Question

1. During his prime in the 1980’s Larry Bird was one of the world’s best basketball players, making in excess of $7million per year playing for the Boston Celtics. However, at one point during his basketball playing days the NBA players went on strike. While on strike Larry took a job as a garbage man where he made approximately $30,000 per year.
   1. Given that Larry’s next best job, after being a basketball player, only paid $30,000, why couldn’t the Boston Celtics have simply paid Larry a bit more than $30,000 (or perhaps even ONLY $1 million) to play for them, rather than $7million? That is, what is the mechanism that forces the Celtics to pay so much more than Larry would have willingly accepted to play the sport he loved?

2. Given that Larry is so rich, how much higher prices does Larry pay for gasoline, food, clothes, etc, than the rest of us merely middle class folks? Please explain briefly.

Answer 1

The phenomena described can be understood as follows:

a) The fact that a good basketball player, playing for a leading team, can earn $7 million annually, reflects the condition of the "labor market" for basketball players.

This labor market is being driven by the forces of demand and supply.

The demand for a good basketball player is very high. It is so high, that any of the NBA teams will gladly pay $7 million, or even more, to the best players. These prices are often negotiable, based on better performance.

The supply of good basketball players, however, is very low. Only a handful of people in the whole world will play really good basketball that is world class. Not everyone will have the physical and mental capabilities.

Now, when NBA itself is on strike, it implies that no new earnings are possible. If Larry had saved a lot of money from his earlier earnings, he probably wouldn't have needed the other job. The garbage man is another job, in another job market. It has much lower demand, and much higher supply.

Now, the Boston Celtics are willing to pay $7 million to Larry based on his capabilities and his bargaining power. In the basketball "labor market", Larry knows that there are very few other competitors. In the garbage man "labor market", almost everyone is eligible. Larry cannot bargain for higher wages in that market.

b) Eventhough Larry is much richer than typical middle class folks, it doesn't necessarily mean that he will pay different prices for the same goods. Things like gasoline, basic food products, generic medicines etc. will still cost the same.

If he consumes the exact same brands as a middle class person, the prices will also be exactly the same.

However, his higher income gives him higher purchasing power. This means that he can spend a lot more money on expensive brands of goods.

For example, if a middle class person buys a shirt worth $20, Larry can buy a much more expensive branded shirt, worth $2000. Now, he could have bought the $20 shirt. This would have helped him save money. But, he chose to buy the expensive shirt.

Similarly, a middle class person may spend $500 on food every month. Larry can easily spend $5000 on food every week! It doesn't mean that he is consuming more, or paying more. It is just that he spends money on more expensive things.

This is a personal choice for him, but a luxury for middle class families.