Monday, May 07, 2007

Roger Clemens, Supply and Demand.

If you haven't heard, Roger Clemens has signed with the New York Yankees for a pro-rated $28mn dollars (it works out to about $6.5mn a month). Some may be asking, how is such a salary possible. A modified supply and demand graph can provide an easier answer.

Supply - The market for baseball pitchers is extremely small right now. Word on the street says that potential for a trade is extremely thin due to a lack of talent. About the only player left on the market of any quality is (well, was) Roger Clemens. Thus the supply curve for Clemens was completely inelastic, i.e. vertical. Changes in the price level would not effect the supply curve because there was simply no more talent that could be induced into player for a higher salary.

Demand - However, there was strong demand for a good pitcher. 3 teams were vying for another starting pitcher (The Yankees, Red Sox and Astros). The reaons were unrelated to price and more related to making the playoffs and out competing the competition. Therefore, the demand curve shifted right and the salary Roger Clemens could extract from the market shot up through the roof.

Conclusion: When something is in short supply and the demand for it is increasing, price will increase. It's just simple supply and demand.

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