Question

Following the 2016 Major League Baseball season, the market for home run hitters who were free agents and available to sign with any team was unexpectedly quiet. Players such as Edwin Encarnacion and Chris Carter signed for lower salaries and for fewer years than either they or their agents had expected. Here are two explanations for the relatively low salary offers: 1\. Mark Shapiro, president and CEO of the Toronto Blue Jays, explained, "There has been a shift ... in how people value \(\ldots\) defense and some of the other aspects of players' games." 2\. Brian Cashman, general manager of the New York Yankees, blamed the weak market on a greater-thannormal number of power hitters who were free agents: "The chessboard was set up with more participants than there were chairs." Draw two graphs depicting the demand and supply for home run hitters. In the first graph, illustrate a change in the market that is consistent with Mark Shapiro's explanation for the decline in salaries. In the second graph, illustrate a change in the market that is consistent with Brian Cashman's explanation for the decline in salaries. Briefly explain your graphs.

Short answer

The declining salaries of home run hitters can be explained using supply and demand principles. Mark Shapiro's explanation suggests a shift in demand, where teams now value different aspects of a player's capabilities, reducing the demand for home run hitters. Brian Cashman's explanation suggests a supply shift, where there are more home run hitters in the market. Both shifts would contribute to the decrease in salaries for these players.

Step-by-step solution

The Demand Shift Explanation

According to Mark Shapiro's explanation, the demand for home run hitters decreased due to a change in how these players are valued. That means, the demand curve for home run hitters shifted to the left. At any given price level (salary), there are fewer teams willing and able to hire these players, hence the decrease in demand.

Drawing the Demand Shift Graph

To illustrate this, draw a graph with 'Salary' on the y-axis and 'Quantity of Home Run Hitters' on the x-axis. Sketch a downward sloping curve to represent the initial demand. Then, draw a second demand curve to the left of the first one to represent the decrease in demand.

The Supply Shift Explanation

According to Brian Cashman's explanation, there was an increase in the number of home run hitters available in the market, which implies an increase in supply. Therefore, the supply curve for home run hitters shifted to the right.

Drawing the Supply Shift Graph

Still using the same axes as in Step 2, sketch an upward sloping curve to represent the initial supply. Then, draw a second supply curve to the right of the first one to show the increase in supply.

Briefly Explain the Graphs

The first graph depicts a shift in demand for home run hitters. Teams reevaluated their priorities and valued other aspects of players' games, leading to a decrease in demand. The second graph shows an increase in supply for the same players due to more players available in the market. Both changes put downward pressure on the salaries of home run hitters - lower demand means teams are less willing to pay higher salaries, and greater supply means more players competing for the same roles, which also drives down salaries.

Key concepts

Demand Curve

The demand curve is a graphical representation of how much quantity of a good or service consumers are willing and able to purchase at different price levels. When referring to labor markets, such as the market for home run hitters, a demand curve can depict how many teams are interested in hiring these players at various salary levels.

In essence, the position of the demand curve can shift left or right depending on factors such as changes in consumer preferences, economic conditions, or perceptions of the value of certain skills. For example, if teams began to value defensive skills over home run capabilities, the demand for home run hitters might decrease. This change would be depicted as a leftward shift of the demand curve, signaling that at each salary point, fewer teams are interested in hiring these players, which can lead to lower overall salaries.

• A leftward shift means decreased demand: fewer hires at any salary.
• Factors affecting the shift include team strategies and skill valuation changes.

Supply Curve

The supply curve illustrates the amount of labor players are willing to offer at different salary levels. When discussing the supply of home run hitters, it reflects how many players are available for teams to hire at various salaries. Typically, if more players enter the market — in this case, becoming free agents — the supply curve shifts to the right. This shift indicates that at any given salary, there are more players available than before. The rationale could be that with more home run hitters available, teams now have a larger pool to choose from, which can exacerbate competition among players and potentially drive salaries down.

• A rightward shift denotes increased supply: more players available at each salary level.
• An influx of free agents can lead to a rightward shift.

Market Disequilibrium

Market disequilibrium occurs when the quantity supplied does not equal the quantity demanded at a particular price, leading to a surplus or shortage. In labor markets, this inequity is often a result of shifts in either the demand or supply curves. In the case of the home run hitters, if there is a leftward shift in demand (fewer teams interested) combined with a rightward shift in supply (more players available), the market may experience a surplus of players. This scenario can lead to teams having the upper hand in negotiations, as numerous players vie for limited positions, keeping salaries lower than anticipated.

• Disequilibrium is marked by an imbalance between demand and supply.
• Leads to surpluses and downward pressure on wages.

Labor Market Dynamics

Labor market dynamics refer to the interactions between employers and employees, including how changes in the demand and supply of labor affect wages and employment levels. In markets like those for specialized skills — such as home run hitting — these dynamics can be particularly pronounced. Changes in what teams value can lead to demand shifts. Conversely, changes in the number of available qualified players can influence supply. Both affect salary levels and employment opportunities. Therefore, understanding labor market dynamics is crucial for players and agents to adjust their strategies in a competitive market.

• Dynamic interplay of demand and supply affects labor market equilibrium.
• Influences wages and job availability.