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Summary The Economics of Sports - Sports Economics (EBB920A05)
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Summary of the chapters 1 - 11 of the book The Economics of Sports. Course: Sports Economics.
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Summary - The Economics of SportsPart one – Introduction and Review of Economic Concepts
Chapter 1 – Econmis and Sports
1. The Organizto of the Text
Industrial organization = the study of firm strategy, such as how firms set prices to maximize profit, as
well as the regulatory response of government when firms’ interests conflict with broad societal goals
(discussed in Part two).
Public finance asks how and why governments provide goods and services, and how they raise
funds to pay for them (discussed in Part three).
Labor economics analyses how markets determine the level of employment and compensation
(discussed in Part four).
1.3 Babe Ruth and Comparative Advantge
Opportunity Costs
Opportunity cost = the value of the best forgone alternative.
Our limited time, income and energy constantly force us to choose between alternative
actions.
If the goal of a team is to win as many games as possible, then the opportunity cost of using a
player at one position is the wins that the team sacrifices by not using him at another
position.
Absolute and Comparative Advantage
Absolute advantage = when the person/country is more efficient at that activity than another
person/country.
Comparative advantage = when the opportunity cost of an activity is lower for a person/country than
it is for another person/country.
Developing specific skills and specializing in activities that use these skills make individuals,
firms, and nations better off.
It may be more efficient for people to pay other people to provide the goods/services than to
try to do everything themselves (e.g., cheaper for working parents to hire day care providers)
We are better off specializing in what we are relatively best at, and leaving the rest to others.
Summary
Sports occupy a unique place in the public psyche. Although sports generate less revenue than many
other industries, sports results are predicted, reported, and analyzed in newspapers, magazines,
books, and on TV and radio programs. This text presents economic models from industrial
organization, public finance, and labor economics to provide insight into the economics of sports. As
you read the text, you will learn about the largest sports leagues in North America and Europe, as
well as mega-events like the Olympics and their power to illuminate economic theory. For example,
one of the most important economic models is that of comparative advantage. Despite having an
absolute advantage as both a pitcher and an outfielder and hitter, Babe Ruth specialized in playing
the outfield because he had a comparative advantage at hitting over pitching.
1
,Chapter 2 – Reviw of the Econmist’ rA senal
Learning Objectives
Use the basic model of supply and demand to explain the relationship between prices and
quantity, such as why collectors pay much more for Mickey Mantle baseball cards than for
Hank Aaron baseball cards, even though Aaron had better career statistics.
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 and apply
the appropriate model to analyze such questions as why the Chicago White Sox do not lower
their ticket prices when doing so would allow them to sell out like their neighbors, the
Chicago Blackhawks.
Explain why the era of professional sports began at the same time in two different countries
with two different sports.
2.1 The Suply and Demand Md
o el
Model = a simplification of reality that allows economists to isolate particular economic forces.
A good model allows economists to make predictions and provide explanations quickly and easy.
Economist rely on theoretical and statistical models of market structure to make reliable predictions
about behaviour.
The supply and demand model is most suitable when there are many buyers and sellers of a
homogeneous good (i.e., all suppliers are selling the same product), and consumers have good
information about available prices across sellers.
Supply and demand show us how producer and consumers respond to price changes. Together, they
determine how much of a good or service is produced and what value society places on it.
Demand, supply and equilibrium
Demand = the relationship between the price of a good and the number of goods that they are
willing and able to buy.
Market demand = shows the quantity that all consumers combined purchase at each price, by
summing the individual demand curves, that is, by adding the quantity that each consumer purchases
at each price.
Market demand curve example:
Downward sloping: the price-quantity
relationship is invariably negative.
Law of demand = the negative relationship between price and quantity.
Change of quantity demanded = caused by a change in a good’s price, moving quantity up along the
demand curve when the price rises and down the demand curve when the price falls.
2
,Supply = relates price to the number of cards that sellers are willing and able to provide. Consumers
view the price of an item as the sacrifice they must take, producers view the price as a reward.
Higher prices encourage producers (sellers) to offer more goods.
Law of supply = the positive relationship between price and quantity.
Market supply curve = the sum of the individual supply curves, example:
Typically upward sloping
Change in quantity supplied = caused by a change in a good’s price, the quantity moves along the
supply curve.
Demand and supply say nothing about the price of an item or how much of it is bought and sold. To
find out what happens in the marketplace, one must look at supply and demand together.
Equilibrium point (e) = the actions of consumers and producers are in balance.
Consumers are willing and able to buy Qe goods at the price Pe, which is exactly the quantity
that producers are willing and able to sell at that price.
disequilibrium occurs at a price higher than Pe
(such as Ph), because producers want to sell Qs
while consumers want to buy only Qd
producers face surplus or excess supply
producers lower their prices in order to
attract more customers
3
, at a price below the equilibrium (Pl), buyers
want to purchase Qd goods, while sellers want to
sell only Qs.
shortage or excess demand
drives the price upward until the shortage
disappears.
The forces of supply and demand determine prices.
Changes in Supply and Demand
Factors that affect the location of the demand curve
Change in demand = a shift in the demand curve. This stems from a change in any of the underlying
factors:
1. Consumer income: consumers buy more of a good if their incomes increase.
Normal goods = consumers normally buy more of a good or service when their
incomes rises.
Inferior goods = consumers buy fewer of a good as one’s income rises.
2. The prices of substitutes or complements:
When the price of a substitute good increases, the demand curve shifts to the
right.
When the price of a complement increases, the demand curve shifts to the left.
4
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