Microeconomics Demand: Utility and Marginality

Professional sports have one of the most competitive and challenging labor markets. Thousands of athletes fight to find their place under the sun. Superstars are common, but true talents are rare. As a result, those who prove themselves unique have sufficient opportunities to win the labor market Olympus. Scarcity is the defining feature of the labor market in professional sports. Scarcity justifies billions of dollars paid to talented athletes who contribute to their teams’ win column (Center for Economic Education, 2005).

Despite its uniqueness, the forces managing the supply and demand in professional sports are mostly similar to those in other labor markets. Hiring practices in professional sports must be regulated, to ensure that athletes are legally protected against discrimination and are offered equal opportunities to realize and improve their talents.

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The forces determining wage in professional sports and other labor markets are mostly the same. The demand and supply of labor are the major determining characteristics of wage in any labor market (Center for Economic Education, 2005). The quantity supplied of labor directly depends upon changes in salaries: the higher the wage the more labor is supplied to the market (Center for Economic Education, 2005).

The marginal revenue of product (MRP) usually predetermines the levels of and changes in labor demand (Center for Economic Education, 2005). Two factors affect wage in any labor market: (1) the amount of goods and services each worker produces; and (2) the marginal revenue of this product or service (Center for Economic Education, 2005).

It goes without saying that different labor markets have different characteristics and can be more or less attractive to workers. The labor market of professional sports is well-known for its incredibly high salaries. It comes as no surprise that professional sportsmen are often compared to teachers: the latter, despite the contribution they make to the society’s scientific development and intellectual progress, cannot always make their ends meet.

This difference in wages has little to do with discrimination but is a complex result of numerous economic forces affecting labor markets. Scarcity is the definitive feature of labor markets in professional sports (McLaughlin, 2007). In the meantime, teachers are available in abundance (McLaughlin, 2007).

They can be easily bred to become perfect educators. Unlike teachers, talented athletes are rare, and teams are willing to pay millions to acquire and retain a talent that will move them to the top of the win column. Scarcity explains the dramatic difference in how much teachers and athletes earn. Scarcity also justifies the incredible sums of money paid to prominent athletes in professional sports.

These differences in teacher and athlete wages are directly related to the so-called diamond-water paradox. The latter explains why “diamonds are so expensive and water so cheap, when water is absolutely essential to the life of every human” (McLaughlin, 2007). Again, it is because of their scarcity that diamonds are valued more than water.

Certainly, water may soon replace diamonds and become a luxury, but at present, every additional unit of water acquired is much less expensive than that of a diamond (McLaughlin, 2007). With the abundance of teachers in the labor market, the cost of every new teacher is incomparably lower than that of a talented athlete. Unless the situation changes (which is hardly possible), athletes will continue to enjoy a privileged position in the labor market.

A belief persists that athletes’ salaries cause the prices of sporting events to be high. Athletes have already assumed a role of entertainers, and sport fans are willing to pay billions of dollars for tickets, to watch another game (Chass, 2002).

Contrary to public beliefs, high athletes’ salaries do not affect ticket prices, simply because player payrolls are fixed and do not depend on the number of tickets sold or their price (Center for Economic Education, 2005). Even children know that professional sportsmen make contracts with their teams and have fixed salaries, which do not change over a definite period of time, for example, 1-2 years.

Certainly, teams receive their share of revenues and can generate considerable profits, if they manage to sell as many tickets as possible. Some teams had the price of their tickets increased, after signing superstars (Center for Economic Education, 2005). However, ticket prices increased not because teams increased their payrolls, but because more fans wanted to see the show (Center for Economic Education, 2005). As the demand for tickets increased, teams raised their price to earn better revenues.

In 2000, Steven E. Landsburg discussed the enormous salary of Derek Jeter, who was believed to be worth of $17 million a year (Landsburg, 2000). At that time, $17 million in athlete salaries was beyond reason, but Landsburg (2000) could not imagine that wages in professional sports would have no limits. Today’s highest-paid baseball player Alex Rodriguez is worth of $31 million annually (The Richest, 2011). He is followed by CC Sabathia and Joe Mauer, each earning $23 million per year (The Richest, 2011).

Wages in professional sports constantly increase. Unlike other industries, agents cannot replace their athletes with capital (Downward, Dawson & Dejonghe, 2009). Each athlete is the source of competitive advantage for the team and the factor of increased marginal revenue. To acquire and retain the most talented athletes, teams must spend millions of dollars, and even then they cannot guarantee the top position in the win column.

The growing complexity of labor relations in professional sports warrants the need for effective management and regulation. Hiring practices in professional sports should give talented athletes equal opportunities to win the labor market Olympus and find their place under the sun. Recent scandals suggest that not everything is perfect in professional sports. Teams and agents must avoid discriminatory practices (Muster, 2001).

The relationships between coaches, agents, and athletes must be strictly regulated, to make sure that members of professional teams do not miss games without a definite reason (Hartness, 2010). Simultaneously, nothing can regulate the price and marginal revenue for product of an athlete, as long as each athlete is unique. Sport is a human activity, and unless something changes, scarcity will continue to drive wages in the labor market of professional sports.

Conclusion

Professional athletes face fierce competition in the labor market. Superstars are common, but true talents are rare. Scarcity is the definitive feature of labor markets in professional sports, and teams are willing to pay millions of dollars to acquire and retain talents.

The situation in professional sports is much similar to the diamond-water paradox: because of their scarcity, diamonds are extremely expensive, although they can do little to maintain health and wellbeing of people. Talented athletes are like diamonds: they are expensive and scarce, unlike teachers who fill the labor market in abundance but cannot always meet their basic needs.

The growing complexity of labor relations in professional sports warrants the need for effective management and regulation. Yet, nothing can regulate the price and marginal revenue for product of an athlete, as long as each athlete is unique. Sport is a human activity, and unless something changes, scarcity will continue to drive wages in the labor market of professional sports.

References

Center for Economic Education. (2005). The economics of pro athlete salaries and

ticket prices. University of Wisconsin-Parkside. Retrieved from http://www.uwp.edu/departments/economics/cee/teaching_resources/lesson03.html

Chass, M. (2002). Scoring the big money: Do pro athletes deserve so many millions?

Here’s how you might be responsible for Derek Jeter’s paycheck. Find Articles. Retrieved from http://findarticles.com/p/articles/mi_m0BUE/is_1_135/ai_n18614876/

Downward, P., Dawson, A. & Dejonghe, T. (2009). Sports economics: Theory, evidence, and policy. UK: Butterworth-Heinemann.

Hartness, E. (2010). UNC changes hiring practices as a result of scandal. Wral Sports Fan. Retrieved from http://www.wralsportsfan.com/unc/story/8616404/

Landsburg, S.E. (2000). At $10 a fan, that’s $17 million. The New York Times. Retrieved from http://www.nytimes.com/2000/01/22/opinion/at-10-a-fan-that-s-17-million.html

McLaughlin, D. (2007). Rich athletes, poor teachers. Ludwig von Mises Institute. Retrieved from http://mises.org/daily/2626

Muster, B. (2001). Minority hiring practices in professional sports. United States Sports Academy. Retrieved from http://www.thesportjournal.org/article/minority-hiring-practices-professional-sports

The Richest. (2011). 10 highest-paid baseball players 2011. Richest.org. Retrieved from http://www.therichest.org/sports/baseballs-highest-paid-players/