Summary Sport Economics
The Economics of Sports
Chapter 1 - Economics and Sports
Introduction
o Sports occupy a unique position in the human psyche.
o Athletic contests around the world have long been a way for individuals, institutions, cities
and nations to define themselves.
o Sports can bring out the best and the worst in people.
o In the pursuit of national pride, countries have sometimes sacrificed the physical well-being
of young athletes by given them performance-enhancing drugs that have dire side-effects.
o Sports can also serve as tools by which nations conduct foreign policy.
o Sports can bring people together.
o Compared to many firms and industries, the sport industry has a relatively small part of the
world economy.
o Studying sports economics provides more than an appreciation for the sports industry, it also
demonstrates how economic reasoning helps us understand the world around us.
1.2: Babe Ruth and Comparative Advantage
OPPORTUNITY COSTS
o An opportunity cost is the value of the best forgone alternative.
o Our limited time, income and energy constantly force us to choose between alternative
actions.
o 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
o A person or country has an absolute advantage in an activity when it is more efficient at that
activity than another person or country.
o A person or country has a comparative advantage when the opportunity cost of an activity is
lower than it is for another person or country.
o 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 make individuals,
firms and nations better off.
o Doing everything would take people away from the activities that they perform best.
o It is sometimes cheaper (more efficient) for people to pay other people to provide the goods
or services than to try to do everything themselves.
o The theory of comparative advantage tells us that athletes are better off when they
specialize.
Summary
o Although sports generate less revenue than many other industries, sport results are
predicted, reported and analysed in newspapers, magazines, books and on TV and radio.
,Chapter 2 – Review of the Economist’s Arsenal
2.1: The Supply and Demand Model
o Model = a simplification of reality that allows economists to isolate particular economic
forces.
o A good model allows economists to make predictions and provide explanations
about the world quickly and easily.
o Economists rely on theoretical and statistical models of market structure to make reliable
predictions about behaviour.
o The supply and demand models is most suitable when there are many buyers and sellers of a
homogenous good, and consumers have good information about available prices across
sellers.
o Supply and demand show us how producers 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
o An individual consumers demand is the relationship between the price and the number of
products that he/she is willing and able to buy.
o Market demand = the quantity that all consumers combined purchase at each price, by
summing the individual demand curves (by adding the quantity that each consumer
purchases at each price).
o As the price of the product falls, the number of products that
consumers buy rises.
o Economists call the negative relationship between price and
quantity the law of demand.
o A change in a good’s price causes a change in quantity
demanded, moving quantity up along the demand curve
when the price rises and down the demand curve when the
price falls.
o The supply of a product relates price to the number of
products that sellers are willing and able to provide.
o Higher prices encourage producers to offer more products. An increase in the price gives
more product owners an incentive to offer their product for sale or to produce more new
products. Additionally, other producers have an incentive to stop what they are doing and
start producing the product.
o Some economist call the positive relationship between price
and quantity the law of supply.
o The market supply curve is the sum of the individual supply
curves.
o If the price of the product changes, the quantity moves along
the supply curve, a movement that economists call a change in
quantity supplied.
o Demand and supply say nothing about the price of an item or
how much of it is brought and sold.
, o Economists call e the equilibrium point because, at that point, the actions of consumers and
producers are in balance.
o At a price higher than the equilibrium point, disequilibrium occurs because producers want
to sell quantity supply while consumers want to buy only quantity demand.
o Unable to sell all the products they want, producers face a surplus or excess supply.
o At a price below the equilibrium, buyers want to purchase quantity demand while sellers
want to sell only quantity supply.
o The shortage or excess demand for the products drives the price upward until the
shortage disappears at equilibrium point.
CHANGES IN SUPPLY AND DEMAND
o The supply and demand relationships are not permanently fixed.
o They can change for many different reasons.
Factors That Affect the Location of the Demand Curve
o Economists call a shift of the demand curve a change in
demand.
o A change in demand stems from a change in any of 5
underlying factors: consumer income, the prices of
substitutes or complements, consumer tastes, the number
of consumers in the market, and the expectations that
consumers hold.
o Consumers buy more of a good if their income increase,
but frequent exceptions exist.
o Normal goods = consumers normally buy more of a good
or service when their incomes rise.
o Inferior goods = consumers buy fewer of them as one’s
income rises.
o When the price of a substitute good increases, the demand curve shifts to the right. The
opposite effect occurs when the price of a complement increases.
o When the prices of sleeves rises, the price of a card with a sleeve also rises, reducing demand
for cards.
o Changes in the tastes and preferences can also shift the demand curve.
o Charging higher prices when more popular teams come to town is a strategy known as
variable ticket pricing.
o The practice of altering ticket prices after the season begins is known as dynamic pricing.
o The demand curve for the more popular teams is father to the right than for most other
teams because of the greater taste of fans for seeing these teams play.
, o The number of consumers in the market can also affect demand.
o Expectations of future prices can affect demand.
o A collector who believes that the prices of cards will rise in the near future is willing to buy
more cards at any given price than a collector who believes that prices will remain stable.
o The expectation of a price increase shifts the collector’s demand curve to the right. If the
collector believes the prices will fall, his demand curve shifts to the left.
Factors That Affects the Location of the Supply Curve
o A change in supply results from a change in input prices,
technology, taxes, expectations held by producers, and
natural events that destroy or promote products or
resources.
o An increase in input prices shifts the supply curve leftward.
o At any given price, the net return to making and selling
products is lower than before, and the incentive to provide
the product falls.
o A technological innovation that reduces the costs of making
cards increases profitability of making products and
encourages producers to make and sell more products.
o A sales tax on products introduces a wedge between the
price the consumers pays and the price the producer
receives and results in a second supply curve.
o The vertical difference between the 2 supply curves equals
the amount of the per-unit tax.
o The price that consumers pay is determined by the
intersection of the demand curve with the supply curve that
includes the tax.
o Quantity decreases because consumers are willing to
purchase fewer products at the higher price.
o The price the seller receive is the price for quantity consumer on the original supply curve
and is equal to the price that consumers pay minus the tax.
o The difference between the price that consumers pay and the price that sellers receive is the
per-unit tax. Multiplying the per-unit tax by the number of products sold, yields the tax
revenue collected by the government.
o Natural disasters also affect the location of the supply curve.
o If producers expect prises to rise in the future, they have an incentive to wait until prices rise
before selling their product.
o At any price, producers are willing to provide less today, if they think that they will be able to
sell for more tomorrow, and the supply curves shifts to the left.
Elasticity of Supply
o If the card producer has a steep curve, such as S0, then it
appears that firms do not respond very much to an increase
in price. As price rises from P0 to P1 output grows from Q0
card to only Q1.
o If the supply curve is relatively flat, producers respond to the
price increase by expanding output from Q’0 to Q’1.
o Slope is a misleading measure of sensitivity.
o Economists account for the producers’ starting point by using
percentage changes in price and output rather than absolute
changes.
