Demand and Supply

The Diamond Water Paradox

• What determines a person's salary? • Why do professional athletes make so much

money? • People who work as firefighters, police officers

or teachers are clearly more important to our society, yet they make much less money than jocks. What explains this?

diamond-water paradox

• Economists have long been fascinated by the diamond-water paradox. The question raised by this paradox is why water, a substance needed to sustain human life, is generally worth less than diamonds, a product that adds no real value to mankind.

• This same question could be posed about professional athletes' salaries.

• How can athletes' salaries be so high when salaries for other occupations, that are clearly more important, are so much lower?

• The prices of goods are set in a market. Because diamonds are a scarce natural resource, they command a high price. The salaries of workers are also set in a market, and professional athletes are a scarce resource in high. In particular, superstar athletes are a very scarce resource.

• An NFL quarterback like Brett Favre—named Most Valuable Player three times to date—is one of only a few people in the world that can perform his job well and he therefore is rewarded with a salary approaching $8.5 million per year.

• Professional athletes make high salaries because people with their skills are scarce.

• The demand and supply for people in various occupations determines the salaries in question—not the “importance” of the job to society.

• This finding is similar to the finding that diamonds are very expensive (while useless in a practical sense) yet water is very cheap (but life sustaining).

• On the other hand, what will happen when clean water becomes more scarce?