Why Some Goods Are Free
Economists spend a great deal of time explaining how market prices are determined, and almost all of that time is spent explaining why prices are positive (above zero). Their price analyses almost always reinforce an often-repeated quip: “There is no such thing as a free lunch.” Economists’ emphasis on positive prices is understandable because most goods cost something to produce, and most production processes are constrained at some point by the old and familiar law of diminishing returns, which simply means that when more and more of a variable resource like labor is added to a fixed resource, like an individual plant or parcel of land, beyond some point the additional output from the additional labor must diminish. If the additional output didn’t begin to diminish beyond some point, then the world’s production of a good such as tomatoes could be grown on a single acre of land (or really in a flower pot). All that would be needed is for the number of workers to be continuously expanded. Since we know that growing the world’s tomato supply on an acre of land is not possible, it follows that for most production processes additional output from each additional unit of labor added will begin to diminish beyond some point. It follows that beyond some point, the additional or marginal cost of production will begin to rise, at least for most goods and services. The positive and increasing marginal production costs will place a lower bound on the price that can be charged.
KeywordsSwitching Cost Search Cost Future Demand Network Good Initial Price
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