Utility and Marginality

Introduction

The classical economist, Adam Smith, presented the diamond-water paradox theory in academic circles. Concisely, the diamond-water paradox theory refers to the outright contradiction that, despite water being more useful for human survival than diamonds, the latter is highly priced in the market.

Blaug (1962) observes that, Adam Smith had presented this theory based on value, which in this context had two meanings: value in use and value in exchange. Water has a higher value in use since it is more essential for human survival than diamonds (p.17). However, since water is readily available in almost all human habitats, it has lower/little value in exchange.

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On the other hand, diamond is very scarce; therefore, most people would be willing to give more money in its exchange than water, making it a very expensive commodity. Adam Smith’s presentation of the theory later came under criticism because the comparison being between heterogeneous commodities could have been explained better by the concept of marginal utility, which he had ignored.

Wage Determination in Labor Markets

Marginality is a term used for reference to a commodity pricing process that is neither based on the usefulness (total Utility) nor the amount of labor expended for production, but rather on its marginal utility.

Marginal utility can be explained by assuming a rational consumer will consume commodities A and B in such a combination as to derive maximum utility. Further, consumption of any additional unit by the consumer marginal utility derived would be smaller. This phenomenon (reducing marginal utility) is known as diminishing marginal utility.

Since water is readily available, its average consumption per person is relatively high, hence results in low marginal utility. Diamond, on the other hand, is scarce; therefore, the average consumption of diamond per person is very low and resulting to a high marginal utility. Due to its high marginality, many people are willing to pay a higher price for diamonds than for water.

A further scenario that has greatly drawn attention is the paradox of value in the fields of sport and that of noble professions such as teaching. Teachers, in any part of the world, receive very low salaries for their highly esteemed service to the society.

On the contrary, sportsmen draw fat paychecks for mere entertainment, a service that society would comfortably live in its absence. The question, however that arises is as to whether this pricing gaps between the two commodities is justifiable. Ensuing is a discussion on the two professions and the factors that lead to such a lift in the market pricing.

Several factors determine the wage levels in the labor market. Atchison, Belcher, and Thomsen classified the factors that influence wages in the market into four categories: “economic, institutional, behavioral, and equity considerations” (2000, p.50). Economic factors refer to the general market forces of supply and demand.

Economic factors would perhaps offer a quick explanation as to why a teacher would get a much lower pay than a professional athlete; the teaching industry has more labor supply than the athletics industry therefore the athlete can easily bargain a higher salary than that a teacher.

In addition, when one considers the institutional ability and willingness to pay, again it becomes evident that the athletics profession would pay highly since it brings in high revenues as compared to the teaching profession. For instance, the typical sources of revenue for the athletics sport would include ticket sales, commission from food sales, advertisements, sale of broadcasting rights, and sale of branded merchandise.

The overall revenue collected is usually a huge amount and given the low numbers of athletes then the paycheck is a huge sum of money. On the other hand, the number of teachers is very big and the source of revenues is usually limited to payments from students as well as the budgetary allocations by the government.

Given the limited revenues, the teacher has no option but to accept a lower pay than an athlete does. Behavioral factors for wage determination that include competition in the industry play a key role in wage determination. Whereas competition is not a key consideration for a teacher, competition is a key determinant for an athlete, which then means that the teaching discipline would be more congested than the athletics’.

Lastly, the principles of equity as a factor of wage determination, dictates that the revenues available be disseminated equitably among the players, which leaves the teacher with a lower average pay than the athlete because of low revenues.

The Diamond-Water Paradox and athletes’ salaries

Paradox of value theory as stated above refers to a scenario where a commodity that is seen to as essential to human life is lowly priced, whereas a commodity of little value to human life is highly priced. Teaching is a service that is very important to society as a teacher is the porter who molds the pupil’s future.

On the other hand, a sportsman at best would offer just entertainment to society. Despite the great role a teacher plays in shaping the society’s future, the teacher earns significantly lower pay than a sportsperson.

As elucidated above, the major explanation for the huge gap in pricing of the two commodities is neither the labor input nor total utility but marginal utility. Whereas a teacher would reach to a very few students (low marginality) sportsman on the other hand, would reach an enormous number of his fans (high Marginality).

Athletes’ Salaries and Pricing of sporting events

Questions arise as to the connection between the huge salaries for athletics and the pricing of sporting events. Landsburg (2000) stated that “it’s not his salary that raises the ticket but his ability to raise ticket prices.”

An athlete commands a large base of fans that in most cases is willing to reward his/her rare abilities and skills by buying the ticket. In addition, the purchase of the highly priced ticket for a sporting event is purely the consumer’s choice and no one can take away such discretion (Murray, 2002, p.26).

Another reason that influences the pricing is market supply and demand forces; given the high demand and limited supply of the sporting event, naturally the prices adjust to bring market operations to a state of equilibrium. The sporting profession has continued to reward its players attractively over the years.

In baseball, for example, currently the highly paid player is Alex Rodriguez of New York who earns an average pay of $33 million per year. Therefore, the high salaries of athletes do not raise prices of the sporting events; fans are willing to pay the high prices to enjoy what athletes have to offer and this has in effect increased players’ salaries.

The Conclusion

The Diamond-water Paradox theory puts forth the generalization and a solid pricing strategy based on marginality and utility. It posits that it is not the total utility (usefulness of diamonds or water) that matters, but the marginal utility (usefulness of each unit of Diamond or Water).

In my personal view, the hiring practice of sportsmen should not be regulated since the field has natural regulatory forces that precipitate the best sports teams of the time. Therefore, regulations are not necessary.

References

Atchison, T., Belcher, D., & Thomsen, D. (2000). Wage level And Its Determinants. New Jersey: Prentice Hall. Print.

Blaug, M. (1962). Economic Theory in Retrospect. Cambridge University Press. Print.

Landsburg, S. (2000). At $10 a fan, That’s $17 million. The New York Times. Retrieved
from

Murray, C. (2002, September 6). Scoring the Big Money: Do athletes deserve so many Millions? Here is how you might be responsible for Jete’s paycheck. New York Times Upfront, 42, pp.26.

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