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Trevor Stone's Journal
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Supply and Demand vs. Performance and Promotion 
12th-Jan-2012 03:09 am
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The theory of supply and demand explains that when a resource is more plentiful, market pressures lower the price, but when a resource is in short supply and high demand, prices go up. Apples are cheap, lobsters are expensive.

This principle ought to apply to the labor market too. The supply of actors exceeds the demand, so most get paid very little, doing uninteresting work. The supply of folks that can sell fast food or dig ditches is pretty high, so they don't get paid very much. Similarly, there's not much demand for driftwood gatherers, so it's a hard way to make a living.

But the model breaks down for high supply, low demand positions. There's a very small and essentially fixed demand for professional baseball players. There's a huge supply of people willing to do the job. But the people who get the job get paid millions, even though they'd probably do it for much less 'cause it sure beats digging dishes. Star actors get way more money, more control, more fame, and more fun roles than their struggling colleagues. In most companies, a promotion means you get more money to have more power and do more interesting and impactful things. If supply and demand worked like they do on the chalkboard, shouldn't a promotion come with a pay cut? Aren't there people who will work as the CEO of a multinational corporation for less than a million dollars?

This illustrates that when it really matters, quality trumps market forces. Even with thousands of Minor Leaguers to choose from, the Major League pays big money to get top quality. And while a CEO with a $5 million salary may not perform ten times better than one who will do it for 500 grand, he may make more than five million dollars of difference. It's more rewarding to be good than to be cheap.

Alternatively, money follows something like the general theory of relativity: very massive bank accounts distort the gravity of the surrounding economic field.
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