Macroeconomic Analysis of Making Money - Essay Example

jehanzeb [Manager] 30 August Why do professional athletes make so much money? Be sure to explain the diamond-water paradox and how it relates to athletes salaries. Ans. According to the diamond water paradox, water is needed to sustain human life, yet it has no value in front of diamonds even when diamonds have no such specific use except to be used as jewellery or in industrial machinery. This phenomenon can be explained by the economic theory of marginal utility and the law of supply and demand. The supply of water is in such a large quantity that its most urgent use, which is drinking to remain alive, is easily fulfilled. Therefore, any additional unit of water can be applied to less urgent uses resulting in a less worth for people due to a greater supply. Comparatively, the supply of diamonds is so low that the usefulness of one diamond is greater than a glass of water, therefore, people are willing to pay a greater amount for diamond as compared to water. This concept can be illustrated with the help of the following graphs: Demand and supply of water Demand and supply of Diamond According to the graph, the supply of water is almost horizontal, so where ever you shift the demand, the equilibrium price will always remain constant. In contrast to this the graph of diamonds show a steep supply, so it’s equilibrium price is not affected by the change in demand. The marginal utilities of both the commodities can be graphically explained with the help of the following graph: We can apply the same concept to explain the reason why an athlete earns so much money. It takes a lot of time and effort to become a professional athlete. Not everyone is capable of becoming a pro athlete; therefore, the supply of a professional athlete is far less than other professions such as engineers, doctors, accountants etc. Moreover, there is an international demand for athletes as they are being liked by numerous fans that are willing to pay a large amount to buy tickets to see their favorite athlete compete. An athlete with a larger number of fans has a higher salary as compared to an athlete with a less number of fans. So, being in a less quantity ( low supply) and a large number of fans ( high demand) results in a high marginal utility of professional athletes, therefore their salaries are high and they make so much money by showing their performances to the audience. 2. A person’s wage is related to his/her worth to the firm. Use the background information and do some research on your own. Compare the marginal revenue product of a teacher to a professional athlete. Why is it different? Be sure to read the marginal productivity presentation on this topic prepared by the instructor. Ans. Marginal productivity is the increase in productivity by the addition of one additional unit of input. Marginal revenue product is closely related to marginal productivity and is defined as the increase in revenue with respect to the increase in one unit of input. The concept of marginal revenue product can also be applied in a workplace and is the core determinant in the decision of an employer of how much salary to pay to his employees. According to the marginal revenue product, a unit of input has more value if it generates a higher income as compared to a unit of input which generates lesser revenue to the organization. This is why employees who are known to be more productive and generate more revenue to an organization also charge a higher salary as compared to those employees who give less impressive results. Usually, academic qualifications, work experience and other personality traits determine a person’s worth in an organization. People who have high academic achievements and have high educational background have a higher worth as not all people are capable of achieving the same level of education. Similarly, not many people have the opportunity to gain work experience in top companies which are recognized globally, therefore they have a higher worth and hence their salaries are high. Teaching is a profession where calculating marginal productivity is not easy as the revenue for schools and colleges is dependent on many students. Students do not pay to schools to study from a single teacher; rather, they pay to study different courses from different teachers. Moreover, the performance of teachers’ productivity depends on not just one student, but the whole class where some students are intelligent and score well while others are not. Therefore, it is difficult to judge the marginal revenue product of a single teacher. Unlike teachers, the marginal revenue product or the marginal productivity of an athlete is easier to judge: if a game is for individual player, such as racing, swimming, snooker etc, the level of output or result depends entirely on one person, the better he plays and wins, the higher his worth. This is why, athletes such as boxers, swimmers etc earn more than even football, rugby or cricket players. Or if the game comprises of team work, the marginal revenue product can still be calculated for the athlete based on his individual performance and contribution in the game. This is why the marginal revenue product of athletes is greater than that of teachers. 3. Why would firms stop hiring workers when the wage is above the marginal revenue product? Ans. Wages higher that the marginal revenue product means that the employee is being paid more money than the revenue he is generating for the firm. In economic terms, the cost of input is higher than the revenue it is generating. When such a situation arises, the employer of a firm is at a loss as he is paying more than what he is earning. This could be a result of lower productivity of workers, low sales of products a company makes or any other factor that affects the revenues of the firm. Under such condition, hiring additional workers would result in more cost of production for the employer and hence lesser revenue and a greater loss. That is why, when such a condition arises where the wage is higher than the marginal revenue product of the firm, the firm stops hiring more workers and rather concentrates on finding reasons for the decline in marginal revenue product. 4. Is it true or false that high player salaries are the reason that pro ticket prices are so high? Explain by using economic concepts from the current and previous modules. Ans. If you have the ability to pay, you will pay any amount to watch your favorite athlete or team perform in a match (if you cannot see him/them perform on television). This is the reason why the tickets of a match in which world renowned players are playing are so expensive. According to the law of supply and demand, the equilibrium price of a commodity is high if the demand is high and the supply is low. As every match and competition is different, therefore, the supply of such games is low where world class athletes gather to show their performances such as football world cups, Olympics etc which happen only twice or thrice in a decade. Therefore, people are willing to pay a high price to watch those games. That is the reason why pro ticket prices are so high and that is also the reason why the salaries of professional athletes are high as a large crowd is willing to pay a high amount to watch them perform. Moreover, as the supply of these games is low and the demand is high, the marginal utility of the games is also very high and therefore the prices are high. References Chass, M. (2002). Scoring the Big Money. Retrieved on February 23, 2010 from: http://findarticles.com/p/articles/mi_m0BUE/is_1_135/ai_n18614876/ Read More