportunity cost in each county is different. The two countries can either choose to produce cars entirely or bicycles entirely but the resources used in the production of each of the commodities are not the same and hence cannot be substituted.

Maximum output

Cars

Bike

Germany

40m

4m

USA

17m

3m

The total output for the two countries will be

Cars=40+17= 57Trucks=4+3=7

Total output= 57+7=64m units

Germany has an absolute comparative advantage than USA in the production of the two commodities. Germany is 2.4 times (40÷17) better in producing cars and only 1.3 times (4÷3) better in producing (Textbook equity edition, 2014).

Question Two

Demand

Both demand and supply are tools in economic that are used to measure and examine the market equilibrium. Demand is a word used by producers to define the potentiality of sales of goods and services. On the other hand, demand is used in the consumer perspective to define the ability and the will to consume goods and services (Econport, 2006). It is a representation of the maximum quantity of a specific product that customers are willing and are willing to buy over a specified period of time. Price of a commodity in relation to the quantity, are the primary characters used to explain of Law of Demand. It states that an increase in price of a certain product or service decreases the quantity of the same product. The opposite is also true; a reduction in the price of a commodity increases the quantity of the commodity. We can use this to say that, increase in price of Apalachicola Florida Oysters decreases the number of the oysters bought in a month. For instance, the price of oysters in April was $20 and later increased in the month of May to $30, the amount of oysters that would have been purchased in May would be less than in April.

Price

Quantity

There are certain factors that affect demand (Econport, 2006). One, it is the price of the product. An increase in price of commodity decreases the quantity that consumers are willing and able of to purchase. Two, is the income of consumers. Increase in income of consumers increases the amount of products bought. This however depends on the type of good. Three, it is the price of related goods. For instance, increase in price of Apalachicola Florida Oysters increases the demand of other sea foods that can be substituted with oysters. Forth, is the taste and preference of consumers. This will affect demand for oysters if customers change their preference to another sea food. Fifth, it is the consumer’s expectations. For example, if Apalachicola Florida Oysters announce that they will be providing another oyster menu that sounds better in terms of taste and presentation, many customers will decide to try that menu. Consequently, the demand of the current oysters menu offered will decrease thereby increasing the demand of the new menu oyster. Lastly, it is the number of consumers in the market. A large number of consumers at Apalachicola Florida Oysters will have a positive effect on the quantity of oysters purchased.

Supply

From the consumers’ perspective, supply is defined as the availability of goods and services that a customer can purchase. Producers understand supply as the desire and ability to provide goods and services. It characterizes the lowest quantity of a product that the producers are willing and able to sell in a specified period of time (Econport, 2006). Just like demand, the primary characters involved are price and quantity of a commodity. This is described using the Law of Supply which states that an increase in price of a commodity increases the quantity supplied. The opposite is also true, decrease in price of a commodity decreases the quantity supplied over a specific time. Using Apalachicola Florida Oysters as a reference example, the supply of oysters will reduce once the prices decrease.

Price

Quantity

There are certain factors that affect supply. These include; the price of inputs. Production of inputs influences the supply such that sales at lower prices should be the same as the money used to produce it to prevent losses for the supplier (Econport, 2006). The number of suppliers in the market also affects supply. There is increased competition in the market as suppliers increase. The third factor is the expectation of producers. For instance, if there is are suppliers who are willing to introduce new sea foods in the market by next month, the existing suppliers in Apalachicola Florida Oysters may decide to sell their products fast and restock small quantities before the new sea foods arrive. The forth factor is the existence of current technology. This includes methods of preservation for oysters to increase shelf life.

Market equilibrium

Equilibrium Price defines the price of market where the quantity of goods supplied is similar to the quantity of goods demanded in a specified period. This therefore means that change in price is equal to both change in demand and supply and hence there will be no excess demand or supply in the market. On the other hand, Equilibrium quantity defines the number bought and sold at the equilibrium price (Econport, 2006). Using an example of Apalachicola Florida Oysters, the equilibrium point will be met when the number of oysters ordered is equal to the number of oysters that is supplied. Surplus of oysters means that the quantity demand is low while the quantity supplied is high. The price will not be affected but there will be movement along the curve rather than the supply graph. Consequently, shortage of oysters indicates that the quantity supplied is low while the quantity demanded is high.

Price

Equilibrium point

Equilibrium

Price

Equilibrium quantity

Quantity

Change in demand and supply is affected by both the price and quantity of commodities over a specified time hence there is a shift in the demand or supply curve. In contrast, change in quantity demanded or supplied explains the number of commodities that have been sold over a specific time at one particular price. It is the movement along the demand or supply curve as a result of change in the price.

If the number of oysters harvested decrease due to less rainfall, the price will not change but the quantity demanded will increase while the quantity supplied will decrease. This therefore will lead to market equilibrium to avoid surplus and shortage.

If Apalachicola uses their unique cup shape to market for improved quality of products, the quantity demanded will increase as more customers will seek to consume more of the product as the expectations will change. Increase in quantity demanded will in turn lead to increase in quantity supplied.

If there was a loss in Louisiana harvest of oysters, there would be increase in the quantity demanded at Apalachicola oysters. The price will remain unaffected but the quantity of oysters that will be bought at Apalachicola oysters will increase. On the other hand, there will be a decrease in competition hence decreasing the quantity supplied.

References

Econport. (2006). Econport. Retrieved september 22, 2017, from Econport Web Site: http://econport.org/content/handbook/supply.html

Econport. (2006). Econport. Retrieved September 22, 2017, from Econport Web site: http://econport.org/content/handbook/supply/changeSupply.htmll

Econport. (2006). Econport. Retrieved September 22, 2017, from Econport Web Site: http://econport.org/content/handbook/Equilibrium.html

Econport. (2006). Econport: Welcome to Econport! Retrieved September 22, 2017, from Econport web site: http://econport.org/content/handbook/Demand/Factors.html#pp

Grossmann, V., Steger, T., & Trimborn, T. (2013). The Macroeconomics of TANSTAAFL∗. Journal of Economics Literature .

Mankiw, G. (2014). Principles of Economics. Elsevier.

Quiginn, J. (2015). TISATAAFL. In J. Quiginn, Zombie Economics: How Dead Ideas Still Walk among Us. Princeton University Press.

Textbook equity edition. (2014). Principles of Economics Volume 2 of 2. Lulu.com.