Lecture slides Sports Economics (EBB920A05) - The Economics of Sports
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Course
Sports Economics (EBB920A05)
Institution
Rijksuniversiteit Groningen (RuG)
Book
The Economics of Sports
Complete overview of lecture slides of the lectures given by prof. dr. Elmer Sterken.
Course: Sports Economics.
Minor: Sport Science, but also other minors.
Summary The Economics of Sports - Sports Economics (EBB920A05)
Summary Sports Economics - Minor Sport Science
College aantekeningen Sport Economics (EBB920A05) The Economics of Sports
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Sports Economics
Lecture 1 – Introduction
Major questions in economics
1. How do people allocate their needs given that resources are scarce? How do we make a
choice between buying apples or oranges? How do we decide on supplying our labour or
enjoying leisure time? Why do we decide to buy a new laptop this or next year?
2. How do we bring together the required inputs to produce new goods or services? How do we
organize this: in a firm or in a public organization? How do we create markets and innovate
products?
Subdivision in economics
Micro: theory of individual behaviour: the firm, a household, a sportsperson. A subdivision is
labour economics: how do we supply and demand our labour?
Macro: theory of aggregate behaviour: how does the economy of a nation grow? How is
inflation created and in control?
In both fields there is always a question: should the government interfere, and – if yes – how?
Sport participation: The Netherlands – 2018
Sport consumption: 473 euro per household
Clothing: 15%
Shoes: 12%
Memberships: 53%
Rental accommodations: 8%
What is sports economics?
A sport economist analyses sport as an economic activity, so as an activity that involves choices and
scarce means to reach certain aims.
What is sport?
What are scarce means?
What is the aim and what are the objectives?
Competitive balance
A sporting contest has at least two opponents
If we consider a team to be a firm, this firm benefits from the strength of other teams
Sports competition is different from market competition
Louis-Schmeling paradox: each firm wants to be a monopolist… but in sports we need
competition.
Retain and transfer
Rookie draft
Revenue sharing
Salary caps
Olympic Games
Does a country benefit from hosting a large sporting event like the Olympic games or the FIFA
World Cup?
Does it generate additional income and/or jobs? And if so, is this impact just temporary or
permanent?
Who benefits from organizing the Summer Olympic Games?
Seat pricing
, Match between demand and supply
Between stadiums: relative performance of teams
Within a stadium: some seats are more popular
Arbitrage: some seats might be comparable to cable-TV experience
Lecture 2 – Chapter 1 & 2
Chapter 1
Olympic games
, From economics to the Olympic Games
o Do richer countries earn more medals? Yes they do.
o Do countries with a larger population win more medals? Yes.
o Is there a home advantage in medal winning? Yes, there is.
From the Olympic Games to economics:
o Does a city/country benefit from organizing the Olympic Games in terms of GDP-
growth? No basically not.
Two main economic themes:
How do people make choices out of scarce alternative sources? What are the reasons why
people spend more on one thing than on the other?
o Choosing between a new basketball or new shoes
o Shall I buy this today or next week?
o Choice theory
How to produce/add value bringing together production factors in an efficient way?
o How do we organize the FIFA WC?
o Production theory
Two important – linked – economic concepts
Opportunity costs: if there is a choice between alternative option A and B, any analysis of the
benefits and costs of A should include an analysis of the relative opportunities of B (or in general the
best forgone alternative option)
Comparative advantage: suppose we have two firms - each producing two goods: widgets and pins. It
could be that firm 1 can produce both widgets and pins both at absolute lower costs. But it is very
likely that firm 1 has a comparative advantage in producing only 1 good! In that case both firms have
a comparative advantage.
Comparative advantage leads to specialization and economic progress.
Comparative advantage in sports – example
Consider how comparative advantage, a model normally used to explain international trade (this is
famous in economics: the Ricardo-model!), can explain why Jamaica used its most famous sprinter in
the third leg of the 4x100m relay.
The case: the 4x100meter relay at the 2008 Beijing Olympic Games
In 2004, Great Britain (GBR) won the gold medal in Athens in 38.07 sec
At the 2007 WC Athletics in Osaka Jamaica ended up in second place in 37.89 sec after the
USA-team (37.78 sec)
The World Record 4x100m relay in those days was 37.40 sec (USA in 1993)
But at the 2008 Olympic Games in Beijing one of the silver team member Usain Bolt won the
100m and 200m events in world record times
With Asafa Powell on the relay team as well, the Jamaican team was a strong opponent of
both the USA- and GBR-team
The problem of the coach
Normally a relay team has a team composition from slow to fast
It could be that some athletes are more experienced in running the curved first and third legs
One would expect that the coach would place Usain Bolt as the last runner in the finals
Jamaica was lucky that the USA-team was disqualified in the first round and that also
defending champion GBR did not make it to the finals
But the big problem for the coach was: is Usain Bolt running in the third or last leg and the
other way round for Asafa Powell?
, Absolute and Comparative Advantage: expected time (seconds) by experts
Usain Bold Asafa Powell
Third leg 9.74 9.85
Fourth leg (anchor) 9.65 9.73
Usain Bolt has a better absolute performance in both legs
But he can run only once
In the third leg Bolt is expected to gain 0.11 sec compared to Powell
In the fourth leg Bolt’s margin is only 0.08 sec
So Bolt has a relative comparative advantage to Powell by running the third leg
The other way round, Powell has a relative comparative advantage by running the fourth leg
And so they did, finishing in a new world record of 37.10 sec
The story does not end in a nice way though. The first runner in the finals, Nesta Carter, was
found guilty for using doping in 2017 and the 2008 Jamaica gold medal was
withdrawn
Strange enough the world record of 36.84 sec is by a Jamaican team with Nesta Carter and
Usain Bolt at the 2012 London Olympic Games (in 2015 Bolt ran 8.65 sec. as the fastest leg
time)
Comparative advantage and specialization
The case of Bolt and Powell shows that looking for the best performance and having to
choose out of scarce alternatives leads to optimization and specialization
More generally, one of the most important conclusions of the theory of comparative
advantage is that developing specific skills and specializing in activities that use these skills
makes individuals, firms, and nations better off
This is an important aspect of the role of labor economics in sports: specialization!
Usain Bolt has a comparative advantage on the third leg, because he has a larger expected gain.
Specialization is key to professional sports.
Chapter 2
Two important economic insights
How to choose out of scarce alternative sources and allocate those in markets? How are
markets organized? Many suppliers or just a single supplier can make a big difference.
How to produce/add value bringing together production factors in an efficient way? This is
called production theory.
Learning objectives:
Use the basic model of supply and demand to explain the relationship between price and
quantity
Describe how teams use their most fundamental input – player talent - to generate wins, and
how the law of diminishing marginal returns impacts teams’ decisions on how to allocate that
talent.
Distinguish the various market structures that are present in the sports industry.
Labour specialization explains the rise of professional sports.
The supply and demand model
Demand, supply and equilibrium
Individual demand for baseball cards is the relationship between the price of those cards and the
number of cards that he/she is willing and able to buy.
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