LeBron James, The Cavaliers, and Derived Demand
PBS video author Paul Solman reports that LeBron James has added $200 million in value to the city of Cleveland since 2003. His presence brings in $100 million each year to the workers and local businesses surrounding the NBA team. The concept of utilitarianism states that the action which is moral is one, which produces the most good. In the minds of most individuals in Cleveland, the most good would be produced by LeBron staying, is this true or is it possible that a greater good could be achieved if he left? What more important the well being of those in Cleveland or the well-being of the people of another city of that of Lebron James?
Pose the following questions as a prompt for your students: Suppose that the city of Beijing, China, was just awarded the Olympics. How would that award affect the labor market and the market for all resources? How would hosting the Olympics fuel growth in Beijing? When the city of Jacksonville was awarded the Super Bowl XXXIX in 2005, the depressed area, whose primary source of income was shipping, turned into an entertainment service sector overnight. The demand for all resources skyrocketed. Super Bowl XXXIX was a boom for Jacksonville.
When LeBron James made a choice to play for the Miami Heat, he had to give up the opportunity to play for his hometown Cleveland Cavaliers. What economic impact did his decision have on Cleveland's service sector? In this lesson, students will see how a change in demand for Cavalier NBA tickets, merchandise, and sector related services might be affected with LeBron's departure. Students will watch a Paul Solman video and listen to a Livescribe Pencast on the topic. Students will illustrate the concept of derived demand by making a spider diagram and find an example of derived demand in their city.
Markets in economics are seen as free. Free markets assume that parties enter into voluntary agreements in which both parties benefit. This is the philosophical premise behind Utilitarianism. The premise in economics infers that rational actors will seek to maximize utility. The extension activity asks students to opine about the philosophical question on freedom.
In this lesson, students will begin to make real-life connections between economics and events in their daily lives. These connections make economics rigorous and relevant!
- Give an example of derived demand in their city, town, or community.
- Illustrate interdependence between the factor and goods market using a Spider Diagram.
Utilitarianism: This site provides an adequate definition of the economic concept of Utilitarianism.
Cleveland's Basketball Boon Brings Economic Vigor: This is a video by PBS correspondent Paul Solman explaining the economic importance of LeBron James to the city of Cleveland. Approx. runtime is 9 minutes.
LeBron to Miami: This is a Livescribe Pencast that explains the economics behind LeBron James' decision to join the Miami Heat. Approx. runtime is 10 minutes.
Spider Diagram: This activity has students create a spider diagram that connects the main business in their hometown to the resources that are used to help production.
Jeremy Bentham: This site provides a biography of the founder of Utilitarianism.
- Teachers and students interested in reading the works Bentham can do so in one click. www.econlib.org/library/Enc/bios/Bentham.html
Start by reviewing or introducing a few economic terms:
Labor Market: The labor supply and labor demand curves. The intersection of the labor supply and labor demand curves determines the equilibrium wage and the quantity of hours people work at this equilibrium wage.
Derived Demand: Demand resulting from what a good or service can produce, not demand for the good or service itself. Example: An increase in for demand cars will lead to an increase in demand for tires, car stereos, and other automobile parts.
Utilitarianism : A moral philosophy, generally operating on the principle that the utility (happiness or satisfaction) of different people cannot only be measured but also meaningfully summed over people and that utility comparisons between people are meaningful. Utilitarianism is defined as maximizing pleasure or satisfaction while minimizing pain.
Introduce the lesson to the students with the following information: On July 7, 2010, LeBron James announced to the world that he was going to play basketball for the Miami Heat. Since 2003, LeBron has played for the Cleveland Cavaliers. During that time, the "Cavs" have been vaulted into the public prominence. Economists reckon that LeBron's presence adds $100 million in city revenue each year. In the economically depressed northeast region of Ohio, many businesses have been built on Cavalier basketball. For example, NBA merchandise is sold online and in souvenir shops. In addition, theme restaurants, hotels, parking, and maintenance personnel have been needed.
Ask the students, now that LeBron James is not going to play for Cleveland, what will happen to those businesses? [Answers may vary]
Next, show PBS journalist Paul Solman's 8.5 minute video. After the clip, introduce students to positive and normative statements. A positive statement represents an objective truth, a fact that can be disputed through evidence and data. Example: Lebron will no longer play for Cleveland and will instead become a member of the Miami Heat. A positive statement says what something is. A normative statement is subjective: it represents an individual's judgment about value of an outcome. Example: "Cleveland would be better off with Lebron James as a Cavalier." Normative statements usually describe how an outcome ought to be, or should be, they cannot be proven true or false by real world data.
The concept of utilitarianism states that the morally right, or best outcome will maximize the utility of everyone. Using the example of Lebron James, one could say that Lebron should stay in Cleveland because his presence there will have a larger impact than it would have in Miami. The positive economic impact of Lebron James playing basketball in Miami will be outweighed by the negative economic impact in Cleveland. The previous statement would be hard to prove by analyzing data but it does seem intuitive.
However, one could make a similar argument against LeBron staying in Cleveland. Suppose that the Cavaliers are able to find the next Lebron James through the draft or by trade and end up better off without him in the long run. Or suppose that James suffers a career ending injury by staying in Cleveland that he would not have if he went to Miami, thus the utility of everyone ends up worse off because James never plays again. Both examples are remote and will not be seen until after the fact, they are still possible. In the real world we cannot run alternate scenarios holding things constant. There is not a parallel universe, which we could peer into to find out what might have happened.
Vince Lombardi, former Green Bay Packers coach, used to say, "Winning isn't everything — it's the only thing." How does Lombardi's saying speak about incentives in sports?' [Lebron James is not only concerned with money it seems. His decision may have been based on his desire to win a championship. He may feel that his best opportunity to do so will come in Miami. If this is the case then he maximized his potential utility by choosing Miami. He may also be aware that a large part of his legacy will be determined by his success on the court. Therefore he may still believe that Miami may offer a better chance to win but also think that the potential future monetary benefits will outweigh the higher salary in Cleveland.]
If LeBron was not motivated by money or winning a championship what other factors may have influenced his decision? [Friendship, weather, the team colors? Ask students to speculate.]
(Optional) Play the following pencast , LeBron James to Miami Heat.
Debrief the students by asking a few follow-up questions. Some possible questions are:
- What is "derived demand" as it relates to LeBron James in Cleveland? [The city of Cleveland, especially businesses that sell products and services when the Cavaliers are successful benefited indirectly from the presence of LeBron James.]
- Suppose that there are three major automakers in the United States, and one of the three decides to completely relocate to Brazil. How would relocation affect the jobs in the United States? In Brazil? [The obvious answer is unemployment for worker at that U.S. factory and a transfer of jobs to Brazil. This does not tell the whole story though. The new jobs in Brazil will likely result in a lower cost of the goods for U.S. and worldwide consumers of the automobile being manufactured there. Also, the out of work U.S. laborers will not be unemployed forever. It is likely that some of them will find better long run opportunities and that losing their job with the automaker will be a positive long run outcome. There will be some losers in the transition period, but the end result for everyone most definitely be better. Think of the world we would live in if we had decided that we don't want any farmers too lose their jobs and therefore no one should use a tractor. The world would be a far less productive place. See Creative Destruction .]
- Who is the largest employer of resources in our community?
Students should see by now that choices have costs. Have students choose a local business and make a Spider Diagram showing the effects that would happen if the business shut down or relocated. As an alternative, have the students show what would happen if a new business came to town that was wildly successful. Also, have the students note the derived demand placed on the rest of the community by these businesses.
Explain to the students that they have now seen how one decision can have a ripple effect on the labor market. Demand for labor and other resources used to produce products is derived. In other words, if eating spider cookies suddenly becomes fashionable, there will be an increase in the demand for the labor and materials needed to make spider cookies. The changes in the spider cookie market will impact both complementary and substitute goods for the cookies. When LeBron James made his decision, he affected the demand for the labor and materials for NBA basketball in Cleveland. It's still too early to see the unintended consequences, if any, that his choice will have in Cleveland and in Miami, but a hallmark assumption of economics is that choices have consequences. The decision by LeBron James to exercise his free agency is a clinical and fascinating study in economics.
A major concept in economics is utility. Jeremy Bentham is the father of utilitarianism. His theory is that people try to maximize their pleasure or utility. Bentham would argue that an action is "good" if the action results in an overall gain in the utility of society.
Have your students weigh the costs and benefits of LeBron's decision by answering the following open-ended questions.
1. Did the costs outweigh the benefits for LeBron James when he decided to leave Cleveland for Miami? Explain
2. Will the cost of LeBron James leaving outweigh the benefits for the city of Cleveland? Explain
3. In your opinion, was LeBron James' decision to play in Miami a "good" one? Why?
[Use your discretion when weighing answers, but answers should be centered around utility.]
The assessment will be the students' Spider diagram and their example of derived demand. [Use your discretion to determine if students meet the criteria.]
For students' examples of derived demand, they should find a business and two or three related resource markets. If you wish, this example can be imbedded into students' Spider Diagrams.