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:
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.
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